Schedule 24 FA 2007: HMRC Penalty Framework, A Practitioner Analysis

Schedule 24 to the Finance Act 2007 is the cornerstone of HMRC’s civil penalty armoury for inaccurate returns. Every adviser engaged in a compliance check, Code of Practice 8 investigation or discovery assessment challenge will encounter it. This analysis dissects each element of the regime, behaviour categorisation, potential lost revenue, quality of disclosure abatement, suspension, special circumstances, offshore overlay and FTT challenge strategy, at the depth required for practitioner application.

Introduction & Legislative Background

Schedule 24 to the Finance Act 2007 came into force on 1 April 2009, replacing the previous penalty code under section 95 of the Taxes Management Act 1970 and the equivalent provisions in VATA 1994 for VAT. The old s95 TMA regime imposed a flat-rate penalty (typically 100% of the tax unpaid, with discretionary reduction) and was widely criticised for opacity and inconsistent application. Schedule 24 was designed to create a transparent, structured regime aligned with the nature and seriousness of taxpayer behaviour.

The regime applies to all major UK taxes from its commencement: income tax, corporation tax, capital gains tax, inheritance tax, value added tax and stamp duty land tax. It covers inaccuracies in returns or documents submitted to HMRC, including partnership returns, company tax returns, PAYE real time information submissions and any other document specified by regulation. The fundamental architecture, a “potential lost revenue” base multiplied by a behaviour-adjusted percentage, with structured abatement for quality of disclosure, has remained essentially unchanged since 2009, though offshore overlays and consultation on reform have accumulated around it.

A critical distinction: Schedule 24 addresses inaccuracies in documents already submitted. It does not address failure to notify a new liability (Schedule 41 FA 2008), late filing (Schedule 55 FA 2009) or late payment (Schedule 56 FA 2009). Advisers must identify which penalty head is in issue before attempting any abatement or appeal strategy.

The Three Behaviour Categories

Paragraph 3 of Schedule 24 prescribes three mutually exclusive categories of behaviour, each carrying a different penalty range. The categorisation is the most contested element of any Sch 24 penalty, it determines both the maximum penalty and the minimum to which it can be reduced. HMRC bears the burden of proof on category at the FTT.

1. Careless Inaccuracy

An inaccuracy is “careless” if it results from a failure to take reasonable care. This is an objective standard, assessed against what a reasonable person in the taxpayer’s position would have done. Para 1(1) Sch 24 provides that a person is not liable to a penalty if the inaccuracy was not careless at the time the document was submitted, but critically, para 1(2) deems an inaccuracy to be careless if the taxpayer later discovers it and fails to take reasonable steps to inform HMRC. Post-submission discovery without disclosure therefore attracts the same treatment as original carelessness.

What constitutes “reasonable care” is not defined in the statute and has been developed substantially through tribunal case law. Relevant factors include:

• Whether the taxpayer was professionally represented (a higher standard of care is expected where a competent agent was retained and given adequate information)
• The complexity of the taxpayer’s affairs relative to their level of understanding
• The adequacy of record-keeping and internal controls
• Whether the taxpayer took professional advice on areas of difficulty
• Whether the taxpayer checked the return before submission

2. Deliberate (Not Concealed)

A deliberate inaccuracy exists where the taxpayer knew the document was inaccurate when submitted but did not take active steps to conceal that inaccuracy. The classic case is the taxpayer who understates income knowing it to be understated, but does not destroy records or falsify documents. HMRC’s approach to evidence is necessarily inferential: deliberate behaviour will rarely be admitted. HMRC looks for patterns of systematic understatement, implausible explanations for large discrepancies, selective inclusion of receipts and inconsistency between declared figures and third-party data (banking records, RTI data, property registers). HMRC must satisfy the FTT to the civil standard, the balance of probabilities, but the tribunal will apply a heightened evidential scrutiny commensurate with the gravity of the allegation (Re B (Children) [2008] UKHL 35 principles apply).

