Schedule 24 FA 2007 Penalty Behaviour Bands: Landlord Inaccuracy Penalties Explained

If HMRC opens an enquiry into your tax return and finds the figures wrong, your penalty is calculated under Schedule 24 of the Finance Act 2007, HMRC's working penalty regime for inaccuracies. Most people know the headline maxima (30 per cent, 70 per cent, 100 per cent). What decides whether you pay near the top of a band or close to nothing is the operational detail underneath: the offshore territory uplift that can take the maximum to 200 per cent, the mitigation floors, the suspension mechanic, and the asset-move stacking under Schedule 21 FA 2015. That is where a penalty case is won or lost.

One framing point first. Schedule 24 governs inaccuracy penalties: figures in returns that are wrong. It does not govern late filing (Schedule 55 FA 2009), late payment (Schedule 56 FA 2009) or failure to notify chargeability at all (Schedule 41 FA 2008). Those are three separate regimes, and on the same facts you can face penalties under more than one.

The three behaviour bands under Schedule 24 paragraph 3

Schedule 24 paragraph 3 sets three behaviour categories. The band fixes the standard maximum penalty, and it is the single most important argument in any penalty negotiation, because the maxima are so far apart.

Careless

Careless means a failure to take reasonable care. HMRC judges this objectively, against what it would expect of a prudent landlord in the circumstances. Typical careless patterns in rental-income enquiries include missing receipts for repair claims that turn out to be capital improvements, double-claiming expenses across two properties, mis-classifying a furnished holiday let, transposing figures from the lettings agent statement, or relying on incorrect software defaults. Careless is the default HMRC reaches for when a return is wrong and there is no evidence of intent.

Deliberate but not concealed

Deliberate is a knowing-falsity test. The Supreme Court in HMRC v Tooth [2021] UKSC 17 set the bar at the taxpayer knowing the figure being submitted was wrong. It is not enough for HMRC to argue that you ought to have known, or that any reasonable person would have spotted the error. There must be evidence of subjective awareness. In practice this usually surfaces where you have admitted to a third party (an accountant, a family member, an online forum) that the rental income was being omitted, or where the gap between actual receipts and declared figures is too large to reconcile with carelessness.

Deliberate and concealed

This is the top band. It requires a deliberate inaccuracy plus arrangements to conceal it: false invoices, document destruction, routing tenants' payments through unrecorded accounts, fabricated repair receipts, or asking tenants to pay cash. HMRC needs evidence of the active concealment step, not just the deliberate inaccuracy.

The bands matter because the maxima under paragraph 4 are 30 per cent, 70 per cent and 100 per cent respectively (for Category 1 territories). Pushing a case down from deliberate to careless can cut your maximum exposure by half, or by two-thirds, before any mitigation is even applied.

The standard maxima under paragraph 4

Paragraph 4 of Schedule 24 sets the maximum penalty as a percentage of the "potential lost revenue" (the tax that should have been assessed but was not). The table is set out in the statute directly, with separate columns for the three territory categories defined in paragraph 4A.

Behaviour	Category 1 max	Category 2 max	Category 3 max
Careless	30%	45%	60%
Deliberate but not concealed	70%	105%	140%
Deliberate and concealed	100%	150%	200%

Two things on this table are commonly misread. First, the percentages are of the lost tax, not of the rental income. If you carelessly under-declare £40,000 of rental income as a higher-rate taxpayer, the tax loss is roughly £16,000 (40 per cent of £40,000), and the maximum careless penalty is 30 per cent of that £16,000, namely £4,800, not 30 per cent of the rental income itself. Second, the Category 2 and 3 columns are not multipliers HMRC applies at its discretion. They are statutory maxima, triggered automatically when the inaccuracy relates to offshore matters in a Category 2 or 3 territory, regardless of behaviour.

Worked example 1 (UK careless). You own five UK buy-to-lets and misclassify a £30,000 new bathroom installation as a deductible repair when it is in fact a capital improvement. The mistake is genuine, the receipts are all on file, and you disclose to HMRC after an opening enquiry letter. Tax loss is £12,000 (40 per cent of the disallowed £30,000 capital expenditure). Maximum careless penalty: 30 per cent of £12,000, namely £3,600. With prompted disclosure mitigation the floor is 15 per cent of £12,000, namely £1,800. The eventual penalty almost always lands within this 15-30 per cent range and is rarely at the maximum.

