⚠️ Penalty Alert
HMRC penalty rates increased significantly in 2025. Late payment interest is now 8.00% from August 2025, up from the previous rate. Corporation tax late filing penalties start at £100 and can reach £1,000 plus up to 20% of unpaid tax.
1. Missing VAT Registration Deadlines
The Mistake
Many businesses exceed the £90,000 VAT threshold without realising they must register within 30 days. This is particularly common during periods of rapid growth or seasonal spikes in revenue.
Current Rules for 2025
| Scenario | Registration Deadline | Consequences of Missing |
|---|---|---|
| Exceeded £90,000 in last 12 months | 30 days from crossing threshold | Must pay VAT on all sales since threshold date |
| Expecting to exceed £90,000 in next 30 days | 30 days before expected date | Penalty based on amount owed and lateness |
Real Example: Construction Company
A building contractor had £85,000 turnover by November 2024. A large December contract pushed them to £105,000 for the year. They should have registered by 30 January 2025 but didn't realise until their accountant mentioned it in March.
Cost: VAT due on £20,000 of sales (£4,000) plus penalties and interest.
How to Avoid
- Monitor monthly turnover against the £90,000 threshold
- Set up alerts when approaching £75,000 (early warning)
- Consider voluntary registration if turnover is £70,000+ and growing
- Factor VAT into pricing before crossing the threshold
2. Claiming Invalid Business Entertainment Expenses
The Mistake
Business owners routinely claim meals, drinks, and hospitality costs as business expenses, not realising HMRC's strict entertainment rules disallow most of these deductions.
What HMRC Actually Allows
| Expense Type | Allowable? | Conditions |
|---|---|---|
| Client meals and drinks | ❌ No | Business entertainment is not deductible |
| Staff Christmas party | ✅ Yes | Open only to employees and reasonable cost |
| Conference with refreshments | ✅ Partial | Travel allowed if main purpose is business; food/drink not allowed |
| Restaurant owner's food costs | ✅ Yes | Normal course of trade exception |
HMRC's Definition
"With certain exceptions, expenditure on business entertainment or gifts is not allowable as a deduction against profits, even if it is a genuine expense of the trade or business."
Safe Approach
- Separate employee entertainment from client entertainment in your accounting
- Keep detailed records showing who attended and the business purpose
- Never claim client meals, gifts, or hospitality as business expenses
- Consider employee entertainment as a benefit in kind for tax purposes
3. Self Assessment Deadline Confusion
The Mistake
Directors and sole traders frequently miss critical Self Assessment deadlines, triggering automatic penalties and interest charges.
Key Dates for 2025-26 Tax Year
| Deadline | Requirement | Penalty for Missing |
|---|---|---|
| 5 October 2025 | Tell HMRC you need to file a return | Potential penalty determination |
| 31 October 2025 | Paper tax return deadline | £100 immediate penalty |
| 30 December 2025 | Online return if paying via PAYE code | Cannot use PAYE collection |
| 31 January 2026 | Online return and tax payment | £100 penalty plus interest |
| 31 July 2026 | Second payment on account | Interest and penalties |
Common Scenario: Company Director
A director takes dividends throughout the year but assumes the company accountant handles all tax obligations. They don't realise they need to file a personal Self Assessment return.
Result: £100 penalty for late filing, plus interest on any unpaid dividend tax.
Prevention Strategy
- Set calendar reminders for all SA deadlines from April onwards
- File returns in November/December, not January
- Pay any tax due by 31 January to avoid interest charges
- Consider making payments on account to spread the cash flow impact
4. Inadequate Record Keeping
The Mistake
SMEs often maintain poor records, missing receipts, or storing documents inadequately. When HMRC investigates, they cannot substantiate their expenses or income claims.
HMRC's 2025 Requirements
Minimum Standards:
- Retention period: 6 years from end of accounting period
- Detail level: "Sufficient detail to allow the person to make a correct and complete return"
- Income records: All invoices, contracts, sales books, till rolls
- Expense records: All receipts, petty cash books, orders, delivery notes
- Digital compliance: Making Tax Digital compatible software (from 2026)
Consequences of Poor Records
- £3,000 fine from HMRC
- Potential director disqualification
- Denied expense claims during investigations
- Estimated tax assessments from HMRC
- Extended compliance checks
Case Study: Marketing Agency
An agency claimed £15,000 in travel expenses but could only provide credit card statements, not detailed receipts. During an HMRC enquiry, they had to pay tax on the disallowed expenses plus penalties.
Better approach: Digital receipt scanning, expense management software, monthly reconciliations.
5. Corporation Tax Filing Delays
The Mistake
Companies file their CT600 returns late, often due to delayed accounts preparation or confusion about deadlines.
2025 Penalty Structure
| How Late | Penalty | Additional Consequences |
|---|---|---|
| 1 day late | £100 | Even if no tax due |
| 3 months late | Additional £200 | Total £300 |
| 6 months late | Additional £200 | Total £500 + HMRC determination |
| 12 months late | Additional £500 | Total £1,000 + tax-related penalties |
Key Deadlines
- CT600 return: 12 months after accounting period end
- Tax payment: 9 months and 1 day after accounting period end
- Large company payments: Quarterly instalments during accounting period
HMRC Determination Risk
If your return is 6 months late, HMRC will estimate your corporation tax liability. You'll be charged penalties on this estimated amount even if you actually owed less tax.
How to Avoid These Mistakes
Immediate Actions
- Set up monitoring systems for VAT thresholds and key deadlines
- Review your expense policies to exclude entertainment costs
- Implement digital record keeping with cloud backup
- Create a tax calendar with all filing and payment deadlines
- Consider professional help for complex situations
Red Flags for HMRC Investigations
- High entertainment expenses relative to turnover
- Repeated late filings or payments
- Large cash transactions without proper documentation
- Inconsistent profit margins between years
- Missing VAT registration despite high turnover
When to Get Professional Help
Consider professional accounting support if:
- Annual turnover exceeds £500,000
- You've previously made any of these mistakes
- Business structure is changing (partnership to limited company)
- Facing an HMRC investigation or compliance check
- Managing multiple income streams or complex expenses
- Planning significant business investments or changes
Protect Your Business from Tax Mistakes
Our team helps UK SMEs maintain full HMRC compliance while maximising legitimate tax savings. Book a free consultation to review your current practices and identify potential risks.