Penalty Suspension Under Schedule 24 FA 2007

Penalty suspension is one of the most powerful and most underused, tools available in a Schedule 24 inaccuracy penalty case. For careless inaccuracies, HMRC has a statutory duty to consider suspension and, where the right conditions can be set, should offer it. A successfully suspended penalty is cancelled entirely at the end of the suspension period if conditions are met. Yet in practice HMRC routinely fails to offer or explain its refusal of suspension and advisers too rarely challenge that failure. This guide analyses paragraph 14 of Schedule 24 FA 2007, the case law on HMRC’s duty and how to force suspension or challenge its refusal at the FTT.

What Is Penalty Suspension?

Penalty suspension is a mechanism under paragraph 14 of Schedule 24 to the Finance Act 2007 that allows HMRC to suspend all or part of a penalty for a careless inaccuracy for a specified period of up to two years. During the suspension period, the penalty does not have to be paid. If the taxpayer meets all the conditions set for the suspension and does not incur any further inaccuracy penalties during the period, the penalty is cancelled at the end, extinguished entirely, with no payment ever required. If the conditions are not met or a further penalty arises, the suspended amount becomes immediately payable.

Suspension is not available for deliberate inaccuracies. Its availability is therefore entirely contingent on the conduct being characterised as careless, which is itself a reason why the careless/deliberate distinction, analysed in our guide on the meaning of deliberate behaviour, is so commercially important. Winning the careless argument does not just reduce the penalty, it opens the door to cancellation.

Paragraph 14 Schedule 24: The Statutory Framework

Paragraph 14 of Schedule 24 FA 2007 provides:

“(1) HMRC may suspend all or part of a penalty under paragraph 1 that is due for a careless inaccuracy if it thinks that complying with a condition of suspension would help P [the taxpayer] avoid becoming liable to further penalties under paragraph 1 for careless inaccuracy. (2) A condition of suspension must (a) be specific, (b) require P to take specified action and (c) relate to the inaccuracy in respect of which the penalty has been incurred or a related inaccuracy in another document.”

The effect of paragraph 14 is a discretionary power: HMRC “may” suspend, not “must”. However, the discretion is not unfettered. The case law has established that where it is possible to set conditions that would genuinely help the taxpayer avoid future penalties, HMRC should offer suspension and a refusal to consider it properly, or a refusal that cannot be explained by the absence of suitable conditions, can be challenged.

Careless Inaccuracies Only

Suspension is expressly limited to careless inaccuracies under paragraph 14(1). It has no application to:

• Deliberate but not concealed inaccuracies (Schedule 24, paragraph 3(1)(b));
• Deliberate and concealed inaccuracies (paragraph 3(1)(c));
• Failure-to-notify penalties under Schedule 41 FA 2008 (a separate regime with its own suspension provisions);
• Late-filing and late-payment penalties under Schedules 55 and 56 FA 2009 (also with separate provisions).

The Conditions HMRC Must Set

Under paragraph 14(2), a condition of suspension must meet three requirements:

1. Specific , vague conditions (“take more care in future”) do not qualify. The condition must identify particular, measurable steps;
2. Require P to take specified action , conditions must impose positive obligations, not merely require the taxpayer to avoid repetition;
3. Relate to the inaccuracy , the condition must relate to the specific type of inaccuracy in respect of which the penalty was charged or a related inaccuracy in another document.

Conditions HMRC typically sets include: instructing a professional accountant to prepare and review future returns; implementing a specific bookkeeping system for the type of income that was under-declared; providing training on the relevant tax obligations; and setting up a documented review process to ensure the inaccuracy type cannot recur.

HMRC’s Duty to Consider Suspension

Although paragraph 14 is expressed as a power (“may suspend”), the courts and tribunals have confirmed that HMRC has a duty to consider suspension in every careless-inaccuracy case. Failing to consider it at all or refusing without explanation, is itself a flaw that can be challenged. HMRC’s own internal guidance (the Compliance Handbook) instructs officers to consider suspension as a matter of course for careless inaccuracy penalties.

The cases establish that the refusal of suspension must be reasoned: HMRC must explain why it concluded that no conditions could be set that would help avoid future penalties. If the refusal amounts to nothing more than a blanket assertion that “suspension is not appropriate” without identifying the specific reason, it is vulnerable to challenge.

What Good Suspension Conditions Look Like in Practice

The most effective approach for an adviser is to propose specific conditions to HMRC rather than waiting for HMRC to formulate them, because:

• HMRC has no obligation to draft conditions for the taxpayer; it simply has to consider whether any conditions would work;
• A taxpayer who proposes concrete, evidenced conditions is much harder to refuse than one who merely requests suspension;
• Proposing conditions shapes the conditions eventually set, making them easier to satisfy.

Well-drafted suspension conditions in a self-assessment income case might include: “The taxpayer will engage a qualified tax adviser (ICAEW, CIOT or equivalent) to review and sign off each self-assessment return for the suspension period”; or “The taxpayer will maintain a contemporaneous register of all rental income received and provide it to their accountant at least 90 days before the return filing date.” These are specific, measurable, action-oriented and directly related to the type of inaccuracy.

