Reducing HMRC Penalties: The Three Levers Under Schedule 24

HMRC says you owe a penalty. Three levers can reduce it—and only one depends on you having been right.

This article is about the percentage-based penalty for getting something wrong in a return or document: an inaccuracy penalty under Schedule 24 of the Finance Act 2007. The maximum runs between 30% and 100% of the tax understated. Played well, the levers can drive it to zero.

Confusingly, there are two "Schedule 24s" in UK tax law. This article is about FA 2007 Sch 24—the 0–100% inaccuracy regime. FA 2021 Sch 24 is the new points-based late-filing regime, covered in the new penalty regime article. They share a number and nothing else.

The three levers are disclosure quality, behaviour category, and suspension. A fourth—special reduction—sits at the end. The headline development is Cox v HMRC [2026] UKUT 7 (TCC), the first binding Upper Tribunal decision on suspension. The suspension section is anchored on it.

What Your Penalty Letter Actually Says

Your letter is usually titled "Notice of Penalty Assessment" or arrives as a "Penalty Explanation Schedule" attached to a closure notice. Two HMRC factsheets travel with it: CC/FS7a (penalties for inaccuracies) and CC/FS10 (suspending penalties).

The letter is built around four things: the tax type (income tax, corporation tax, VAT, PAYE etc.), the behaviour (careless, deliberate, deliberate-and-concealed), whether your disclosure was prompted or unprompted, and a quality score for telling, helping, and giving. The Penalty Explanation Schedule is where the percentages show up: behaviour ticked at the top, the prompted/unprompted box next, and three numbered rows for telling, helping, and giving with HMRC's reduction figure beside each. If those reductions look low compared with what you actually did, you have grounds to challenge the quality score.

You have 30 days from the date of the assessment to appeal in writing. You can request a statutory review instead of, or before, going to the tribunal; HMRC then has 45 days to complete it. The 30 days clock runs from the original assessment, not from any review outcome—do not let the deadline drift while waiting.

The Three Behaviour Categories

Schedule 24 splits inaccuracies into three behaviour bands, each with a maximum penalty and a floor that depends on whether your disclosure was prompted or unprompted:

These are the Category 1 (domestic) figures. Where an offshore matter involves a Category 2 or 3 territory the maxima rise—up to 200% in the worst case. The detail is in CH403145.

Behaviour does double duty. It controls not just the penalty but also HMRC's window to assess the underlying tax: four years for innocent error (section 34 TMA 1970), six years for careless (section 36(1) TMA), twenty years for deliberate (section 36(1A) TMA). So a contested behaviour finding is rarely just about the penalty—it is also about whether HMRC could lawfully reach back and assess the tax at all. On a deliberate finding HMRC can reopen the previous twenty tax years; on a careless finding only six. The extra tax often dwarfs the penalty. The mechanics of those time limits sit alongside in discovery assessments.

Lever One — Disclosure Quality (Telling, Helping, Giving)

Paragraph 9 of Schedule 24 lets HMRC reduce the penalty to reflect the quality of your disclosure. HMRC's Compliance Handbook (CH82400) splits quality into three weighted slices.

Prompted Vs Unprompted: The Floor You're Aiming At

Para 10 sets two floors per behaviour band. Unprompted means you told HMRC at a time when you had no reason to believe HMRC had discovered the inaccuracy or was about to. Anything else is prompted. The gap matters: an unprompted careless disclosure can be reduced to zero; a prompted one bottoms out at 15%. On a £10,000 understatement that is the difference between no penalty and £1,500.

The 30/40/30 Split

HMRC's guidance allocates the quality score across three elements:

The three weights add to 100%. A perfect-quality disclosure can collapse the whole gap between the maximum and the prompted/unprompted floor. Note that the 30/40/30 split is HMRC guidance—paragraph 9 itself simply says HMRC may reduce by reference to the quality of disclosure, without numbers.

