HMRC has published draft legislation that would introduce a new, express obligation on taxpayers to take action to correct inaccuracies in returns and other documents submitted to HMRC once they become aware of them. The draft legislation would also give HMRC a new statutory power to issue a Customer Correction Notice requiring a taxpayer either to correct a suspected inaccuracy or explain why no correction is needed.
The government has confirmed that the proposed regime will be legislated for in Finance Bill 2026-27 and will become operative on 1 April 2028, although the draft measures could still be subject to change.
The current position
At present, taxpayers submit tax returns and related documents on the basis that the information provided is correct and complete to the best of their knowledge and belief. HMRC already has powers to impose penalties where a taxpayer submits an inaccurate document which, for example, gives rise to an understatement of tax or a false or inflated claim. For the returns and documents within its scope, these inaccuracy penalties are governed by Schedule 24 of the Finance Act 2007.
HMRC’s existing powers include revenue correction powers, enquiry powers, assessment powers, information and inspection powers, and prompts/communications aimed at taxpayers; however HMRC has been consistently seeking to strengthen its approach. These upcoming changes will impose an express duty on taxpayers to correct inaccuracies and introduce a new statutory power to issue Customer Correction Notices.
In practice, where a taxpayer later identifies an error, it can make a correction in a number of ways depending on the tax and procedural context, including amendment, disclosure or engagement with HMRC. Existing legislation already penalises a failure to notify HMRC of a subsequently discovered inaccuracy: paragraph 3(2) of Schedule 24 FA 2007 treats as careless an inaccuracy originally made neither carelessly nor deliberately, if the taxpayer later discovers it and fails to take reasonable steps to inform HMRC. The draft legislation replaces that provision with an express duty to secure correction and deliberate treatment for non-compliance.
What is the duty to correct?
The draft legislation would insert a new Schedule 24A “Correction of errors” to the Finance Act 2007. In broad terms it would apply where:
- A person has given HMRC a document of a specified kind;
- The document contains an inaccuracy which understates tax liability, falsely states or inflates a loss, or falsely claims or inflates a tax repayment;
- The person later becomes aware of that inaccuracy; and
- At the time the person becomes aware of it, the inaccuracy remains capable of correction, by an assessment to tax or otherwise.
The proposal covers the relevant returns and documents listed in Schedule 24 FA 2007, including those relating to income tax, corporation tax, VAT and CIS.
Where the conditions above are met, the taxpayer must take reasonable steps to correct the inaccuracy. If the taxpayer is able to correct the inaccuracy i.e. submitting an amended return, they are required to do so. If they cannot, they must inform HMRC.
The requirement that correction remains possible when awareness arises is clearly an important limitation on the duty. However, it is important to note that expiry of the taxpayer’s amendment window would not necessarily prevent the duty from arising: correction may still be possible through an HMRC assessment.
Failure to take the required reasonable steps would cause the inaccuracy to be treated as deliberate for Schedule 24 penalty purposes, even if the original error was made despite reasonable care.
What is a Customer Correction Notice?
A major feature of the new legislation is HMRC’s power to issue a Customer Correction Notice (“CCN”). Under proposed Schedule 24A, paragraph 2(1), HMRC would be able to issue a notice where it has reason to suspect that a relevant document submitted by the taxpayer contains an inaccuracy which understates tax liability or falsely states or inflates a loss or repayment claim, and the inaccuracy, if existing, can still be corrected. The notice would need to specify the suspected inaccuracy, or the kind of inaccuracy HMRC suspects may be present and set a deadline by which the taxpayer must either (a) take reasonable steps to correct, or (b) explain why the document does not contain an inaccuracy.
If the taxpayer neither takes reasonable steps to secure correction nor explains why the specified inaccuracy does not exist before the CCN deadline, paragraph 2(3) presumes the inaccuracy to have been careless for Schedule 24 penalty purposes. However, the draft does not require HMRC to accept the explanation given. Provided that the taxpayer has given an explanation, paragraph 2(3) will not apply, even if HMRC continues to dispute the taxpayer’s position.
Where the inaccuracy is deemed to be both careless and deliberate (including where it is deemed to be deliberate as a result of failure to comply with the duty to correct), deliberate treatment takes precedence. Otherwise, the taxpayer may rebut the careless presumption by satisfying HMRC or, on appeal, the tribunal that they took reasonable care to avoid the inaccuracy.
