HMRC Penalties for Inaccuracies Under Schedule 24 FA 2007

If you file a tax return that understates what you owe or overstates a repayment, HMRC penalties for inaccuracies under Schedule 24 of the Finance Act 2007 can add anywhere from nothing to 100% of the extra tax on top of the tax itself, and up to 200% where offshore income or assets are involved.¹ The exact figure depends on why the error happened, whether you came forward before HMRC noticed, and how fully you cooperated once the issue was on the table. The regime covers Income Tax, Capital Gains Tax, Corporation Tax, VAT, and several other taxes.

The Three Behaviour Categories

Everything starts with how HMRC classifies the behaviour behind the error. There are three levels, and each opens a different penalty range.

Careless. You failed to take reasonable care. Reasonable care means doing what a sensible person would do in your circumstances: keeping proper records, checking figures, and getting professional help when a transaction is complex. If you relied on a suitably qualified adviser, gave them all the relevant information, and followed their advice in good faith, HMRC will often accept that you took reasonable care and no penalty is due at all.²

Deliberate but not concealed. You knew the return was wrong when you filed it, but did nothing to hide the trail.

Deliberate and concealed. You knew the return was wrong and took active steps to cover it up. Fake invoices, destroyed records, and evidence fabricated during an enquiry all sit here. This is the most serious category and carries the highest penalties.

What HMRC Charges the Penalty On

Schedule 24 penalties are a percentage of the “potential lost revenue” (PLR), meaning the extra tax that would have gone unpaid if HMRC had not caught the error. In simple cases, PLR is the difference between the correct tax and the tax shown on your return.¹

Where a return overstates a loss that has already been used to reduce a tax bill, the PLR is the tax actually saved. Where the overstated loss has not yet been used, the PLR is 10% of the unused portion.¹ HMRC does not wait until you actually use a fictitious loss before penalising you, but the amount is smaller because the tax impact is still theoretical.

When a single return contains several errors, HMRC adds all the resulting understatements together. Overstatements can only offset understatements if they relate to the same tax and the same period, so a VAT overpayment cannot cancel out an Income Tax shortfall.

The Penalty Ranges

Within each behaviour category, the range depends on whether your disclosure was unprompted (made before HMRC had any reason to think there was a problem) or prompted (made after HMRC had already started asking questions).

For careless inaccuracies:³

Unprompted disclosure: 0% to 30% of PLR
Prompted disclosure: 15% to 30% of PLR

For deliberate but not concealed inaccuracies:³

Unprompted disclosure: 20% to 70% of PLR
Prompted disclosure: 35% to 70% of PLR

For deliberate and concealed inaccuracies:³

Unprompted disclosure: 30% to 100% of PLR
Prompted disclosure: 50% to 100% of PLR

The gap between the prompted and unprompted floors is where early action pays. A deliberate error disclosed before any enquiry opens starts at 20%; wait for HMRC to come knocking and the floor jumps to 35%. The ceiling is the same either way, so early disclosure only buys you a lower starting point, never a lower cap.

Moving Down Inside the Range

Where you land within a range depends on the quality of your disclosure, which HMRC assesses across three elements:⁴

Telling: admitting the inaccuracy in full and explaining what went wrong.
Helping: actively assisting HMRC to work out the correct tax and quantify the PLR.
Giving access: handing over the records HMRC needs to verify the figures independently.

HMRC weighs the timing, nature, and extent of each. Cooperating quickly counts for more than cooperating after months of correspondence. Full cooperation on all three elements pushes the penalty toward the minimum; partial cooperation leaves it near the maximum; refusing to cooperate typically means paying the full penalty. In concrete terms, a taxpayer with a deliberate inaccuracy who makes a full unprompted disclosure and cooperates completely can see the penalty drop from 70% to 20% of the tax at stake. The same taxpayer who waits for an enquiry and then drags their feet can face the full 70%.

Higher Rates for Offshore Errors

Errors involving offshore income, gains, or assets can attract much higher penalties. HMRC sorts territories into three categories according to how much tax information they share with the UK. Category 1 territories (including most EU countries, the United States, Australia, Canada, and Switzerland) attract the standard domestic rates. Category 2 covers territories with weaker information sharing. Category 3 covers those with the least transparency. A territory not specifically listed as Category 1 or Category 3 defaults to Category 2.⁵⁶

For tax periods from 2016-17 onward, Category 2 maximums are 45% for careless, 105% for deliberate, and 150% for deliberate and concealed. Category 3 maximums are 60%, 140%, and 200% respectively.⁷ The enhanced rates apply only to Income Tax, Capital Gains Tax, and Inheritance Tax. An offshore VAT error is penalised at the standard domestic rates.