The CC/FS7a 10-Point Cap

CC/FS7a tells taxpayers that, for prompted disclosures, HMRC will not reduce the penalty by more than 10 percentage points above the minimum range. This is HMRC guidance, not statute—the statutory floor is the para 10 minimum. Where HMRC's quality score is irrational a tribunal can disregard the cap, but tribunals largely treat it as a reasonable administrative restriction.

Three-Year Delay Restriction

CH82465 restricts the available reduction by 10 percentage points where the inaccuracy is disclosed more than three years after it occurred (for disclosures from 6 April 2017). The clock runs from the filing date of the return that contained the inaccuracy, not from the date you noticed. The earlier you tell HMRC, the more reduction is available.

Worked Examples

The formula is: penalty percentage = max% − (quality% × (max% − floor%)).

Example 1 — careless, unprompted, full disclosure. Tax understated £10,000. Range 0%–30%. Quality 100%. Penalty = 30% − (100% × 30%) = 0%. No penalty.

Example 2 — careless, prompted, full disclosure. Same understatement, HMRC found it first. Range 15%–30%. Quality 100%. Penalty = 30% − (100% × 15%) = 15% = £1,500.

Example 3 — careless, prompted, 60% quality. Telling 20, Helping 20, Giving 20 = 60%. Penalty = 30% − (60% × 15%) = 21% = £2,100.

Example 4 — deliberate but not concealed, prompted, 70% quality. Tax understated £20,000. Range 35%–70%. Penalty = 70% − (70% × 35%) = 45.5% = £9,100.

Example 5 — deliberate and concealed, unprompted, full disclosure. Tax understated £50,000. Range 30%–100%. Quality 100%. Penalty = 100% − (100% × 70%) = 30% = £15,000. Even a perfect disclosure leaves the 30% floor.

What "Telling" Looks Like In Practice

A short letter that says "I think my 2023/24 return was wrong, please look at it" is not telling. Good telling identifies exactly what was wrong, in which return and period, explains why, provides a corrected calculation, and offers the supporting documents. Date it and keep it on file—it becomes the evidence base for your "telling" score if HMRC later disputes quality.

Helping is the heaviest slice at 40%. It means doing the quantification work for HMRC instead of forcing them to chase it. Examples that have scored well: producing reconciled bank statements with the disputed items flagged, supplying contracts or invoices that explain a transaction, showing your working for a CGT computation, providing a schedule of foreign income with conversion rates, responding to HMRC's questions in days rather than weeks.

Giving access means letting HMRC see records without forcing them to issue a Schedule 36 information notice. Offer your accountant's working papers, your software audit log, employer correspondence, broker contract notes—whatever HMRC reasonably needs to verify your figures. Reluctance scores badly; statutory privilege (legal professional privilege, certain auditor papers) is the legitimate exception.

For unprompted disclosures outside an enquiry, the standard route is HMRC's Digital Disclosure Service. For suspected fraud, the Contractual Disclosure Facility (COP 9) is the route—but that is a different track with criminal-investigation immunity in exchange for full disclosure, and you should take advice before opening it.

Lever Two — The Behaviour Battle

If HMRC's opening position is "deliberate" (70%–100% range) and you can move the finding to "careless" (0%–30%), the gap is large enough to justify a full appeal. The case law on behaviour categorisation is now substantial.

Burden Sits On HMRC

The burden of proving behaviour—both that you were careless and, where alleged, that you acted deliberately—sits on HMRC. You do not have to prove you took care. HMRC has to prove you did not.

Careless: The Prudent and Reasonable Test

Para 3(1)(a) defines careless: an inaccuracy is careless if it is due to a failure by you to take reasonable care. The objective standard is the prudent and reasonable taxpayer, articulated by Judge Berner in David Collis v HMRC [2011] UKFTT 588 (TC) at [29]:

"The standard by which this falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question."

The test is whether reasonable care was taken—not whether every conceivable step was taken. The Upper Tribunal confirmed the standard in Atherton v HMRC [2019] UKUT 41 (TCC) and HMRC v Hicks [2020] UKUT 12 (TCC). "Careless" is a statutory category, not a slur—a finding of carelessness means you fell below the prudent-and-reasonable bar, nothing more.

