Finance Act 2007 Schedule 24: Penalties for Errors

Schedule 24 of the Finance Act 2007 introduced a new system for penalizing taxpayers for errors in tax returns and other documents submitted to HM Revenue & Customs (HMRC). This framework replaced the previous, often inconsistent, penalty regime with a more standardized and transparent approach designed to encourage accuracy and compliance.

The core principle of Schedule 24 is that penalties are levied based on the behavior that led to the error. This means HMRC considers the reasons behind the inaccuracy when determining the penalty amount. Errors are categorized into three main behaviors:

• Reasonable Care: If the taxpayer took reasonable care to ensure the return was accurate, but an error still occurred, no penalty is usually charged. What constitutes “reasonable care” depends on the taxpayer’s circumstances, including their experience, knowledge, and the complexity of the tax matter. HMRC will consider factors like whether the taxpayer sought professional advice or kept adequate records.
• Careless: This covers situations where the taxpayer failed to take reasonable care. This is the most common category for errors and attracts penalties ranging from 0% to 30% of the potential lost revenue (PLR). The percentage applied depends on the specific circumstances and how forthcoming the taxpayer is in disclosing the error. Prompt disclosure and cooperation usually result in a lower penalty.
• Deliberate: This involves intentionally making an error, either knowing it is wrong or being indifferent to whether it is wrong. Deliberate errors are further divided into two categories:
• Deliberate (but not concealed): The taxpayer deliberately made the error but did not attempt to hide it. Penalties range from 20% to 70% of the PLR.
• Deliberate and Concealed: The taxpayer deliberately made the error and took active steps to conceal it. This attracts the highest penalties, ranging from 30% to 100% of the PLR.

The “Potential Lost Revenue” (PLR) is the amount of tax that HMRC has potentially lost as a result of the error. This is the starting point for calculating the penalty. The penalty percentage, determined by the taxpayer’s behavior, is then applied to the PLR.

Schedule 24 also includes provisions for reductions in penalties for disclosure. Taxpayers who promptly notify HMRC of an error and cooperate fully with the investigation can receive significant reductions in the penalty amount. The earlier the disclosure and the more comprehensive the cooperation, the greater the reduction.

Appeals against penalties issued under Schedule 24 are possible. Taxpayers can appeal to HMRC initially and, if unsatisfied with the outcome, can appeal to the First-tier Tribunal (Tax Chamber). Grounds for appeal typically include disputing the behavior that led to the error, challenging the amount of the penalty, or claiming that reasonable care was taken.

The aim of Schedule 24 is to encourage accurate tax returns and provide a fair and consistent system for penalizing errors. While the framework is complex, understanding its principles is crucial for taxpayers to minimize their risk of incurring penalties and to ensure they receive fair treatment from HMRC.

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