This is materially different from the normal “nudge” letters HMRC has often used in the past. A CCN would have a statutory basis with defined consequences for failing to respond appropriately. The regime also needs workable notification procedures and proportionate response deadlines, with sufficient time to investigate complex issues and a clear mechanism for seeking extensions. Guidance should explain how the duty operates where the issue is already being discussed with HMRC.
Why the new rules matter – penalties and time limits
The penalty consequences depend on which obligation is breached. Failure to comply with the duty to correct would automatically trigger deliberate treatment under Schedule 24 FA 2007, attracting materially higher penalties, even if the taxpayer disagrees that there is an inaccuracy. By contrast, a taxpayer issued with a CCN may avoid the presumption of carelessness by explaining, before the deadline, why no correction is needed, even if HMRC disagree. The interaction between the two will need clarification where the parties disagree.
The assessment consequences go beyond higher penalties. For income tax and CGT, the ordinary four-year assessment period extends to six years where a loss of tax was brought about carelessly and twenty years where it was brought about deliberately. Existing section 118(6) TMA 1970 treats a loss arising from subsequently discovered inaccurate information as brought about carelessly where the taxpayer fails to take reasonable steps to inform HMRC. The draft replaces that classification with deliberate treatment, engaging the twenty-year rather than six-year period, subject to the other assessment conditions. A later failure to notify could therefore expose an earlier return to assessment beyond the ordinary four-year period even where the original error was innocent. Although receipt of a CCN alone would not establish those conditions, a notice could bring an inaccuracy to light and a subsequent failure to notify could engage the extended period. Clear commencement and transitional rules are needed to establish how the new regime will apply to historical returns and earlier failures to notify.
There is however some limited relief available. Under proposed paragraph 3D of Schedule 24 FA 2007, a taxpayer would escape a penalty for a careless inaccuracy if both: (1) they had not been issued with a CCN during the six-year period ending when the penalty liability would otherwise have arisen; and (2) they take reasonable steps to secure correction under a CCN before its deadline.
This relief requires steps to secure correction; merely explaining why no inaccuracy exists complies with the CCN but does not, of itself, satisfy the relief condition.
What can taxpayers do to prepare?
Businesses should understand the risks in the filing positions they adopt and review how potential errors are identified, investigated and resolved. A CCN may require them to explain why a position is correct within a specified deadline; an inadequate response or failure to act on an identified error could have material penalty and assessment consequences. Practical steps include:
- Assessing filing risks before submission, obtaining appropriate advice on technical uncertainties and recording the facts, assumptions and reasoning supporting the position adopted, so it can be explained if challenged;
- Establishing clear responsibility and escalation routes for potential errors and CCNs, including coordination with external advisers and monitoring response deadlines;
- Keeping a factual record of when an issue was identified, what was investigated, the conclusions reached and any action taken, while protecting privileged advice;
- Preparing to use the appropriate response route: correcting an identified inaccuracy, informing HMRC where direct correction is unavailable, or explaining why a suspected inaccuracy does not exist;
- Considering assessment and penalty exposure separately, including the implications for earlier returns, and monitoring the final commencement and transitional rules.
Individual taxpayers who use agents should agree who will receive HMRC correspondence, investigate potential errors and ensure that any required response is made promptly.
The interaction with existing record-retention requirements also needs clarification, particularly where taxpayers are asked to revisit historical positions and the supporting records are no longer available.
Conclusion
HMRC’s objective of encouraging prompt correction of tax errors is understandable. The concern is the mechanism chosen. In particular, the draft legislation’s use of a taxpayer’s failure to correct as a route to treating an inaccuracy as deliberate has the potential to produce very significant consequences.
The final legislation needs to distinguish clearly between an identified error and a genuinely disputed tax treatment and explain how the correction duty interacts with a taxpayer’s response that no inaccuracy exists. Proportionate deadlines, safeguards for reasonable mistakes about the duty, and clear transitional rules for historic returns and earlier failures to notify will be essential.
For taxpayers, the practical message is to understand and document filing risks before submission and have a clear process for investigating and responding to subsequent challenges. A CCN need not require acceptance of HMRC’s position, but it will require a timely, considered response.