3. Deliberate and Concealed

This is the most serious category. “Concealment” requires active steps taken to hide the inaccuracy. Mere failure to disclose does not suffice. HMRC’s published guidance and tribunal decisions identify the following as evidence of concealment: destruction or alteration of records; creation of false invoices or accounts; use of third-party accounts or offshore structures to obscure receipts; coaching of employees to provide misleading information; and using multiple identities or entities to fragment income. The distinction between “deliberate not concealed” and “deliberate and concealed” is therefore a distinction between passive suppression and active obfuscation.

Penalty Percentages, Prompted & Unprompted Disclosure

The penalty is expressed as a percentage of the Potential Lost Revenue (PLR). The percentage depends on the behaviour category and whether disclosure was prompted or unprompted. “Unprompted” disclosure means disclosure made at a time when the taxpayer had no reason to believe HMRC had discovered or was about to discover, the inaccuracy. Once HMRC has opened an enquiry, issued a notice of investigation or otherwise signalled awareness of the issue, any subsequent disclosure is “prompted”. The distinction is binary, there is no “part-unprompted” category.

The practical significance of the unprompted/prompted distinction is most acute in deliberate cases. Unprompted disclosure in a deliberate case halves the minimum penalty from 35% to 20% , a reduction of 15 percentage points before any quality of disclosure abatement is applied. For deliberate and concealed cases, the unprompted minimum is 30% against 50% prompted, a 20 percentage-point advantage. Advisers who are aware of or discover, a deliberate inaccuracy before HMRC has opened enquiries should consider the timing of any voluntary disclosure very carefully.

Potential Lost Revenue (PLR)

The penalty is a percentage of the “Potential Lost Revenue” (PLR), the additional tax that would have been payable had the inaccuracy not occurred and the return been correct. PLR is defined in paras 5–8 of Schedule 24. It is not simply the tax that is unpaid as a result of the enquiry; it is a carefully constructed figure that may diverge from the amount of additional tax assessed.

Key points on PLR calculation:

• PLR is the “net” additional tax: where an inaccuracy has understated a loss, PLR is 10% of the understated loss (not 100%), reflecting that the loss would have been carried forward to reduce future liabilities rather than giving rise to an immediate tax repayment.
• Credit for tax already paid: if the inaccuracy in one document is linked to an overpayment in another return, the overpayment reduces the PLR. HMRC cannot charge a penalty on tax that, taken overall, was not lost.
• Interaction with surcharges and interest: PLR does not include interest or surcharges. The penalty is charged on the primary tax loss only. This is distinct from HMRC’s power to charge interest under s101 FA 2009 (late payment interest), which runs separately from any penalty.
• Mitigation of PLR by disclosure: where a taxpayer makes voluntary disclosure of additional liabilities beyond those identified by HMRC, the voluntarily disclosed amount contributes to the PLR but should attract the full benefit of unprompted disclosure abatement.

Quality of Disclosure Abatement

Paragraph 4 of Schedule 24 provides for reduction of the penalty to reflect the quality of the taxpayer’s disclosure. The available reduction is the difference between the maximum and minimum penalty for the applicable category and disclosure type. HMRC (and the FTT on appeal) apportion this available reduction across three components, which together account for 100% of the reduction range:

1. Telling (30% of available reduction) , The taxpayer proactively provides full and accurate information about the nature, extent and cause of the inaccuracy. A taxpayer who tells HMRC everything HMRC needs to know, without being asked, scores highly on this component. Partial or misleading disclosure scores correspondingly lower.
2. Helping (40% of available reduction) , The taxpayer actively assists HMRC in quantifying the inaccuracy: producing calculations, identifying all affected years, facilitating third-party enquiries. The largest weighting reflects that quantification is the most resource-intensive part of an investigation for HMRC and its saving is the most commercially significant mitigation.
3. Giving access (30% of available reduction) , The taxpayer provides HMRC with access to records, premises and third parties without requiring formal information notices, production orders or tribunal applications. Cooperation with informal requests scores highly; contested statutory notices indicate poor cooperation.