Cancellation or Crystallisation at the Period End

At the end of the suspension period (up to two years), one of two things happens:

• Cancellation: If the taxpayer has complied with all the conditions and has not incurred a further inaccuracy penalty during the period, HMRC must cancel the suspended penalty. The taxpayer owes nothing, the penalty is gone.
• Crystallisation: If conditions are not fully met or if a further penalty for careless (or deliberate) inaccuracy arises during the period, the suspended penalty becomes immediately payable. The suspended amount is added to any new penalty assessed.

The adviser’s task during the suspension period is to monitor compliance with conditions and to ensure the client has evidence of compliance (signed-off returns, accountant letters, system records) that can be produced to HMRC at the end of the period.

The FTT’s Review Standard

Under paragraph 17(3) of Schedule 24, on an appeal the tribunal may rely on the suspension power “to the same extent as HMRC or to a different extent, but only if the tribunal thinks that HMRC’s decision in respect of the application of [the suspension power] was flawed.” Paragraph 17(6) defines “flawed” as “flawed when considered in the light of the principles applicable in proceedings for judicial review.”

This means the FTT is not conducting a full merits rehearing on suspension. It applies judicial review principles:

• Illegality: Did HMRC correctly understand the legal test for suspension? Did it appreciate that suspension is available for careless inaccuracies and that it must consider it?
• Irrationality: Was HMRC’s refusal so unreasonable that no reasonable HMRC officer, properly directed, could have reached it, for example, refusing suspension where conditions were obviously available and appropriate?
• Procedural impropriety: Did HMRC consider the application at all or did it fail to give reasons for refusal?

If the FTT finds HMRC’s decision flawed on any of these grounds, it can exercise the suspension power itself under paragraph 17(3)(b), meaning it can set its own conditions and direct suspension for an appropriate period. This gives the Tribunal real teeth on this issue, provided the “flawed” threshold is met.

Challenging a Refusal

The refusal of suspension is not separately appealable, it must be raised as part of the appeal against the penalty itself. The correct approach is:

1. In the notice of appeal or grounds of appeal, expressly plead that HMRC’s decision on suspension was flawed;
2. Identify the specific ground of flawedness: failure to consider, failure to give reasons, refusal despite workable conditions;
3. Exhibit the conditions that were proposed (or those that should have been proposed) and explain why they would have been workable;
4. Ask the Tribunal, in the event it finds the penalty itself not to be disputed or reduced to nil, to exercise the suspension power itself under paragraph 17(3)(b) and set appropriate conditions.

Raising suspension as a ground is important even where the Tribunal reduces the penalty: even a reduced penalty can be suspended and cancellation at the end of the suspension period means the client pays nothing at all.

Interaction With the Deliberate/Careless Distinction

As noted above, suspension is only available for careless inaccuracies. This creates a powerful incentive to pursue the careless characterisation robustly, even where the penalty reduction from deliberate to careless is itself modest. A 70% PLR penalty reduced to 30% PLR is commercially significant; the same 30% PLR penalty suspended for two years and then cancelled means the taxpayer pays nothing. The full value of winning the careless argument is therefore not visible from the penalty band alone. See our full analysis in our guides on the deliberate behaviour test and the Schedule 24 penalty framework.

Practitioner Strategy

Address Suspension From the First Meeting

Suspension should be on the agenda from the moment a careless penalty is in prospect, not as an afterthought after the penalty has been assessed. Understanding the type of inaccuracy, its systemic cause and what systemic changes can remedy it sets up the suspension argument long before HMRC issues the penalty notice.

Draft and Propose Conditions

Do not wait for HMRC to draft conditions. Propose specific, detailed, measurable conditions in the response to the penalty assessment. Conditions should be: drafted to target the exact type of inaccuracy; achievable by the taxpayer; evidentiable (the taxpayer must be able to demonstrate compliance at the end of the period); and of appropriate duration, 12 to 24 months.

Document HMRC’s Response

If HMRC refuses suspension, require written reasons. A bare refusal without reasons is itself a flaw. Engage with those reasons: if HMRC says no conditions can be set, challenge what conditions it considered and why it rejected them.

Include Suspension in the Grounds of Appeal

Even if the substantive appeal (deliberate vs careless or quantum) is the primary focus, always plead the suspension ground separately. The FTT has the power to impose suspension, use it.

Practitioner Checklist

1. Confirm the penalty is for a careless inaccuracy , suspension is only available for careless, not deliberate. If deliberate, run the deliberate behaviour challenge first.
2. Raise suspension early , at the penalty assessment stage, not only on appeal.
3. Draft specific suspension conditions targeted to the type of inaccuracy and propose them in writing to HMRC before or alongside any penalty appeal.
4. Require written reasons from HMRC if suspension is refused, a formulaic or absent reason is itself grounds for challenge.
5. Plead suspension as a separate ground in the appeal notice , assert that HMRC’s refusal was “flawed” within paragraph 17(6) on whichever judicial review ground applies.
6. Ask the Tribunal to exercise the suspension power under paragraph 17(3)(b) if it finds the refusal flawed.
7. Monitor conditions during the suspension period and ensure the client collects documentary evidence of compliance throughout.
8. Diarise the period end and provide HMRC with compliance evidence in good time to secure cancellation.

Frequently Asked Questions