Penalties when tax is paid late rather than lost

Where an error only delays tax, so that it is declared in a later return instead of the right one, potential lost revenue is not the full tax but 5% of the delayed tax for each year of delay, reduced pro rata for shorter periods. The penalty percentage is then applied to that much smaller figure. Late payment interest on the tax itself is a separate charge.

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What does HMRC mean by a timing error?

An inaccuracy penalty under Schedule 24 to the Finance Act 2007 is a percentage of potential lost revenue (PLR). Normally PLR is the full extra tax due once the error is corrected. Paragraph 8 of Schedule 24 replaces that rule where an inaccuracy resulted in tax being declared later than it should have been, which HMRC calls a delayed tax inaccuracy.

HMRC’s guidance at CH82390 says a delayed tax inaccuracy:

results in tax being declared later than it should have been;
always has two or more elements in different tax periods, an understatement followed by one or more overstatements; and
has elements whose timing is closely linked, meaning there is a connection between how and why the original inaccuracy was made and when the amount was later declared.

The test is whether the error only has a timing effect, so that comparing the two periods there is no overall loss of tax at the same rate. The general rules on PLR are covered in our guide to potential lost revenue; this page concentrates on the delayed tax rule.

Which errors qualify and which do not?

CH82390 says an inaccuracy that will be automatically reversed without any further action by the person will normally be delayed tax. HMRC’s examples are:

a VAT tax point error, where using the wrong date means the VAT is overdeclared in a later period; and
an undervalued closing stock figure, which depresses profit in one return and, used as opening stock in the next, increases profit by the same amount.

By contrast, the rule does not apply where someone underdeclares in a return and then accounts for the amount in a later return after sorting out a cashflow problem. When the first error was made, the person did not know when, or if, the right tax would ever be accounted for. CH82390 also excludes wrongly recorded losses, which have their own rules (see how HMRC penalises an overstated loss), and inheritance tax, because there is no later return in which an IHT error can reverse. Paragraph 8(2) confirms the delayed tax rule does not apply where the loss rules in paragraph 7 apply.

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How is the penalty worked out?

Paragraph 8(1) sets PLR at 5% of the delayed tax for each year of delay, or a proportionate percentage for a period of less than a year. CH82392 says the delay is the gap between the period end date of the return containing the inaccuracy and the period end date of the return in which it was, or would have been, reversed. HMRC’s examples at CH82394:

Situation	PLR
Quarterly return to June contains the error, reversed in the September return	Delayed tax x 5% x 3/12
Monthly return for May contains the error, reversed in the July return	Delayed tax x 5% x 2/12
£100,000 error in the May monthly return, half reversed in July and half in September	£416.66 plus £833.33, rounded to £1,249

Once PLR is known, the normal steps follow: the penalty percentage for the behaviour, then the reductions for the quality of disclosure explained in penalty reductions for disclosure. CH82392 confirms that a careless penalty calculated this way can still be considered for suspension.

What does a real calculation look like?

HMRC’s example at CH82395 involves Ben, whose accounting system allocated a VAT invoice dated 30 June to the September quarter rather than the June quarter. VAT of £150,000 was omitted from the June return and included in the September return with no action by Ben. He accepted he had failed to take reasonable care. The delay was three months, so PLR was £150,000 x 5% x 3/12 = £1,875.

Taking that further, the maximum careless penalty at 30% of £1,875 is £562.50, and with a full prompted disclosure the 15% minimum gives £281.25. Under the normal PLR rule the maximum careless penalty on £150,000 of VAT would have been £45,000. The delayed tax rule therefore makes a very large difference where it genuinely applies.

What if the later return is not yet due when HMRC finds the error?

Normally the reversal has already happened. CH82390 makes an exception where HMRC discovers the inaccuracy before the later return is filed and is satisfied, on the balance of probabilities, that the person’s accounting system would automatically reverse it. CH82397 gives two examples:

Jennifer claimed £10,000 of input tax a quarter early. Her systems would not have claimed it again in the next quarter, so PLR was £10,000 x 5% x 3/12 = £125.
Luke carelessly left out a £200,000 VAT invoice dated late September from his September return. The officer was confident the sale would have been picked up in the December quarter, so PLR was £200,000 x 5% x 3/12 = £2,500.

Evidence of how the accounting system actually works is what makes this exception available, so it is worth explaining the system to the officer early.

When will HMRC refuse to use the delayed tax rule?

CH82394 and CH82250 say the delayed tax rule is not applied where other, unrelated inaccuracies are found in either of the periods it covers. Instead all the understatements and overstatements in those periods go through the normal multiple inaccuracy rules. CH82273 accepts that this will sometimes produce a higher penalty, and says it applies even where the unrelated errors were made despite taking reasonable care. In HMRC’s Stuart PLC example the normal rules actually gave no penalty, because an unrelated overstatement wiped out the PLR.

The rule is available for every Schedule 24 behaviour: careless, deliberate, deliberate and concealed, and a failure to take reasonable steps to tell HMRC about an inaccuracy (CH82390). For VAT, CH81143 shows how this interacts with error correction. Sonya, who found a £6,000 error that would reverse automatically and was allowed to correct it on her next return, took reasonable steps and incurred no penalty. Vijay, whose £120,000 error was too large to correct that way and who did nothing because it would reverse automatically, was treated as careless. See VAT inaccuracy penalties for the wider VAT rules.

Is there still interest on the tax that was paid late?

Yes. The delayed tax rule only reduces the penalty. For VAT accounting periods starting on or after 1 January 2023, HMRC’s guidance says late payment interest is charged on amounts overdue following a return, an amendment or correction of a return, or a VAT assessment. For income tax self assessment, HMRC’s manual at SALF308A says interest on extra tax from an amended self assessment runs from the original due date. HMRC’s rate is the Bank of England base rate plus 4% from 6 April 2025, and its published table shows 7.75% from 9 January 2026. More detail is in HMRC late payment interest.

Illustration only. A trader’s closing stock is carelessly understated, pushing £8,000 of tax into the next annual return, where it reverses automatically 12 months later. PLR is 5% of £8,000, so £400. The maximum careless penalty is £120, but interest on the £8,000 for the year it was paid late is charged separately at the rates in force.

What mistakes should you avoid?

Accepting a penalty based on the full tax when the error was purely one of timing and reversed automatically.
Arguing for delayed tax treatment where the later payment followed a cashflow problem rather than an automatic reversal.
Overlooking unrelated errors in the same periods, which switch the delayed tax rule off.
Measuring the delay from the payment date rather than from period end date to period end date.
Assuming a large VAT error can be left to reverse on its own without telling HMRC.
Forgetting that interest on the tax is charged in addition to any penalty.

Our guide to penalties for tax return errors explains how behaviour is judged in the first place.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.