Deliberate: Subjective Intent To Mislead

The leading FTT formulation of "deliberate" is Auxilium Project Management Ltd v HMRC [2016] UKFTT 249 (TC) at [63]:

"A deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. This is a subjective test."

The Supreme Court in HMRC v Tooth [2021] UKSC 17 at [47] reached substantively the same conclusion: an intention to mislead the Revenue. The UT in CF Booth Ltd v HMRC [2022] UKUT 217 (TCC) confirmed that Tooth did not displace Auxilium.

A careless mistake, even an obvious one, is not deliberate unless HMRC can prove subjective intent. The full deliberate-inaccuracy story is in Tooth v HMRC: deliberate inaccuracy.

Where Carelessness Shades Into Deliberate

If your plan is "I just put it off", read this carefully. In Milligan v HMRC [2025] UKFTT 498 (TC) Judge Fairpo held that a deliberate choice not to engage with one's tax obligations is deliberate behaviour even where it is not dishonest:

"That was not merely carelessness. We find that it was a deliberate (but not dishonest) choice not to engage with his tax responsibilities and, instead, prioritise other issues in his life."

"I knew I had to do it and didn't" can be deliberate even without a plan to mislead. The protection sits with engagement—not with denial.

Relying On An Agent — Para 18(3) And Hanson

Para 18(3) modifies para 3 in the agent context. An inaccuracy is treated as careless if you discovered it later and did not take reasonable steps to inform HMRC.

The leading agent-reliance case is Hanson v HMRC [2012] UKFTT 314 (TC). Mr Hanson claimed CGT holdover on a trust transfer on his accountant's advice; the relief was not in fact available. The FTT cancelled the penalty: a taxpayer who instructs an apparently reputable firm of accountants is entitled to rely on their advice without himself consulting the legislation. The tribunal stressed at [21]:

"A person cannot simply appoint an agent and deny responsibility for their tax affairs."

Hanson is a high-bar exception. To argue it you need to show who you instructed, what you told them, what advice they gave, and that you did not simply sign whatever was put in front of you. Contemporaneous emails, engagement letters, and your own questions of the adviser are the evidence base. Without them, "my accountant did it" generally does not work.

Reasonable Care ≠ Reasonable Excuse

A careful distinction: "reasonable care" in Schedule 24 para 18 is the definition of careless behaviour. If you took reasonable care, there is no careless inaccuracy—no penalty bites at all.

"Reasonable excuse" under section 118(2) TMA 1970 is a defence to other penalties—late filing under Schedule 55, late payment under Schedule 56, Schedule 36 information-notice failures. Schedule 24 contains no general reasonable-excuse defence for careless or deliberate inaccuracies.

If you are arguing reasonable excuse against a Schedule 24 inaccuracy penalty, you are aiming at the wrong target. The right argument is that you took reasonable care, displacing carelessness. The reasonable-excuse cases—especially Perrin v HMRC—inform but do not directly apply.

Lever Three — Suspension (Sch 24 Para 14)

Suspension is the most underused lever and, after Cox, the most clearly defined. The mechanics are at Sch 24 para 14.

The Five Non-Negotiables

1. Careless only. Para 14(3) refers in terms to "further penalties under paragraph 1 for careless inaccuracy". A deliberate penalty cannot be suspended. This is a frequent practitioner misconception—do not waste a suspension request on a deliberate finding.
2. Maximum two years (para 14(2)(b)). HMRC commonly suspends for 12 or 24 months.
3. Conditions must be specified. The notice must say exactly what you must do and by when (para 14(4)).
4. Successful completion cancels the penalty in full (para 14(5)). At the end of the suspension period you ask HMRC to confirm the conditions were met; the penalty disappears.
5. A new para 1 careless penalty during the suspension period kills the suspension (para 14(6)). The suspended penalty becomes payable.

