HMRC penalty explanation letters

A penalty explanation letter is HMRC’s written account of the penalty it intends to charge, sent before the formal penalty assessment. HMRC’s guidance requires it to set out the inaccuracies, the evidence of behaviour, why the disclosure was prompted or unprompted, the reductions given and any suspension conditions, and to give you a reasonable opportunity to respond, usually about 30 days when the case is run by correspondence. It is not itself a decision you can appeal, so this is the cheapest point to correct HMRC’s thinking.

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Why does HMRC send a letter before charging the penalty?

HMRC’s Compliance Handbook at CH408000 says that before charging a penalty the officer must give the person a written explanation of their conclusions about the penalty and a reasonable opportunity to respond. HMRC links this to the Human Rights Act. Its guidance at CH300200 says inaccuracy penalties must be treated procedurally as “criminal” for the purposes of Article 6 of the European Convention, although they remain civil penalties in UK law, so the person must be kept informed and the matter dealt with without unreasonable delay.

The letter comes late in a compliance check. Earlier, HMRC should have given you the Human Rights Act message and factsheet CC/FS9, together with the relevant penalty factsheet such as CC/FS7a for inaccuracies. CH402350 tells officers to explain at that stage that, if a penalty is due, they will send a letter explaining why with their calculations, and that you will have 30 days to send further information if you disagree.

Who decides the penalty before the letter is sent?

The letter reflects a decision already reviewed inside HMRC. CH407050 says the caseworker must obtain authorisation from an authorising officer, usually one level above, before giving or sending a penalty explanation letter. The authorising officer checks that the law is applied correctly and that the evidence would convince a tribunal. If the officer has discussed the penalty with you earlier, they should have told you their view still needed authorisation. This is why the letter is the first firm statement of HMRC’s position, and why changing it after it is sent requires a fresh authorisation and a new letter (CH409000).

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What does the letter contain?

For penalties processed on HMRC’s National Penalties Processing System, the letter is the NPPS1. CH408000 says it includes the officer’s text on:

the details of the inaccuracies, failures or wrongdoing;
the evidence of the behaviour that led to them, which decides whether the penalty is careless, deliberate, or deliberate and concealed;
the facts that determined whether the disclosure was prompted or unprompted;
the reasons for any reductions given for disclosure;
any suspension conditions and the period of suspension.

Where your agreement to suspension conditions is needed, an NPPS101 agreement form is produced alongside it. In deliberate cases the letter must also explain the implications: possible inclusion in the Managing Serious Defaulters programme and possible publication of your details. Some of the text becomes part of the penalty schedule attached to the later assessment.

How long do you have to respond?

There is no statutory period. CH408000 tells officers to allow a reasonable time, taking account of the complexity of the case, your possible need for professional advice and any earlier discussion of the penalty. As a guide:

How the penalty was explained	Time HMRC should allow
By correspondence	Approximately 30 days
In a meeting or telephone call	At least five days
Copy handed over and fully discussed at a meeting	The assessment can be issued immediately

If HMRC is close to the time limit for assessing the penalty, the guidance allows it to shorten the period, even sending the letter and the assessment together. Our page on time limits for penalty assessments explains when that pressure arises. If you need longer because, for example, you are gathering evidence of reasonable care, ask in writing before the period ends.

Can you appeal against the letter?

No. CH414100 states that the NPPS1, NPPS100 and NPPS100(S) penalty explanation letters are not notices containing appealable decisions; they summarise the decision and the calculation. The appealable documents are the NPPS2 notice of penalty assessment, any amended assessment, and the notice of penalty suspension. Under Schedule 24 to the Finance Act 2007 those decisions cover whether a penalty is payable, its amount, a refusal to suspend it and the suspension conditions. The appeal clock, normally 30 days, starts from the assessment, not the letter. See how to appeal an inaccuracy penalty for that stage.

How should you respond?

Treat the letter as a draft you are invited to correct. Check each element against the facts:

Is there an inaccuracy at all, and is the potential lost revenue right? Errors in the tax figure flow straight into the penalty.
Behaviour. CC/FS7a says HMRC will not charge an inaccuracy penalty if you took reasonable care, for example by keeping accurate records and checking with an adviser when unsure. If HMRC says deliberate, look at the evidence it cites; a deliberate finding raises the penalty and brings the serious defaulter consequences.
Prompted or unprompted. Check the dates. A disclosure made before you had reason to believe HMRC had found or was about to find the problem is unprompted, with a lower minimum.
Telling, helping and giving. If the officer has cut the reduction for delay or missing documents, set out what you provided and when.
Suspension. For a careless penalty, propose conditions that would improve your records or processes. Suspension is only possible for careless inaccuracies, for up to two years.
Special circumstances. If something unusual makes the penalty unfair, ask for special reduction. Inability to pay does not qualify.

Put your response in writing, attach evidence and say what change you want. HMRC’s guidance requires it to give you that opportunity before issuing the assessment, and anything you raise now also forms part of the record if the matter later goes to review or tribunal.

What if you do not agree to the suspension conditions?

CH405225 says that if you do not agree some or all of the conditions, HMRC considers with a manager whether you are likely to comply anyway. If you say you will comply even though you do not agree with them, HMRC can suspend without agreement after authorisation. If compliance is unlikely, it will not suspend. Agreement does not have to be on the NPPS101: CH405260 says any correspondence confirming acceptance is enough.

What happens after you respond?

CC/FS7a says that after considering what you have told it, HMRC will either send a penalty assessment notice or invite you into a contract settlement covering tax, interest and penalty. The penalty must be paid within 30 days of the notice under paragraph 13 of Schedule 24. In contract settlement cases where the penalty is explained at a settlement meeting, the explanation letter is optional unless the penalty is suspended, because the letter is then the written record of the suspension conditions.

Illustration only. After a check, Priya receives a letter proposing a careless penalty on £4,000 of undeclared rental profit, treated as prompted, with a 70% reduction for disclosure. She replies within the 30 days with emails showing she raised the issue with her accountant before HMRC wrote. HMRC accepts the disclosure was unprompted, re authorises a lower figure and sends a new letter before assessing.

What mistakes do people make?

Ignoring the letter because it is not the assessment, and losing the easiest chance to change the outcome.
Waiting to raise points until the appeal, when HMRC’s position is already authorised and formal.
Arguing about the amount without challenging the behaviour finding, which sets the penalty range.
Assuming the 30 day response period is an appeal deadline. It is not; the appeal period runs from the assessment.

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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.