HMRC Overturned Tax Penalties: Why Thousands of Penalties Are Being Cancelled

Thousands of taxpayers have successfully challenged penalties issued by HM Revenue and Customs, with the latest official figures showing a substantial rise in HMRC overturned tax penalties.

HMRC’s 2024–25 Annual Report and Accounts shows that 46,266 automated penalties and default surcharge decisions were cancelled following statutory review, compared with 35,876 in 2023–24. That represents an increase of roughly 29% in the number of cancellations.

The figures are important for individuals, landlords, sole traders and businesses because they show that receiving an HMRC penalty does not necessarily mean the decision cannot be challenged.

Where HMRC has made an error or the taxpayer has a valid reasonable excuse, an appeal or statutory review may result in the penalty being reduced or cancelled.

How Many HMRC Tax Penalties Were Overturned?

HMRC dealt with 69,341 statutory reviews relating to automated penalties and default surcharges during 2024–25.

The outcomes were:

This means around two-thirds of the automated penalty decisions reaching statutory review were cancelled.

The number of cancellations increased considerably from the previous year. In 2023–24, HMRC cancelled 35,876 such decisions after review.

However, the figures need to be interpreted carefully. They do not mean that two-thirds of every penalty issued by HMRC was incorrect. They relate specifically to penalties that taxpayers challenged and which subsequently went through HMRC’s statutory review process.

HMRC issued more than 9 million automated penalties, penalty points and default surcharges during 2024–25, according to its annual accounts.

Why Are So Many HMRC Penalties Being Overturned?

There is no single reason behind every cancelled penalty. HMRC penalties can be challenged for several reasons, ranging from administrative mistakes to circumstances outside the taxpayer’s control.

Tax specialists have pointed to administrative problems, banking delays and difficulties obtaining support from HMRC as factors that can contribute to taxpayers missing deadlines.

The introduction of newer online appeal systems, particularly for VAT penalties, has also made it easier for some taxpayers to challenge decisions.

TaxWatch’s review of HMRC’s figures also highlighted the unusually high cancellation rate.

It reported that 67% of automated penalties considered under statutory review in 2024–25 were cancelled, compared with only 12% of other types of assessments and penalties reviewed.

That difference suggests taxpayers should examine a penalty carefully rather than automatically assuming it must be paid without question.

Can You Appeal an HMRC Tax Penalty?

Yes. HMRC allows taxpayers to challenge many types of tax penalties.

A taxpayer may potentially appeal if they believe:

• HMRC calculated the penalty incorrectly.
• The return was submitted on time.
• The payment was made by the required deadline.
• HMRC incorrectly believed a tax return was required.
• There was a reasonable excuse for missing the deadline.
• Information held by HMRC was incorrect.
• Circumstances outside the taxpayer’s control prevented compliance.

HMRC states that a person will usually have 30 days from the date the penalty was issued to contact HMRC or submit an appeal.

The exact procedure depends on the tax involved and the type of penalty.

What Counts as a Reasonable Excuse for an HMRC Penalty?

A “reasonable excuse” is one of the most important concepts when challenging an HMRC penalty.

There is no single definition that automatically applies to every taxpayer. HMRC considers the individual circumstances surrounding the failure.

Examples that HMRC says may constitute a reasonable excuse include:

• A serious or life-threatening illness.
• An unexpected hospital stay.
• The death of a partner or close relative shortly before the deadline.
• Computer or software failure while preparing an online return.
• Problems with HMRC’s online services.
• Fire, flooding or theft.
• Unexpected postal delays.
• Certain circumstances involving disability or mental illness.
• Being unaware of or misunderstanding a legal obligation in circumstances where that misunderstanding was reasonable.

HMRC normally expects the taxpayer to correct the problem as soon as reasonably possible after the circumstances preventing compliance have ended.

Simply forgetting the deadline or not receiving an HMRC reminder will generally not be enough on its own.

Does Having No Money Count as a Reasonable Excuse?

Usually, no.

HMRC’s guidance says insufficient funds are generally not regarded as a reasonable excuse for failing to pay tax on time.

There can, however, be circumstances where the lack of funds arose because of events outside the taxpayer’s control. HMRC guidance states that those circumstances should be considered individually.

Anyone who knows they cannot pay a tax bill should therefore contact HMRC as early as possible rather than simply allowing the payment deadline to pass.

How Does an HMRC Statutory Review Work?

A statutory review allows an HMRC decision to be reconsidered by an officer who was not involved in making the original decision.

For direct taxes, taxpayers generally need to appeal the original HMRC decision before requesting a review.

During the review, the officer considers whether the original decision was made correctly according to legislation, HMRC policy and established practice.

The review can produce three main outcomes:

1. The decision is upheld, and the original penalty remains.
2. The decision is varied to the penalty or decision is changed.
3. The decision is cancelled, the taxpayer no longer has to comply with that penalty decision.

HMRC says statutory reviews normally take around 45 days, although some cases can take longer.

What Should You Include When Appealing an HMRC Penalty?