HMRC has discretion to refuse. The FTT's role on appeal is supervisory—judicial-review-style—asking whether HMRC's decision was "flawed" (para 17(4)).

What Cox v HMRC Now Says

Cox v HMRC [2026] UKUT 7 (TCC) (Judges Zaman and Dean, January 2026) is the first binding UT authority on para 14 suspension. The appellants wrongly claimed Business Asset Disposal Relief on a 2019/20 disposal; HMRC refused suspension on the basis that no future careless errors could be identified that conditions might prevent. The UT dismissed the appeal but restated the test:

• Paragraph 103: Para 14 "does not require that there be a link between the type of inaccuracy for which the penalty in issue has been levied and the type of inaccuracy which might give rise to a penalty in the future". A "similar" inaccuracy is not required.
• Paragraphs 105–106: A condition must be "intended to change or improve the taxpayer's behaviour"—and what the taxpayer could "reasonably have done differently" is the touchstone. Eastman's acid test is expressly endorsed.
• Paragraphs 120–127: SMART (Specific, Measurable, Achievable, Realistic, Timebound) is a permissible framework. It is not itself a fetter on HMRC's discretion.

Two practical consequences. First, the old HMRC line that "one-off errors can't be suspended" is gone—the question is whether a behavioural condition can be set, not whether the same error type could recur. Second, your proposed condition must address the behaviour that produced the error, in language a tribunal will recognise as SMART.

The FTT Case Arc Behind Cox

The road to Cox runs through five FTT decisions over a decade.

Fane v HMRC [2011] UKFTT 210 (TC) established that a generic "file accurate returns" condition is not enough. Boughey v HMRC [2012] UKFTT 398 (TC) concerned a redundancy relief claimed twice; Judge Geraint Jones QC held at [15] that HMRC had taken "far too narrow a view" of what conditions could do, and substituted suspension on condition that returns be prepared by a chartered or certified accountant. In Testa v HMRC [2013] UKFTT 151 (TC) — an under-declared severance payment — Judge Poole said at [31]–[32]:

"The apparent underlying purpose of the legislation is not simply to allow a taxpayer the opportunity of 'a last chance' if he mends his ways (akin to a suspended sentence in the criminal sphere) but only to allow him that last chance if he takes some specific and observable action which is specifically designed to improve his compliance."

The tribunal substituted suspension on condition that the taxpayer retain a tax adviser for two years. In Steady v HMRC [2016] UKFTT 473 (TC) at [27], HMRC's refusal to suspend a bank-interest miswriting was held "Wednesbury unreasonable".

Eastman v HMRC [2016] UKFTT 527 (TC), Judge Berner, gave the FTT's tightest formulation. At [42]–[43]:

"Every case must fall to be considered by reference to its own facts and circumstances. In considering whether any appropriate conditions may be imposed, the acid test, in our view, is to ask what the taxpayer could reasonably have done differently that would have avoided the original inaccuracy."

And at [39]: "There is no necessary link between the type of inaccuracy and the possibility of further penalty." Cox endorses the Eastman acid test and confirms the "no necessary link" principle at UT level.

SMART Conditions — What Works

SMART (Specific, Measurable, Achievable, Realistic, Timebound) is HMRC's adopted framework in CC/FS10 and the Compliance Handbook at CH405050. It is now UT-endorsed via Cox paras 120–127.

Conditions that tribunals have accepted:

• "Returns to be prepared by a chartered or certified accountant for two years" (Boughey).
• "Engage and instruct a qualified tax adviser; provide HMRC with the adviser's name on request" (Testa).
• "Maintain a contemporaneous schedule of bank interest received" (Steady).
• "Implement a documented pre-signing checklist; provide HMRC with a copy on request" (Eastman-line).

Conditions that have failed include a generic "I'll file accurate returns" (Fane) and "I'll take advice if I ever do a similar transaction again" (rejected on the Cox facts as not measurable).

