In July 2026, HMRC published a policy paper entitled “Modernising the correction of errors” alongside draft legislation. While this is currently at the ‘consultation’ phase, it is expected that it could be included in the Finance Bill 2026-27.
What does the legislation propose?
The legislation, if enacted as drafted, will create a statutory obligation to correct inaccuracies in documents provided to HMRC by that person. It will also give HMRC a new power to issue Correction Notices if there is a reason to suspect a document contains an inaccuracy. HMRC’s note on the draft legislation, published on the same date states that it will affect.
“Taxpayers who submit tax returns or other documents to HMRC, and tax advisers who provide professional tax advice or services to those taxpayers.”
What does it mean in practice?
This is a significant and serious change to HMRC’s current processes, but what does it actually mean and how will this impact taxpayers, accountants, advisers and agents?
There are already Professional Conduct in Relation to Tax guidelines endorsed by professional bodies such as the Chartered Institute of Taxation, which require members to inform a client when they have discovered an error in that client’s tax affairs, advise full disclosure to HMRC and ultimately cease to act if the client refuses to correct the error. In addition, for a number of years HMRC has sought to drive early disclosure by applying an uplift in tax geared penalties (of typically 10% of the tax) where there have been significant delays in coming forward to disclose an error leading to an underpayment of tax. Higher penalties are also charged if a disclosure was prompted by HMRC activity.
However, the proposed new legislation places a statutory obligation to “take reasonable steps” to correct the error, as soon as it is discovered. In practice, this will mean that the taxpayer will have to amend the tax return if the amendment window is open or make a full disclosure to HMRC if the window has closed.
What happens if the error is not corrected?
Under the proposed new legislation, failure to correct a known error leading to an underpayment of tax will automatically be treated by HMRC as ‘deliberate’ for penalty purposes, regardless of the behaviour that led to the error in the first place. In other words, if a taxpayer was to fail to correct an error that was the result of nothing worse than a simple oversight or misunderstanding of the rules, that error could still be treated as deliberate.
The implications of this new treatment are very serious indeed and raises many questions about how it will work in practice. Currently the behaviour leading to an error determines the level of penalty charged, and the number of years for which HMRC can issue assessments to recover underpaid tax. For example, where an error is made despite taking reasonable care, the starting point is that HMRC can issue assessments covering four years, and no penalties will be charged. If HMRC can establish the taxpayer discovered the error and did not take reasonable steps to correct it, it is currently deemed to have been brought about carelessly.
The new rules dictate that if a taxpayer fails to correct an error they discover, even if it was initially made despite taking reasonable care, it will consequently be treated as deliberate due to the subsequent failure to correct. HMRC will then be able to issue an assessment up to 20 years later and charge much higher penalties.
What is a correction notice and what does it require?
The draft legislation will also give HMRC powers to issue a taxpayer with a ‘correction notice’ when that taxpayer has given HMRC a document (including tax returns and accounts) that HMRC has “reason to suspect contains an error”.
The correction notice will specify the inaccuracy and require the taxpayer to take reasonable steps to correct it or explain why there is no inaccuracy within a time frame specified in the notice.
If the taxpayer does not comply with the notice within the time frame, HMRC will treat the error as at least ‘careless’ in nature with the associated penalties and extended assessment windows being applied. We anticipate these notices will be used to bolster HMRC’s nudge letter activities.
What should taxpayers and advisers do?
It is not clear exactly what is meant by ‘reasonable steps’ or how quickly HMRC will expect an amendment or disclosure to be made before seeking greatly increased penalties etc. These terms will no doubt be tested and defined further over time. However, it is obvious that once the new legislation has been enacted, penalties for submitting incorrect returns etc will increase in many cases.
With that in mind, taxpayers should review their tax affairs now so that any historic errors can be identified and rectified before the changes occur.
When making a disclosure to HMRC, it is vitally important that the advice of a suitably qualified and experienced professional is sought. Crowe’s Tax Disputes and Investigations Team have vast experience in handling HMRC disclosures, enquires and investigations.
If you have identified an error and would like advice on how best to make a disclosure to HMRC, please contact us.
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