Worked Example: Deliberate Inaccuracy, Unprompted Disclosure

A sole trader deliberately omits £80,000 of cash sales over three years. Total PLR (income tax and NICs): £35,000. The inaccuracy is characterised as deliberate (not concealed). The taxpayer makes unprompted disclosure before any HMRC contact.

• Maximum penalty: 70% of £35,000 = £24,500
• Minimum penalty (unprompted deliberate): 20% of £35,000 = £7,000
• Available reduction: £24,500 − £7,000 = £17,500
• If maximum telling, helping and access are all awarded (100% of available reduction), penalty = £7,000
• If HMRC awards 80% of available reduction: reduction = £14,000; penalty = £24,500 − £14,000 = £10,500

The three-component breakdown for maximum reduction at 100%: telling = £5,250 (30% × £17,500); helping = £7,000 (40% × £17,500); access = £5,250 (30% × £17,500).

Suspension of Careless Penalties

Paragraph 14 of Schedule 24 confers on HMRC a discretion to suspend all or part of a penalty for a careless inaccuracy for a period of up to two years. Suspension is not available for deliberate or deliberate-and-concealed penalties. The suspension is conditional: HMRC must specify conditions in the suspension notice designed to prevent the taxpayer from incurring further careless inaccuracy penalties. The conditions may relate to record-keeping, accounting systems, engagement of a competent adviser or any other specific improvement that addresses the root cause of the inaccuracy.

When Must HMRC Offer Suspension?

The statute provides that HMRC “may” suspend a penalty, but this has been interpreted by the FTT and Upper Tribunal to impose a duty to suspend where conditions can be set that would help prevent future careless inaccuracies. If HMRC refuses suspension in a case where appropriate conditions could have been set, that refusal is capable of being challenged on appeal. The leading approach is set out in HMRC v Hicks [2020] UKUT 12 (TCC), which confirmed that the tribunal can exercise jurisdiction to suspend a penalty even where HMRC has refused, provided the statutory conditions are met.

Consequences of Breach

If the taxpayer breaches the suspension conditions during the suspension period, the suspended penalty becomes immediately payable. HMRC will notify the taxpayer of the breach; the taxpayer may appeal the notification. If the conditions are satisfied throughout the suspension period and no further penalty is incurred during that period, the suspended penalty is cancelled , it does not merely become payable at a reduced rate. The incentive for compliance is therefore considerable: a taxpayer who successfully meets suspension conditions effectively receives a full remission of the careless penalty.

Special Circumstances (Para 11)

Paragraph 11 of Schedule 24 provides that HMRC may reduce a penalty below the minimum if they consider that there are “special circumstances.” The term is not defined in the statute. Paragraph 11(3) explicitly states that special circumstances do not include the ability of the person to pay or the fact that a potential loss of revenue from one taxpayer is balanced by a potential over-payment by another.

FTT Approach to Special Circumstances

The tribunals have consistently interpreted para 11 narrowly. In Bluu Solutions Ltd v HMRC [2015] UKFTT 95 (TC) and subsequent cases, the FTT has confirmed that special circumstances must be something truly exceptional that takes the case outside the range of cases already addressed by the standard abatement mechanism. Factors that do not constitute special circumstances include:

• The taxpayer’s genuine cooperation during the enquiry (this is already reflected in the quality of disclosure abatement)
• Absence of previous defaults or a good compliance history
• Financial hardship or inability to pay
• The relatively modest size of the inaccuracy

What may qualify, on the facts, is a genuine misunderstanding of a complex or novel point of law by an inexperienced taxpayer without professional representation, particularly where the law itself was unclear at the time. The key is that the circumstance must be one that falls outside the contemplation of the standard penalty architecture.

Why Para 11 Arguments Rarely Succeed

Because the standard abatement mechanism is specifically designed to reward all cooperative, mitigating behaviour, para 11 is structurally residual. HMRC’s internal guidance treats it as a near-last resort. Advisers should not rely on para 11 as a primary argument; it should be raised as an alternative ground in any FTT appeal where the facts genuinely disclose something exceptional, but should never substitute for robust arguments on behaviour category, PLR and abatement scoring.