Mitigation floors under paragraph 10

The maxima above are only the starting point. Paragraph 10 of Schedule 24 requires HMRC to reduce the penalty below the maximum based on the quality of your disclosure, and sets minimum percentages below which the reduction cannot go. The floors depend on whether disclosure is unprompted (you came forward with no reason to think HMRC was about to find out) or prompted (anything else, including disclosure after a nudge letter or opened enquiry).

Standard percentage	Unprompted floor	Prompted floor
30%	0%	15%
70%	20%	35%
100%	30%	50%

The offshore Category 2 and Category 3 maxima are reduced proportionately on the same disclosure principles. A Category 3 deliberate-concealed maximum of 200 per cent can come down to 60 per cent on unprompted disclosure, or 100 per cent on prompted disclosure.

Two operational points are frequently got wrong. First, Schedule 24 does not impose a within-12-months cliff on the 0 per cent careless-unprompted floor. That cliff exists in Schedule 41 FA 2008 (failure-to-notify), where unprompted disclosure of a non-deliberate failure must be made within 12 months of when liability arose to access the 0 per cent floor, otherwise the floor is 10 per cent. Schedule 24 is structurally different: the 0 per cent careless-unprompted floor is available regardless of how long after the inaccuracy you disclose, subject to the quality of that disclosure. Do not assume your right to the 0 per cent floor has expired simply because time has passed.

Second, "quality of disclosure" is a discretionary HMRC judgement under three heads: telling (admitting the inaccuracy), helping (explaining how it arose and handing over the supporting evidence), and giving access (letting HMRC verify it). HMRC's Compliance Handbook at CH82420 onwards sets out the criteria. If you tell HMRC the headline figure but withhold the underlying ledgers and ask it to "trust the disclosure", you are not making a high-quality disclosure, and the reduction below the maximum will be modest.

Worked example 2 (prompted Cat 1 offshore disclosure). You are a higher-rate taxpayer with a Spanish holiday let generating €30,000 a year of net rental income, roughly £25,000 sterling. You deliberately omitted the income from your UK returns for three tax years. HMRC opens an enquiry following a CRS data match from the Spanish tax authority. You disclose fully and provide three years of Spanish income returns, bank statements and tenancy agreements. Spain is a Category 1 territory (full information exchange via CRS plus a comprehensive double-tax treaty), so the Category 2 and 3 uplifts do not apply. Tax loss is £30,000 across three years. Maximum deliberate-not-concealed penalty: 70 per cent of £30,000, namely £21,000. Prompted disclosure floor: 35 per cent of £30,000, namely £10,500. Your negotiated penalty is likely to land between these two figures, depending on how well you co-operate.

The offshore uplift under paragraph 4A

Paragraph 4A of Schedule 24 was inserted by Finance Act 2010 and substantially amended by Finance Act 2015 (in force 1 April 2016). It defines three territory categories and sets the higher maxima for Category 2 and 3 matters. Paragraph 4A applies only to income tax, capital gains tax and inheritance tax inaccuracies. Corporation tax and VAT inaccuracies do not attract the offshore uplift even where the underlying assets are offshore.

Category 1 territories

Territories with full information exchange with the UK. This covers all EU member states (post-Brexit, via the Common Reporting Standard and bilateral arrangements), the United States (FATCA reciprocity), Canada, Australia, New Zealand, Japan, and most major economies. In practice, if you are UK-resident, your Spanish, French, Italian, Portuguese, German and Irish property positions are Category 1, and the standard 30 / 70 / 100 per cent maxima apply.

Category 2 territories

Territories with partial information exchange. The list is dynamic and published by HMRC in the underlying offshore-categories Order, so check the current list in HMRC's published guidance before you rely on a categorisation. Where the inaccuracy relates to property income or gains in a Category 2 territory, the maxima are 45 per cent / 105 per cent / 150 per cent across the three behaviour bands.

