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I've spun this off from the infingements thread to keep the technical discussion (that I hope will ensue) can be kept separate from the "debate" in the other thread. That way this thread can be linked when this question arises again... it surely will.

One of my fears as an aeroplane renter is that I could be flying along close to the vertical limit of some airspace and a combination of a moment's inattention coupled with a transponder encoder that is reading high but within allowable limits, could deem me a criminal. For example, Coventry's circuit is 1000' with an elevation of 267' - that's only 233' below Birmingham's Class D - I'm sure there are plenty of other examples.

So.... AIUI, some transponders have built in encoders - presumably connected to the static system. Others have a separate encoder (also connected to the static system.)

The software in the encoder works out a FL and sends it out in response to a secondary radar (or TCAS) interrogation.

That FL appears on the ATC radar screen.

So where are the potential sources of inaccuracy in that? I've seen it said that +/- 200' is acceptable from a transponder POV. Is that written down anywhere?

If I'm at 1250' Alt. Would the encoder send FL12 or FL13? What about 1275'?

Is there any processing that is done at the ATC end where error could be introduced?

I know that I could google and spend an hour or more locating and collating different threads, but there's bound to be someone here who just knows! :-) Thanks to them and anyone else who can add to my knowledge (it's not hard)
It depends on the transponder and altitude encoder combination. Some will only report flight level which means increments of 100 ft others such as Garmin 330 ES can report in increments of 25 ft .

If reporting in increments of 100 ft, then there are rounding errors and accuracy errors which are normally + or - 50 ft. so it could be up to 200ft wrong as a result.
As I understand it, Mode C transponders report in 100ft intervals, Mode S in 25ft intervals. I'm not 100% sure, but that's what's been reported on the forums.

What has also been reported previously is that with 100ft intervals, 1249ft is reported as 1200, 1250ft as 1300, but I don't know if that's correct either.

Altitude encoders are usually tucked away for many years and may not be 100% accurate.

There are a few things which can go wrong with the wiring as well. As I understand it, the connection from the encoder to the transponder is a parallel binary connection, and if one wire breaks or makes a bad connection, the altitude reported can be out considerably, depending on which wire it is.

The steps in QNH mean a resolution of 30ft between settings anyway, and an absolute number, without a decimal, may be somewhere in between the FLs, so one's altimeter, or that set in the ATC system, will have some wiggle room from the reported FL.
When an aircraft has its radio annual (or whatever it is) is the transponder’s mode c accuracy checked and if so what are the tolerance limits. I’d previously been lead to believe it was 200’ but the post here suggests that it is only 125’

Is there a real answer and is it back up in any sort of guideline/recommendation?
I know I'm going to get my head blown off again, but I'm going to say it because it is provably correct, even though many don't want to believe it.

Most transponders (even Mode S transponders) only transmit altitude in 100ft increments, the figure of 125ft is obviously wrong. Some fairly basic maths based on public information shows that while the procedure used at the annual check of transponder accuracy uses the figure of 125ft, the actual accuracy guaranteed by this check is 200ft, which is the specification for most altitude encoders.