Modernising the correction of errors: a deliberate overreach?

Modernising the correction of errors: a deliberate overreach?

Proposed legislation introducing a statutory duty to correct inaccuracies in tax returns is billed as a modernisation, but the imposition of tax-geared deliberate penalties for failure to do so is seriously problematic.

At the 2025 Budget, the government announced it would legislate to modernise the UK’s rules governing the correction of inaccuracies in tax returns. On 13 July 2026, the government published a policy paper and draft legislation for inclusion in the 2026-27 Finance Bill. The accompanying written ministerial statement declared that the policy was intended to “resolve simple, common issues more quickly and proportionately and improve consistency and fairness by setting a clear expectation that customers self-correct errors”.

The draft legislation uses the threat of tax-geared penalties to incentivise taxpayers to self-correct inaccuracies in their returns. These penalties can be material – in the case of domestic matters, up to 30% of the potential lost revenue for careless errors, and up to 100% for deliberate errors.

The draft legislation introduces two key changes:

• First, it imposes a statutory “duty to correct” where a taxpayer “becomes aware” of an inaccuracy in a return (including corporation tax, income tax, VAT and Pillar 2 returns) at some later time when the return is still able to be corrected. The taxpayer must take reasonable steps to correct the inaccuracy (by amending its return, if it is still in time to do so), or inform HMRC of the inaccuracy if not.
• Secondly, it gives HMRC power to nudge a taxpayer to correct a perceived inaccuracy through the issue of a “correction notice”. A notice requires the taxpayer either to take reasonable steps to correct the inaccuracy, or explain to HMRC why there is no inaccuracy. 

Correction notices

The correction notice power should do no more in practice than encourage existing good practice of disclosing inaccuracies if they subsequently come to light. In effect, it puts onto a statutory footing HMRC’s existing practice of issuing “nudge” letters to taxpayers they suspect of being non-compliant. 

On receiving a correction notice, taxpayers will need to act quickly and either take reasonable steps correct the inaccuracy or explain why there is no inaccuracy, before the deadline specified in the notice.  

A compliant taxpayer who takes reasonable steps to correct the inaccuracy is relieved from a carelessness penalty, unless they have already received a correction notice in the previous 6 years (although deliberate penalties could still apply if the error was deliberate). On the other hand, failure to comply will mean the inaccuracy is “presumed” to be careless, unless it was deliberate or unless the taxpayer can establish on appeal that it was not careless.

The drafting and policy intention of this provision is not terribly clear, but it seems to be an attempt to offer a carrot to generally compliant taxpayers who require occasional nudges. 

The duty to correct

The rules operate more harshly for taxpayers who breach the new duty to correct requirement where no correction notice is received. In those cases, the inaccuracy is simply deemed to be deliberate.

The threshold here is low – all that is required for the duty to correct to apply is that the taxpayer “becomes aware” of an inaccuracy at a time when it can still be corrected (by the taxpayer or HMRC). In those circumstances, the taxpayer must take reasonable steps either to correct the inaccuracy (if that is still possible) or inform HMRC (if it is not). If these steps are not taken, the inaccuracy is – without more – “to be treated as deliberate”. This draconian consequence is notably not mentioned in the accompanying policy paper. 

In the ordinary course, an allegation that a taxpayer has made a deliberate inaccuracy is a serious matter, with a suitably high threshold – an inaccuracy will generally only be deliberate where a taxpayer (a) knowingly provides HMRC with a document that contains an error, (b) with the subjective intention that HMRC should rely on it as an accurate document. Although deliberate conduct is not the same as fraud, the First-tier Tribunal has in some cases (for example Tooth [2018] UKUT 38 (TCC)) held that an allegation of deliberate conduct is tantamount to an allegation of fraud, and deliberate penalties are generally investigated by HMRC’s Fraud Investigation Service, with the risk of escalation to a criminal investigation or prosecution. 