Category 3 territories

Territories with no effective information exchange. The current list is shorter and tends to feature jurisdictions that have either declined to sign onto the CRS framework or have no comprehensive tax-information agreement with the UK. Where the inaccuracy relates to property income or gains in a Category 3 territory, the maxima are 60 per cent / 140 per cent / 200 per cent.

Worked example 3 (Category 3 deliberate-concealed). You own rental property held through an opaque corporate structure in a jurisdiction that does not exchange tax information with the UK. The income has been omitted from your UK returns for ten years, the structure is designed to disguise ownership, and you have used false invoices to extract funds. HMRC discovers the structure through a third-party investigation. Tax loss is £200,000. Behaviour band: deliberate and concealed in a Category 3 territory. Maximum penalty: 200 per cent of £200,000, namely £400,000. Prompted disclosure floor: 100 per cent of £200,000, namely £200,000. You face a penalty of between £200,000 and £400,000 plus the £200,000 of underlying tax plus interest plus, on this profile of case, very likely a Code of Practice 9 contractual disclosure offer.

Schedule 21 FA 2015: the asset-move uplift

Schedule 21 of the Finance Act 2015 imposes a separate, additional penalty on top of any Schedule 24 (or Schedule 41) penalty where assets have been moved from a specified territory (Category 2 or 3) to a non-specified territory, and the main purpose (or one of the main purposes) of the move was to prevent or delay HMRC discovery. The penalty equals 50 per cent of the underlying Schedule 24 penalty (paragraph 6(1) of Schedule 21).

Schedule 21 took effect on 26 March 2015, the date of Royal Assent to Finance Act 2015. It applies only to asset moves occurring after that date. Moves before 26 March 2015 attract only the underlying Schedule 24 penalty, not the asset-move uplift.

The mechanic is simple in principle but heavy in effect. A £200,000 Schedule 24 penalty in a Category 3 deliberate-concealed case carries an additional £100,000 Schedule 21 asset-move penalty if the relevant assets were moved post-26 March 2015 to defeat HMRC discovery. The combined exposure on a £200,000 tax loss can therefore reach £300,000 in penalty alone, plus the underlying tax, plus interest.

If you hold historic offshore structures, treat Schedule 21 as a separate diligence question alongside Schedule 24. Ask yourself: have any assets moved between offshore jurisdictions since 26 March 2015? What was the documented commercial rationale at the time? Where is the contemporaneous evidence of it?

Suspension of careless penalties under paragraph 14

Paragraph 14 of Schedule 24 permits HMRC to suspend all or part of a careless inaccuracy penalty for a period not exceeding two years. The mechanic is HMRC discretion plus written notice, subject to FTT appeal. Three operational points.

First, suspension is available only for careless inaccuracies. Deliberate-but-not-concealed and deliberate-and-concealed penalties cannot be suspended under paragraph 14, however co-operative you are or however high the quality of your disclosure. That is one of the practical reasons to argue the band down to careless wherever the evidence permits.

Second, HMRC must set at least one specific suspension condition that would help you avoid becoming liable to a further careless inaccuracy penalty (per HMRC's Compliance Handbook at CH83110). Common specific conditions include putting dedicated landlord accounting software in place for the rental business, engaging a qualified accountant to review the year-end position, or running a quarterly bookkeeping discipline ahead of MTD for ITSA. There is also a generic condition that you file all returns on time during the suspension period.

Third, if you fail to meet the suspension conditions, the suspended penalty becomes payable in full at the end of the period. Becoming liable to a further careless inaccuracy penalty during the suspension triggers it too.

HMRC's decision not to suspend, and any conditions it chooses to impose, are appealable to the First-tier Tribunal. The Tribunal will look at whether the conditions are linked to avoiding future carelessness and whether they are realistically achievable. Conditions that fail those tests are vulnerable on appeal.