Offshore Penalty Overlay, FA 2015 Schedule 20

Where the inaccuracy relates to offshore income, gains or assets, the standard Schedule 24 regime is overlaid by the enhanced offshore penalty provisions in Schedule 20 to the Finance Act 2015. The overlay significantly increases penalty rates depending on the territory in which the relevant assets or income arise.

Territory Categories

For the purposes of Sch 20, territories are classified into three categories:

• Category 1: Territories with a high level of information exchange with the UK, including most EU member states, the United States, Australia and others listed in regulations. Standard Sch 24 rates apply without upward adjustment.
• Category 2: Territories with some information exchange but considered lower transparency. Enhanced maximum penalty rates apply: careless 45%, deliberate 105%, deliberate and concealed 150%.
• Category 3: Territories with limited or no information exchange. Maximum penalty for deliberate and concealed behaviour: 200% of PLR. These are the most severely penalised cases in the UK tax penalty code.

Asset-Based Penalty

Where the offshore inaccuracy involves assets held in a Category 2 or 3 territory, an additional asset-based penalty may be charged. This is calculated as a percentage of the value of the relevant offshore assets (not simply the PLR) and can apply concurrently with the standard percentage penalty. The asset-based penalty is designed to address cases where the PLR (the tax lost) is modest relative to the asset value, for example, where an offshore account has been accumulating undeclared interest at a low rate but the underlying capital has never been declared.

Sch 24 Behaviour Categorisation Under the Overlay

The same three behaviour categories, careless, deliberate, deliberate and concealed, apply under the Sch 20 overlay. The same telling, helping and access abatement components apply. However, the abatement is applied against the elevated (Sch 20) maximum, not the standard Sch 24 maximum. Advisers should therefore recalculate available abatement using the Sch 20 figures, not the standard table, for offshore cases.

Interaction with Sch 41 FA 2008 (Failure to Notify) and Sch 55 FA 2009 (Late Filing)

Schedule 41, Failure to Notify

Schedule 41 to the Finance Act 2008 imposes penalties for failure to notify HMRC of a liability to register for a tax or of the commencement of a new taxable activity. This is structurally distinct from Sch 24: Sch 41 applies where no return has yet been submitted (because the taxpayer failed to register), whereas Sch 24 applies to inaccuracies in returns already submitted. Both may arise concurrently, the most common scenario being a taxpayer who failed to register for VAT and, once discovered, is also found to have submitted inaccurate VAT returns in the period after they should have registered.

The key differences between Sch 41 and Sch 24 are:

• Applicable test: Sch 41 uses “reasonable excuse” (not “reasonable care”) as the defence to a non-deliberate penalty. Reliance on an agent is not a reasonable excuse under Sch 41 unless the taxpayer took reasonable care in selecting and supervising the agent, mirroring the Sch 24 position in practice, but the legal framing differs.
• PLR interaction: Where both Sch 41 and Sch 24 penalties apply, HMRC must avoid double-counting. The PLR for the Sch 24 penalty must be reduced to exclude any tax already taken into account as the basis for a Sch 41 penalty. The combined tax loss is the ceiling; HMRC cannot use the same lost revenue as the base for two separate penalties.
• Disclosure interaction: A voluntary disclosure that corrects both the failure to notify and subsequent inaccurate returns is generally treated as a single disclosure for both regimes, though HMRC will assess the quality of that disclosure separately for each penalty.

Schedule 55, Late Filing

Schedule 55 to the Finance Act 2009 governs late filing penalties. It is conceptually separate from Sch 24 and the two can coexist. A taxpayer who files a return late and that return contains a careless inaccuracy will face both a Sch 55 late filing penalty and a Sch 24 inaccuracy penalty. There is no double-penalty rule preventing this; they relate to different failures. However, advisers should note that where a late return is amended and the amendment corrects an inaccuracy, the Sch 24 penalty regime may apply to the original inaccuracy in the late-filed return. The existence of a Sch 55 penalty does not mitigate the Sch 24 penalty and vice versa.