A worked composite proposal—the kind you would put in writing to HMRC—might read: "For 24 months from the date of the suspension notice, the appellant will (a) instruct a CTA or ICAEW/ACCA-qualified accountant to prepare each self-assessment return, providing HMRC with the engagement letter within 30 days; (b) maintain a documented pre-signing checklist covering income sources, capital disposals and reliefs claimed; and (c) on request, provide HMRC with a copy of the most recent checklist and the accountant's covering note." That hits Specific (named adviser, named documents), Measurable (engagement letter, checklist, covering note), Achievable, Realistic, and Timebound (24 months).

How To Propose Suspension

A workable suspension proposal has five elements:

1. Confirm the penalty is careless. A deliberate penalty is not suspendable. Where HMRC's behaviour finding is borderline, fight that first—then ask for suspension on the careless alternative.
2. Identify the behavioural deficit. Not "what tax did I get wrong" but "what did I or my system fail to do". That deficit is what the condition has to address.
3. Propose specific, measurable conditions. Name the qualified adviser. Specify the document (checklist, schedule, engagement letter). Give a date by which HMRC will receive evidence.
4. Make the conditions evidentially verifiable. HMRC will refuse anything it cannot check. Build in deliverables HMRC can demand.
5. Propose in writing early. Before the formal assessment if possible. If HMRC refuses, request a statutory review and, if necessary, appeal under para 17 within 30 days. Appeals against the amount go under para 15; appeals against a refusal to suspend, or against the conditions HMRC has imposed, go under para 17. Both use the standard tribunal Form T240 (or the GOV.UK online appeal portal). The FTT can substitute conditions where HMRC's refusal is flawed (Boughey, Testa, Steady, Eastman). For drafting tips see writing grounds of appeal.

Lever Four — Special Reduction (Para 11)

Paragraph 11 lets HMRC reduce a penalty below the statutory minimum if there are "special circumstances". The same wording appears in Sch 55 para 16 and Sch 56 para 9. Inability to pay is expressly excluded (para 11(2)(a)).

The leading authority is Edwards v HMRC [2019] UKUT 131 (TCC). The principles: HMRC must consider whether special circumstances exist; if so, exercise discretion; the FTT can substitute its own decision if HMRC's was flawed. "Special circumstances" is undefined but treated as "uncommon or exceptional" or where the strict application of the penalty would be contrary to the law's clear intention (see CH170600).

Special reduction is rare. Raise it if your facts genuinely sit outside the normal range—a serious illness or bereavement during the period of the inaccuracy, an HMRC error or misleading guidance that contributed to the error, or a wholly anomalous fact pattern that the penalty regime was not designed for. It is not a substitute for the disclosure-quality and behaviour-category arguments, but if those have failed and your circumstances are genuinely uncommon, raise it expressly so the FTT has it on the table.

What To Do This Week — Reader Checklist By Situation

(a) Disclosure To Reduce

1. Write the disclosure narrative: what, when, why, corrected calculation, evidence offered.
2. File it with HMRC before any enquiry letter arrives if at all possible—that secures the unprompted classification and the lower floor.
3. Provide bank statements, contracts, working papers without waiting to be asked. Document everything you send.
4. Keep your written narrative—it is the evidence base for your "telling" score.

(b) Disputing Behaviour Category

1. Read your penalty letter against the Auxilium/Tooth test for deliberate and the Collis test for careless. Mark where HMRC's reasoning sits.
2. Gather contemporaneous documents: emails to advisers, notes of phone calls, software prompts, draft returns. These show subjective state of mind.
3. If you relied on an agent, build the Hanson picture—instructing letter, scope letter, advice received, questions asked. "I just signed" does not work.
4. Frame grounds of appeal addressing the behaviour finding directly.

(c) Asking For Suspension

1. Confirm the penalty is careless. Deliberate cannot be suspended.
2. Identify the behavioural deficit—what should you (or your system) have done differently.
3. Draft SMART conditions that address it. Name names. Set dates. Specify deliverables.
4. Submit the proposal in writing, ideally before the formal assessment. If HMRC refuses, request a review and, if necessary, appeal within 30 days.
5. Treat the suspension period seriously. A new para 1 penalty during it kills the suspension.