An effective penalty appeal should focus on facts and evidence rather than simply stating that the penalty feels unfair.

Taxpayers should normally explain:

• Which penalty is being challenged.
• The relevant tax period.
• Why the penalty is believed to be incorrect.
• What prevented the obligation being completed on time.
• When the problem started and ended.
• What action was taken afterwards.
• Any supporting evidence available.

Supporting documents might include hospital records, correspondence with HMRC, screenshots showing online service failures, bank records, postal evidence or correspondence with an accountant.

The evidence required will depend on the circumstances of the case.

What Happens if HMRC Rejects the Appeal?

A rejected initial appeal does not always mark the end of the process.

Depending on the tax and circumstances, a taxpayer may be able to request a statutory review or take the dispute to the First-tier Tribunal (Tax Chamber).

HMRC states that if a taxpayer disagrees with the outcome of a statutory review, they will normally have 30 days from the date of the review conclusion letter to notify an appeal to the tax tribunal.

The tribunal operates independently of HMRC.

HMRC’s own compliance guidance confirms that tribunals can, in relevant penalty cases, uphold or cancel HMRC’s decision to impose a penalty.

Professional tax advice may be appropriate where significant amounts of money or complex technical issues are involved.

Are VAT Penalties Different?

VAT now operates under a newer penalty system for accounting periods beginning on or after 1 January 2023.

Instead of immediately issuing a financial penalty every time a VAT Return is late, HMRC normally awards a penalty point. Once the taxpayer reaches the relevant threshold, a £200 financial penalty can apply.

The threshold depends on how frequently VAT Returns are submitted.

VAT taxpayers can check penalties through their online account and request a review. HMRC confirms that a penalty point or financial penalty may be cancelled or changed where the taxpayer has a reasonable excuse.

The newer system is one reason comparisons between recent HMRC penalty figures and older years need to be made carefully.

Are Self Assessment Penalties Changing?

Changes are also being introduced for taxpayers moving into Making Tax Digital for Income Tax.

The new points-based late submission and revised late payment penalty system applies from the tax year in which the taxpayer joins Making Tax Digital for Income Tax. Existing rules continue to apply to previous Self Assessment years.

For example, taxpayers entering Making Tax Digital from 6 April 2026 will still be subject to the existing penalty regime for their 2025–26 Self Assessment return due by 31 January 2027.

This makes it increasingly important for taxpayers to identify exactly which penalty system applies to the accounting period concerned.

What Do the HMRC Overturned Tax Penalties Figures Mean for Taxpayers?

The record number of cancellations sends a straightforward message: an HMRC penalty should be checked before it is accepted as correct.

HMRC’s figures show that of the 69,341 automated penalty and default surcharge decisions reviewed during 2024–25, 46,266 were cancelled.

That does not establish that HMRC’s entire penalty system is inaccurate, because the reviewed cases represent a small and self-selecting proportion of all penalties issued.

It does demonstrate, however, that the appeals and review system can materially change HMRC decisions.

Taxpayers receiving a penalty should therefore check the tax period, deadline, amount, filing history and circumstances surrounding the alleged failure. If something appears wrong, acting within the appeal deadline can be important.

Conclusion

The rise in HMRC overturned tax penalties shows why taxpayers should not automatically assume every automated penalty is final.

HMRC cancelled 46,266 automated penalty and default surcharge decisions following statutory review in 2024–25, with only 33% of those reviewed decisions remaining fully upheld.

Anyone receiving a penalty should check why it was issued, gather evidence and review the appeal deadline shown on the notice. Where there is a genuine reasonable excuse or an HMRC error, the taxpayer may have grounds to challenge the decision.

This article provides general information only and should not be treated as personalised tax, accounting or legal advice.

Frequently Asked Questions

Can HMRC cancel a tax penalty?

Yes. HMRC can cancel a penalty where an appeal or statutory review establishes that the original decision should not stand. A review officer may uphold, vary or cancel an HMRC decision.

How long do I have to appeal an HMRC penalty?

In many cases, taxpayers have 30 days from the date the penalty was issued to make an appeal. Different procedures can apply depending on the tax and penalty involved.

How many HMRC penalties were overturned in 2024–25?

HMRC recorded 46,266 cancellations following statutory reviews of automated penalties and default surcharges during 2024–25. A further 289 decisions were varied.

What percentage of reviewed HMRC penalties were cancelled?

Of the 69,341 automated penalty and default surcharge reviews completed in 2024–25, approximately 67% resulted in cancellation, while 33% were upheld.

Can I appeal an HMRC penalty if I have already filed the return?

Potentially, yes. Filing the outstanding return does not necessarily remove an existing penalty, but taxpayers can still appeal where they believe they have reasonable grounds. They should generally correct the underlying failure as soon as possible.

What happens if HMRC refuses to cancel my penalty?

Depending on the circumstances, the taxpayer may be able to request a statutory review or appeal to the First-tier Tribunal. Following a statutory review, an appeal to the tribunal will usually need to be made within 30 days of the review decision.