When a Careless Penalty Can Be Suspended

HMRC can suspend a penalty for a careless inaccuracy for up to two years. During that period you must meet agreed conditions designed to stop the same type of error recurring. Satisfy every condition and file no further inaccurate returns in the suspension period, and the penalty is cancelled. Breach a condition or file another inaccurate return, and the original penalty becomes payable immediately.⁸

Suspension is only available for careless behaviour. Deliberate and deliberate-and-concealed penalties cannot be suspended.⁸ The conditions themselves must be specific and measurable: a vague instruction to “keep better records” will not do; a requirement to introduce a traceable cross-referencing system between purchase invoices, your purchase day book, and your VAT account by a specified date will.⁹

Special Reduction in Unusual Cases

Beyond the standard disclosure reductions, HMRC has a discretionary power to reduce a penalty further, stay it, or agree a compromise where “special circumstances” make it right to do so.³ The bar is high. A special circumstance must be something not already accounted for elsewhere in the regime, so ability to pay does not count, and neither does the fact that someone else overpaid tax to offset your underpayment. It must be genuinely unusual and relevant to the specific penalty.¹⁰

How Long HMRC Has to Charge You

HMRC cannot leave the penalty question open indefinitely. An assessment must be issued within 12 months of the end of the appeal period for the decision that corrected the underlying error. If the error was corrected without a formal assessment, the 12 months run from the date of correction.³ The “appeal period” here is the window during which the tax correction could have been appealed, or if it was appealed, the period until that appeal was determined or withdrawn.

If You Have Already Been Prosecuted

If you have been convicted of a criminal offence in respect of the same inaccuracy, HMRC cannot also charge a civil penalty for it.¹¹ The protection runs one way. Paying a civil penalty does not prevent a later prosecution, but a conviction bars a later civil penalty for the same conduct.

Appealing a Penalty

You can appeal a Schedule 24 penalty to the First-tier Tribunal on several grounds:³

Whether any penalty is due, for example because you took reasonable care.
The amount, if HMRC has applied too high a percentage or miscalculated the PLR.
A refusal to suspend a careless penalty.
The conditions attached to a suspension.

The Tribunal’s powers depend on what you challenge. On the amount, it can substitute its own figure, provided HMRC had the power to impose that amount. On a refusal to suspend, the suspension conditions, or the way HMRC exercised the special reduction power, the Tribunal can only intervene if it finds HMRC’s decision was “flawed” in the judicial review sense, meaning HMRC acted irrationally, took irrelevant matters into account, or ignored relevant ones. Arguing the percentage was too high is a relatively open challenge. Arguing HMRC should have suspended the penalty is a much harder fight, because you must show the decision itself was unreasonable, not just that another outcome would have been preferable.

1
Legislation.gov.uk. Finance Act 2007 – Schedule 24
2
GOV.UK. HMRC Compliance Handbook – Reasonable Excuse: Reliance on Another Person
3
Legislation.gov.uk. Finance Act 2007 – Schedule 24
4
Legislation.gov.uk. Finance Act 2016 – Schedule 20 – Reduction of Penalty for Disclosure
5
GOV.UK. HMRC Compliance Handbook – Offshore Matters: Inaccuracies Penalties: Categories of Inaccuracies
6
GOV.UK. Territory Categorisation for Offshore Penalties: From 24 July 2013
7
GOV.UK. HMRC Compliance Handbook – Offshore Matters: Inaccuracies Penalties
8
GOV.UK. Compliance Checks: Suspending Penalties for Careless Inaccuracies in Returns or Documents (CC/FS10)
9
GOV.UK. HMRC Compliance Handbook – Charging Penalties: Suspending Penalties: Setting Suspension Conditions: SMART Examples
10
GOV.UK. HMRC Compliance Handbook – Special Reduction: What Are Special Circumstances
11
Legislation.gov.uk. Finance Act 2007 – Schedule 24 – Double Jeopardy