The consequences of being assessed to a deliberate penalty are severe, and can include:

• For a domestic matter involving (broadly) UK assets or income, HMRC can assess a tax-geared penalty of up to 100% of the potential lost revenue if the inaccuracy is both deliberate and concealed, subject to mitigation in certain circumstances.
• HMRC can name and shame taxpayers who have been assessed to a deliberate penalty on a publicly accessible list published online (under section 94 of the Finance Act 2009).
• Suppliers are mandatorily excluded from public tender processes if they or their associated and connected persons have received a deliberate penalty. Existing contracts with UK contracting authorities could also be terminated in some instances if a deliberate penalty is assessed. See discussion of this point here: The Procurement Act 2023 and Tax: What heads of tax and legal teams need to know | Freshfields.

Those consequences arise when a deliberate penalty “sticks” (i.e. HMRC assess a deliberate penalty that is either not appealed, or the taxpayer is unsuccessful on appeal). However, under the draft duty to correct legislation, an inaccuracy that would in normal circumstances be neither careless nor deliberate, is deemed to be deliberate if the taxpayer does not comply with the duty to correct, regardless of the nature of the conduct giving rise to the underlying error or to the failure to self-correct. There is no need to establish quasi-fraudulent conduct.

In the ordinary course, a taxpayer can appeal against an assessment to a deliberate penalty and would have an opportunity to establish that the relevant conduct did not cross the deliberate threshold. However, it is unclear whether and in what circumstances a taxpayer can appeal a penalty where the deliberate degree of culpability is deemed to exist. The most obvious grounds appear to be either that any steps taken were reasonable in the circumstances, or that the taxpayer did not have the requisite degree of awareness to trigger to the duty to correct.

It is also unclear what it means to become “aware” of an inaccuracy and therefore the point at which the duty to correct applies. In many cases, taxpayers and HMRC may reasonably disagree as to whether an inaccuracy exists – in those cases, the legislation does not explain how the duty to correct should operate. Logically, the awareness condition must be a subjective test that depends on the taxpayer’s viewpoint, but in practice this point will only ever be considered with the benefit of hindsight.

Where a taxpayer is a corporate entity rather than a natural person, attributing awareness is notoriously difficult – tax managers move on and change roles, views may differ or change over time, and recordkeeping may be inexact. Under the proposed draft legislation, the buyer of a target company could be (indirectly) exposed to a deliberate penalty if it disagrees with the historic transfer pricing policy adopted by the target company but does not self-correct. That penalty could arise even if the target company’s conduct fails to meet even the carelessness threshold and even if there are good reasons for the failure to self-correct (e.g. the buyer may not have conduct of historic years).

The new rules appear to be inspired by existing rules used to incentivise individuals to correct historic tax positions relating to offshore matters. Expanding them to cover the full range of corporate taxes could pose a serious compliance burden for multinational groups with complex tax affairs, for whom inaccuracies may occur in the ordinary course, usually inadvertently. Large corporates would need to establish a process to determine the point at which awareness of inaccuracies arose, to establish when a duty to correct arises and therefore mitigate the risk of being deemed to have made a deliberate inaccuracy, with the attendant consequences. 

Softening the impact

HMRC have invited comments on the draft legislation (by 7 September 2026). The legislation has already attracted market comment. HMRC should consider amending the draft legislation, for example by replacing the deemed deliberate behaviour with a presumption which can be overturned on appeal if the taxpayer establishes that the relevant conduct giving rise to the inaccuracy and/or the failure to self-correct did not meet the deliberate threshold. Similarly, HMRC should consider amending the legislation to clarify what it means to become “aware” of an inaccuracy. Given the severe consequences, this should only be the case where there is no reasonable doubt as to the correct tax position. In addition, the duty to correct should not apply where an enquiry or appeal is ongoing and the taxpayer reasonably believes their position to be correct, even if it is later proved to be wrong.