HMRC has published draft legislation under its ‘Modernising the Correction of Errors’ initiative. The proposals introduce a clearer and more proactive framework for correcting inaccuracies in tax returns and other documents sent to HMRC. They are designed to encourage taxpayers to correct known errors earlier, while also giving HMRC a new way to prompt action where it suspects a submitted document may be inaccurate.

A new duty to correct tax errors

At the heart of the proposals is an explicit duty for taxpayers to take reasonable steps to correct an inaccuracy once they become aware of it. This would apply to returns covering a wide range of taxes, levies and duties, as well as related documents which HMRC may rely upon, such as company accounts.

HMRC may treat known tax errors as deliberate if ignored

The most significant change is how HMRC may treat the taxpayer’s behaviour for penalties and assessment time limits.

If a taxpayer becomes aware of an inaccuracy but doesn’t take reasonable steps to correct it or notify HMRC, the inaccuracy may be treated as deliberate. In practice, an innocent error could have more serious consequences if prompt action is not taken once it has been identified.

A mistake made despite taking reasonable care would usually fall within a four-year assessment window. However, it could become subject to a 20-year assessment period if HMRC isn’t notified once the error is identified. Penalties could also increase to as much as 100% of the additional tax due.

HMRC’s new Customer Correction Notice power

HMRC would also be able to issue a Customer Correction Notice where it has reason to suspect a document contains an inaccuracy. This would require the taxpayer to review the position and respond by correcting the error, making a disclosure or explaining why no correction is needed. The notice would give HMRC a more formal route to ask taxpayers to revisit submitted information before a full compliance check is needed.

Greater emphasis on evidence and review processes

If enacted as drafted, the proposals are likely to increase the importance of documenting how tax errors are reviewed. Taxpayers and advisers may need to show when an issue became known, what steps were taken to review it and why any correction or disclosure was, or wasn’t, considered appropriate.

Preparing for HMRC’s proposed reforms

Although not yet enacted, these proposals form part of HMRC’s 2025 Transformation Roadmap, focusing on modernising compliance powers. HMRC’s direction is clear: known errors should be addressed promptly. Taxpayers who have identified historic discrepancies, or who are carrying out reviews that may uncover them, should consider their approach to corrections, disclosures and record keeping in light of this draft legislation.

For more information, please contact Paul Marcroft or your usual RSM contact.

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