Can HMRC charge a behavioural penalty for an unsuccessful SDLT refund claim?

Introduction

Readers often ask whether HMRC can impose a penalty simply because a Stamp Duty Land Tax (SDLT) refund claim fails. This question comes up regularly where a buyer has claimed that a property was not suitable for use as a dwelling at the date of purchase, but HMRC later says the evidence is not strong enough.

The short answer is that an incorrect claim does not automatically mean a penalty is due. For HMRC to charge a behavioural penalty, it must consider the taxpayer’s behaviour. That usually means asking whether the claim was made with reasonable care, carelessly, or deliberately. Where there was a genuine and arguable basis for the claim, a penalty may be much harder for HMRC to justify.

The Question

A buyer purchased a residential property, paid SDLT in full, and later submitted a refund claim on the basis that the property was in such poor condition that it was not suitable for use as a dwelling at the effective date of the transaction.

While HMRC was reviewing the claim, the buyer was told the claim might not meet the test and was asked whether they wished to continue. The buyer said yes. HMRC then asked for more evidence, including items such as surveys, sales particulars and invoices. The buyer later decided not to pursue the claim further, partly because gathering the evidence had become difficult and personal circumstances had changed.

HMRC then said it was considering a behavioural penalty and invited representations about why the claim had been made and whether the buyer’s conduct amounted to careless behaviour.

Nick’s Explanation

Nick’s core point was that a failed claim and a penalty are not the same thing. In anonymised form, his view was:

“If there was an arguable claim, it would not usually be justifiable to impose a penalty. HMRC may argue that the taxpayer acted carelessly, but if the position was defensible, that is not a reasonable conclusion.”

He also focused on the practical importance of evidence. In cases like this, HMRC will usually want to see the original claim, correspondence, photographs, surveys, sales particulars and any other material showing the condition of the property at the relevant date. Without that material, it becomes harder to show both that the substantive claim was arguable and that the taxpayer acted with reasonable care.

Nick also highlighted that where HMRC is considering a penalty, the taxpayer should set out a clear timeline: why the claim was made, what information was relied on at the time, what happened when HMRC asked for more evidence, and why any later gaps in the evidence do not mean the original claim was careless.

The Law

The substantive SDLT issue usually arises under section 116 of the Finance Act 2003. That provision helps determine whether property is residential property. A building used or suitable for use as a dwelling will generally be treated as residential. If a property was not suitable for use as a dwelling at the effective date of the transaction, the taxpayer may argue that non-residential rates applied instead.

However, the legal threshold for showing that a property was not suitable for use as a dwelling is now relatively high following Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799. The Court of Appeal made clear that serious disrepair, the need for renovation, or the absence of modern features will not by themselves be enough. The question is whether the building had lost the fundamental characteristics of a dwelling at the relevant date.

On penalties, the key rules are in Schedule 24 to the Finance Act 2007. That Schedule applies where a document given to HMRC contains an inaccuracy which leads to an understatement of tax, a false or inflated claim, or some other tax loss. The level of penalty depends on behaviour:

• reasonable care: no penalty;
• careless: penalty may apply;
• deliberate: higher penalty may apply.

In broad terms, “careless” means failing to take reasonable care. HMRC must look at the actual facts, including what the taxpayer knew, what steps were taken before submitting the claim, whether advice was obtained, and how the taxpayer responded during HMRC’s check.

Analysis

The analysis has two separate parts.

First, was the SDLT reclaim itself legally arguable?

That depends on the condition of the property at the effective date of the transaction, not simply on how much work was later carried out. A buyer may feel that a house needing a new kitchen, bathroom, wiring and extensive repairs was effectively uninhabitable. But after Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799, the courts have set a demanding threshold. The property must usually be shown to have lacked the essential character of a dwelling, not merely to have been in a poor or outdated condition.

So if the property had dangerous electrics, no functioning sanitary facilities, severe structural problems, or conditions making occupation genuinely unsafe, there may still have been an arguable claim. But if the property was simply run down, in need of modernisation, or expensive to repair, that is less likely to succeed.

Second, even if the claim was wrong, was it careless?

That is a different question. A person can make a claim that ultimately fails without having acted carelessly. Relevant points may include:

• the buyer paid the SDLT originally and only later made a reclaim;
• the claim was made because the buyer genuinely believed the property was not suitable for use as a dwelling;
• the buyer relied on available information at the time, such as the property’s condition, photographs, sales particulars, or advice from others;
• the buyer did not fabricate evidence or conceal facts;
• the failure to provide further documents later may have been due to time, health, family pressures, or the passage of time rather than dishonesty.

That said, there are also weaknesses HMRC may point to. If the buyer had no structural report, no clear contemporaneous evidence, and no retained copy of the original submission, HMRC may argue that the claim was advanced without proper support. If HMRC asked whether the claim should continue and the buyer said yes, HMRC may also say the buyer should have checked more carefully before maintaining the claim.

The strongest defence is usually not to argue that HMRC is forbidden from checking the claim, but to show that the claim was made in good faith on a reasonably arguable view of the law and facts. In other words, the taxpayer should distinguish between “I could not ultimately prove the claim to HMRC’s satisfaction” and “I was careless in making it in the first place.” Those are not the same thing.

Outcome

The practical conclusion is this: HMRC can consider a behavioural penalty where an SDLT refund claim is incorrect, but it does not follow that a penalty is automatically due.

If the taxpayer had a genuine and arguable basis for saying the property was not suitable for use as a dwelling, and if the claim was made honestly rather than recklessly or deliberately, there may be a strong argument that no penalty should be charged under Schedule 24 Finance Act 2007.

However, on the underlying SDLT issue, readers should be cautious. The threshold for proving that a dwelling was not suitable for use is now relatively high after Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799. Many properties needing extensive work will still count as residential for SDLT purposes.

Practical Steps

If HMRC is considering a penalty in a case like this, the taxpayer should gather and organise the following:

• a copy of the original SDLT reclaim or as much of it as can be reconstructed;
• all HMRC letters, emails and notes of telephone calls;
• sales particulars or auction particulars describing the property at the time of purchase;
• photographs showing the property’s condition at completion;
• surveys, contractor reports, electrical reports, structural reports and repair estimates;
• invoices and receipts for remedial works;
• a short chronology explaining what the buyer believed at the time and why.

When responding to HMRC, it is usually sensible to address three points clearly:

1. why the claim was made at the time;
2. what evidence existed then, even if not all of it was later provided;
3. why any failure to provide further documents does not amount to careless or deliberate behaviour.

The response should avoid exaggeration. If there was no structural report at the time, it is better to say so plainly. If health issues or family circumstances affected the ability to respond, that should be explained briefly and factually. If the taxpayer believed the claim had lapsed because HMRC said it would not continue without a response, that point should also be set out clearly.

Conclusion

An unsuccessful SDLT reclaim does not automatically justify a behavioural penalty. HMRC must still show why the taxpayer’s behaviour was careless or worse. If the claim was genuinely arguable when made, that is an important point in the taxpayer’s favour. But because the legal test for “not suitable for use as a dwelling” is now strict, especially after Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799, the quality of the contemporaneous evidence is often decisive.

Legal References Used

• Finance Act 2003, section 116
• Finance Act 2007, Schedule 24
• Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799

This page was last updated on 22 March 2026.

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