The new duty to correct tax errors

Significant new obligations for taxpayers

The government is proposing to introduce a new legal obligation for taxpayers to correct errors in tax returns or documents provided to HMRC.

Under the proposals, HMRC would also acquire a new legal power to issue a correction notice, requiring a taxpayer to check their position and either correct an inaccuracy or explain why no correction is necessary.

Draft legislation was published for consultation over the summer and the outcome of that process is awaited. The government has indicated that the proposals will take effect from a date to be announced.
  

Why the proposals matter

Currently, it is not always clear whether a taxpayer has a legal obligation to correct an error in a tax return or other document provided to HMRC. Advisers and HMRC may take different views as to what is appropriate. For some advisers, there is no duty to correct an error which comes to light after the filing has been made. On this view, the act of filing discharges the taxpayer’s obligation.

If the proposals are implemented as currently formulated, then the taxpayer will have an explicit statutory, duty to correct post-filing. Furthermore, failure to comply with that post-filing duty could have severe consequences for the taxpayer, including significantly increased exposure to tax and penalties.
  

Who will be affected

The proposals will apply to all taxpayers and across many taxes, including income tax, corporation tax, VAT, inheritance tax, digital services tax, stamp duty land tax and stamp duty reserve tax.

Businesses (irrespective of size, activity or sector) and individuals (HNW, UHNW or otherwise) will need to consider how they will comply with the new duty to correct and what processes they should have in place.
  

Key points

• Taxpayers must take reasonable steps to correct errors in returns or documents submitted to HMRC once they become aware of them. This can be done by amending a return or notifying HMRC.

• Failure to correct an error after becoming aware is treated as "deliberate" behaviour, even if the underlying error was not deliberate. This is significant because the highest penalties and the longest HMRC assessment time limit (20 years) are reserved for deliberate behaviour. Whilst “deliberate” used to be a high bar, that will no longer be the case.

• HMRC can issue a correction notice where it suspects an error. The taxpayer would then be required to correct the error or explain why correction is not necessary.

• Important boundary issues are unresolved. For example, the proposals do not define what constitutes an error, what it means to become aware of one or the extent to which the duty to correct will apply to errors which pre-date the proposals.

• Complexities arise when the underlying topic has uncertainties, which is often the case in tax. It is unclear to what extent post-filing developments like new case law or guidance can affect whether, and when, a taxpayer becomes aware of an error and has a duty to correct it.

• Commercial transactions will be affected. For example, buyers in M&A transactions will need to consider the target’s duty to correct. Bearing in mind the comments above about non-deliberate behaviour attracting higher penalties and HMRC’s power to go back up to 20 years, there is heightened risk for buyers. Sellers will likewise want to assess the risk to ensure it does not harm them. There should therefore be extra diligence to identify tax errors and a plan for dealing with them. Insurers will also be interested in these proposals.
    

Contact us

Taxpayers will need to take advice in order to protect themselves against risks presented by the new duty to correct. We can assist – please contact Shofiq Miah at shofiq.miah@stephensonharwood.com or another member of the Stephenson Harwood Tax team.