Challenging a Sch 24 Penalty at the First-tier Tax Tribunal

A taxpayer who has received a Sch 24 penalty notice has a statutory right of appeal to the First-tier Tax Tribunal (FTT) under para 15 of Schedule 24. The notice of appeal must be lodged within 30 days of the penalty notice (or such further period as the tribunal permits). HMRC must be notified of the appeal simultaneously. An application for permission to appeal out of time should be made promptly where the deadline has been missed.

Grounds of Appeal

1. Wrong behaviour category , The most valuable ground where the evidence supports it. HMRC bears the burden of proving deliberateness or concealment on the balance of probabilities. An inability to explain an inaccuracy does not by itself establish deliberate behaviour.
2. Incorrect PLR calculation , The FTT has jurisdiction to correct the PLR computation. Arguments include: wrong year, wrong tax head, failure to credit related adjustments, incorrect netting of losses.
3. Wrong abatement calculation , Challenge the scoring of telling, helping and access. The FTT substitutes its own assessment; it does not merely review HMRC’s scoring for reasonableness.
4. Failure to offer suspension , Where HMRC has refused suspension of a careless penalty and conditions could feasibly be set to prevent recurrence, the FTT may direct suspension.
5. Special circumstances (para 11) , As noted above, a residual ground for truly exceptional cases.
6. Reasonable care, no penalty , The most complete defence: if the taxpayer took reasonable care, no penalty arises at all under para 1 Sch 24. This is a complete answer to the penalty, not merely a mitigation.

Burden of Proof

HMRC bears the burden of establishing the penalty on the balance of probabilities, including establishing the behaviour category, the PLR and the correctness of the abatement assessment. The taxpayer bears the burden of establishing any defence (e.g. that reasonable care was taken). In deliberate cases, the heightened evidential scrutiny applicable to serious allegations means HMRC must present cogent, direct evidence of deliberate conduct rather than mere inference from the size of an understatement.

HMRC’s Disclosure Obligations

In an FTT penalty appeal, HMRC must disclose all documents in their possession relevant to the penalty computation, including the penalty computation itself, the officer’s working papers, any internal guidance applied and any documents relied upon to establish behaviour category. Advisers should issue a disclosure request at the outset of FTT proceedings; undisclosed internal guidance can be a valuable source of challenge where HMRC has departed from its own stated criteria.

Practitioner Checklist, 10 Points to Review in Every Sch 24 Case

1. Is the penalty validly assessed? Check the time limit under para 13 Sch 24, generally two years from the end of the year of assessment in which the return was filed, extended for deliberate cases.
2. Is the correct behaviour category applied? Obtain HMRC’s evidence for the category and stress-test it. HMRC bears the burden of proof.
3. Is the PLR correctly calculated? Request the full computation. Check for double-counting, incorrect years, failure to credit related adjustments and incorrect treatment of loss understatements.
4. Was disclosure prompted or unprompted? Examine the precise sequence of HMRC contact and taxpayer disclosure. A generic campaign letter may not constitute “prompting” for a specific inaccuracy.
5. Has HMRC correctly scored telling, helping and access? Obtain the officer’s written scoring rationale. Challenge any component where the stated rationale does not reflect the evidence.
6. For careless penalties, was suspension offered? If not, consider whether the FTT should be invited to direct suspension and draft appropriate conditions.
7. Is this an offshore case? If so, confirm the applicable territory category and whether the asset-based penalty has been separately assessed. Verify that the Sch 20 overlay (not standard Sch 24) percentages have been correctly applied.
8. Does Sch 41 also apply? If a failure to notify arose concurrently, check that the PLR for the Sch 24 penalty has been reduced to avoid double-counting.
9. Are there special circumstances? Consider para 11, but only where the facts disclose something genuinely exceptional. Do not dilute stronger arguments by overreliance on a weak para 11 argument.
10. Has the 30-day appeal deadline been observed? Diarise the deadline from the date of the penalty notice. Out-of-time applications require a convincing explanation and are not guaranteed.

Frequently Asked Questions