Appeal route and timing discipline

Appeals against a Schedule 24 penalty assessment go to the First-tier Tribunal (Tax Chamber) under the Tribunals, Courts and Enforcement Act 2007 and the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273). Your notice of appeal must be made within 30 days of the penalty assessment under TMA 1970 section 31A. It is not 60 days, despite a persistent error in landlord-facing commentary. The 30-day clock starts on the date of the penalty assessment notice, not the date you receive it (subject to limited postal-receipt arguments).

A late appeal requires an application under the framework set out in Martland v HMRC [2018] UKUT 178. That framework is materially stricter than HMRC's pre-Martland practice, so if you miss the 30-day window you face a real risk that a late appeal is refused regardless of the merits.

HMRC's alternative dispute resolution service (ADR) runs alongside the FTT route, but it does not pause the 30-day appeal clock. If you are using ADR, lodge a protective notice of appeal in parallel.

How Schedule 24 sits alongside other landlord penalty regimes

You can face penalty exposure under more than one statutory regime on the same facts. The five most common are:

• Schedule 24 FA 2007 (inaccuracy in returns and documents), the regime set out here.
• Schedule 41 FA 2008 (failure to notify chargeability). Bites where you never registered for self-assessment despite having rental income, under TMA 1970 section 7. Standard maxima 30 / 70 / 100 per cent of potential lost revenue, with a within-12-months 0 per cent floor for non-deliberate unprompted disclosure that does not feature in Schedule 24. See our coverage of penalties for not declaring rental income.
• Schedule 55 FA 2009 (late filing). £100 fixed penalty, daily £10 charges, 5 per cent / £300 milestone penalties. See our coverage of HMRC penalties for late landlord tax returns.
• Schedule 56 FA 2009 (late payment). 5 per cent surcharges at 30 days, 6 months and 12 months past payment deadline.
• Schedule 18 FA 2017 (Failure to Correct, the offshore disclosure regime with a 30 September 2018 deadline and post-deadline 200 per cent / 100 per cent penalty bands). Relevant only to offshore landlord disclosures that should have been made by 30 September 2018.

On the same facts, these regimes do not double-count on the same tax loss. If you never registered (Schedule 41), you cannot then face an additional Schedule 24 penalty on the same year's omitted rental income. But if you registered, then filed inaccurately for some years and were completely unregistered for earlier years, you can face Schedule 41 on the earlier unregistered years and Schedule 24 on the later filed-but-wrong years. The two regimes address different statutory failures, and HMRC pursues the appropriate one for each year on its facts.

Practical playbook for a Schedule 24 penalty proposal

When a Schedule 24 penalty proposal lands, work it in this order:

1. Within the first 7 days. Establish whether the band HMRC has proposed is defensible on the evidence. Most arguable cases sit on the careless-versus-deliberate boundary, and the evidentiary burden is on HMRC to show subjective knowledge for the deliberate band.
2. Within the first 14 days. Work out whether the disclosure you have made, or are about to make, qualifies as unprompted. The cliff between unprompted and prompted is 15 percentage points on careless, 15 on deliberate-not-concealed, and 20 on deliberate-concealed. Unprompted status is sometimes worth contesting where HMRC has issued a nudge letter but not yet opened a formal enquiry.
3. Within the first 21 days. Map your quality-of-disclosure position (telling, helping, giving access) and assemble the supporting evidence. Higher quality moves the eventual penalty closer to the floor; lower quality holds it near the maximum.
4. Within the 30-day appeal window. Lodge a protective notice of appeal even if a negotiated agreement looks likely, to preserve your FTT rights. Use ADR in parallel where it helps.
5. Where the band is careless. Build a suspension proposal under paragraph 14, with specific conditions tied causally to the carelessness pattern. A suspended penalty is a zero penalty if you meet the conditions.

The biggest gains come from band classification (the difference between 30 per cent and 70 per cent), then unprompted-versus-prompted positioning (15 percentage points), then the quality-of-disclosure narrative, then suspension in careless cases. Schedule 21 asset-move stacking and the offshore Category 2 / 3 uplifts are operational facts to factor in, not arguments you can negotiate down.

If you are facing a Schedule 24 penalty proposal, the evidence and timing windows above are where the work happens. The form at the foot of the page is the route to a structured response.