The number of Failure to Notify penalties issued by HMRC for capital gains tax (CGT) have more than doubled over the past two tax years, a freedom of information (FOI) request by Financial Software Ltd (FSL) has revealed.

The increase in penalties came following a reduction in the annual exemption amount (AEA) from £12,300 to £6,000 in 2023/24 and to £3,000 in 2024/25.

In 2022/23, HMRC issued 165 Failure to Notify penalties for CGT, rising to 254 in 2023/24 and 350 in 2024/25, according to the FOI.

A Failure to Notify penalty can be issued for several reasons, including clients not telling HMRC by the relevant deadline that they have sold an asset and need to make a capital gains payment, that their circumstances have changed in a way that affects their tax position, or that their company is liable for corporation tax.

Additionally, a penalty can occur if clients have not told HMRC by an appropriate deadline that they are liable to tax because their new business made a profit, that their business turnover reached the VAT registration threshold, or that they have started a type of business that must register with HMRC.

The penalty is calculated on potential lost revenue, which is based on the amount of unpaid tax due to the Failure to Notify, although HMRC can reduce the penalty if they are informed about the failure and dependent on the quality of the disclosure.

FSL noted that HMRC uses the National Penalty Processing System (NPPS) to record certain types of penalty information, including Failure to Notify penalties, but the system is not used across all areas of HMRC so the figures “should not be considered a complete HMRC picture”.

Commenting on the FOI figures, FSL managing director, Michael Edwards, said: “People are seeing bigger fines and interest penalties as HMRC looks to boost the UK’s coffers after fresh impetus from the Chancellor of the Exchequer Rachel Reeves. She has committed to funding more investigations on ‘missing’ tax receipts, aiming to pull in an additional £5.1bn a year by 2029.

“With CGT Failure to Notify penalties doubling over the last couple of years, clients will need their advisers more than ever to be on top of their investment tax situation, as well as potential CGT charges that may occur outside of their investment portfolios.”

FSL tax reporting analyst, Alex Ranahan, added: “To me, it seems simply unbelievable that only 165 Failure to Notify penalties were issued in 2022-23. Similarly, it’s astonishing that just 350 taxpayers, failed to notify HMRC that they were subject to CGT over the last year. These figures are most likely the tip of the iceberg.

“We know from the Public Accounts Select Committee that HMRC does not know how many billionaires pay tax in the UK.

“We also know from the consultations issued around third-party data, that HMRC struggles to identify investment income and gains, while the National Audit Office has identified serious issues with HMRC’s ability to effectively tax the most wealthy. Almost half of complex high-value cases were closed in 2023-24 with no yield and just 25 prosecutions made.

“With the annual exempt amount being decreased to £3,000 and therefore bringing more people into scope for CGT, we expect a corresponding and more substantial rise in penalties issued for failure to notify.

“Taxpayers should be aware of their responsibilities and HMRC should be doing everything they can to make people aware of their possible liabilities in order to avoid costly enquiries and penalties later on.”

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