Where To Get Help

You do not have to handle this alone. TaxAid and Tax Help for Older People provide free advice to people on low incomes; LITRG publishes plain-English guidance; Citizens Advice signposts. Where the penalty is large (broadly £50,000+) or HMRC is alleging deliberate behaviour, the cost of a Chartered Tax Adviser or solicitor is often justified—the behaviour finding controls not just this penalty but the extended assessment time limit too.

Key Legislation And Resources

Legislation

• Schedule 24 FA 2007 — inaccuracy penalty regime in full
• Sch 24 para 4 — standard amounts
• Sch 24 para 9 — reductions for disclosure
• Sch 24 para 10 — prompted/unprompted floors
• Sch 24 para 11 — special reduction
• Sch 24 para 14 — suspension
• Sch 24 para 18 — interpretation, including reasonable care
• Section 36 TMA 1970 — extended time limits for careless/deliberate
• Section 118(2) TMA 1970 — reasonable excuse (other regimes)

Key Cases

• Cox v HMRC [2026] UKUT 7 (TCC) — first binding UT authority on para 14 suspension; SMART endorsed; no "similar inaccuracy" requirement
• Eastman v HMRC [2016] UKFTT 527 (TC) — the "acid test": what could the taxpayer reasonably have done differently
• Boughey v HMRC [2012] UKFTT 398 (TC) — tribunal substituted suspension with chartered-accountant condition
• Testa v HMRC [2013] UKFTT 151 (TC) — tribunal substituted suspension with adviser-engagement condition
• Steady v HMRC [2016] UKFTT 473 (TC) — HMRC's refusal "Wednesbury unreasonable"
• Fane v HMRC [2011] UKFTT 210 (TC) — generic "file accurate returns" condition not enough
• Auxilium Project Management Ltd v HMRC [2016] UKFTT 249 (TC) — deliberate inaccuracy is a subjective test
• David Collis v HMRC [2011] UKFTT 588 (TC) — careless is the prudent-and-reasonable taxpayer standard
• Hanson v HMRC [2012] UKFTT 314 (TC) — reasonable reliance on a competent accountant
• Milligan v HMRC [2025] UKFTT 498 (TC) — a deliberate choice not to engage is deliberate behaviour even if not dishonest
• HMRC v Tooth [2021] UKSC 17 — Supreme Court on deliberate: intention to mislead
• Edwards v HMRC [2019] UKUT 131 (TCC) — three-step framework for special reduction
• Atherton v HMRC [2019] UKUT 41 (TCC) — UT confirmation of carelessness standard
• HMRC v Hicks [2020] UKUT 12 (TCC) — same carelessness standard across the regimes

HMRC Guidance

• CC/FS7a — Penalties for inaccuracies in returns or documents
• CC/FS10 — Suspending penalties (introduces SMART)
• CH82400 — Calculating the penalty reduction
• CH82440 — Telling
• CH82450 — Helping
• CH82460 — Giving access
• CH82465 — Three-year delay restriction
• CH170600 — Special reduction
• CH405050 — Suspension of penalties
• CH403145 — Offshore matters: territory categorisation

On This Site

• HMRC penalties explained — the wider penalty landscape
• Tooth v HMRC: deliberate inaccuracy — the leading "deliberate" authority
• Perrin v HMRC: reasonable excuse — the boundary with reasonable care
• Writing grounds of appeal — drafting Sch 24 appeal grounds
• HMRC enquiries and closure notices — the enquiry context that triggers Sch 24
• Discovery assessments — behaviour controls the time limit
• Self-assessment penalties — the Sch 55/56 contrast
• The new penalty regime — FA 2021 Sch 24/26 (different schedule, same number)
• VAT penalties and appeals — VAT under Schedule 24
• Schedule 36 information notices — the "giving access" link
• Preparing for your tax tribunal hearing — what happens if Sch 24 reaches a hearing

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.