How speed of response and transparency can limit the impact of a UK tax error
Published on 23rd April 2026
Voluntary disclosure to HMRC can sharply reduce penalties and the risk of wider investigation
At a glance
Discovering a UK tax error often triggers a choice: disclose voluntarily or risk harsher treatment if HMRC later discovers the error.
Penalty rates typically range from nil for careless errors disclosed promptly to 100% for deliberate concealment.
A structured investigation and full disclosure can reduce penalties (sometimes to nil).
There is never a good time to discover an error related to tax affairs but, if one is found , what a business does next can have a material bearing on the outcome. Acting quickly, taking expert advice early, and investigating the issue can limit the financial damage and the risk of a wider HMRC investigation.
To disclose or not?
The UK tax system, and in particular the tax penalty regime, is designed to encourage taxpayer transparency and cooperation. A voluntary disclosure can significantly reduce the financial and logistical impact of an error and lower the risk of HMRC deciding to conduct an investigation of its own, potentially saving management time and further cost.
Even if there is no strict legal obligation to voluntarily disclose an historic tax error, continuing errors can force the issue. For example, a business that discovers it has been making supplies for VAT purposes for several years without having been registered must, as a matter of law, register and apply VAT on any ongoing supplies. Failure to do so could constitute a deliberate failure, which is a serious and potentially criminal matter. If a registration is being made, HMRC is bound to discover that the supplies began at an earlier date. A full and frank disclosure to HMRC alongside the registration in those circumstances will almost always be in the business' interests.
Errors should not be considered in isolation. Larger businesses will want to consider how a tax error fits into their wider compliance picture, including the uncertain tax treatment regime in schedule 17 to the Finance Act 2022 and/or the senior accounting officer regime in schedule 46 to the Finance Act 2009. Large businesses should also consider the impact that significant or repeated errors could have on their business risk review plus, or BRR+, rating with HMRC.
Mitigation of penalties
A voluntary disclosure of tax errors can materially reduce any penalties levied by HMRC, potentially to nil. Proposals announced at the Autumn Budget 2025 to consolidate and update the various existing penalty regimes were a timely reminder of HMRC's increasing focus on taxpayer transparency and its willingness to penalise uncooperative behaviour.
For most taxes, penalties for errors in tax returns and other documents are generally assessed under schedule 24 to the Finance Act 2007, as a percentage of the amount of tax underdeclared. The applicable rate depends on the taxpayer's conduct at the time.
Penalty rates: schedule 24 Finance Act 2007
| Type of error | Standard penalty | Prompted disclosure minimum | Unprompted disclosure minimum |
| Reasonable care | N/A | N/A | N/A |
| Careless | 30% | 15% | 0% |
| Deliberate but not concealed | 70% | 35% | 20% |
| Deliberate and concealed | 100% | 50% | 30% |
Higher rates can apply where the inaccuracy involves an offshore matter: they vary by territory category and can reach up to 200% of the potential lost revenue.
Other similar regimes exist for different types of errors, such as a failure to notify HMRC of certain circumstances under schedule 41 to the Finance Act 2008
Even if HMRC determines that the error was careless or deliberate, penalties can be potentially reduced or even eliminated if, once it is discovered, the taxpayer discloses the matter quickly and in full to HMRC.
In particular, mitigation can apply if a disclosure is made on an "unprompted" basis; that is, when the taxpayer has no reason to believe that HMRC is about to discover or has already discovered the error. Similarly, a disclosure made quickly upon discovery of the error and without any undue delay, with sufficient detail and transparency to enable HMRC to understand the error in question, and with subsequent cooperation and openness can weigh in the taxpayer's favour.
Disclosure steps
No two tax errors are the same, but there are some basic principles to follow when investigating and disclosing a tax error.
Confirm the errors
If a potential error comes to light, depending on the complexity involved, a detailed tax analysis may be required to establish that errors have in fact occurred.
Preliminary disclosure
Once errors are confirmed, the usual next step is a preliminary disclosure to HMRC, noting that a full disclosure will follow a thorough investigation. The main purpose is to protect the "unprompted" nature of the taxpayer's disclosure.
Calculation of liability
The additional tax liability will need to be calculated, along with any proposed penalties, and provide details of the calculation in a voluntary disclosure. Part of this will depend on relevant limitation periods and this is where advocacy as to the taxpayer's behaviour can be additionally important, as different time limits can apply for careless or deliberate arguments errors; potentially saving material amounts of tax itself and not just penalties.
From a practical perspective, it is usually advisable to request making a payment on account of the calculated tax liability as soon as possible, to prevent late payment interest from continuing to accrue (HMRC have special rates tracking above Bank of England base rates, meaning interest can quickly ramp up).
Investigation
A full disclosure goes beyond identifying the correct tax treatment and any additional liability. It also informs HMRC of the state of mind of those involved at the time the error occurred. For complex matters, the investigation is best structured to ensure it is protected by legal professional privilege as far as possible and appropriate controls put in place from the outset.
The findings can then be paired with advocacy based on conduct and other relevant factors. HMRC is unlikely to consider greater levels of penalty mitigation if they do not have clear evidence that the causes of the error have been properly investigated and the outcome of that investigation justifies mitigation. For instance, if it is arguable that the error was "deliberate", HMRC will want to be satisfied that criminal sanctions are not appropriate. Given the potential to materially mitigate both tax and penalties, an investigation can sometimes be cost neutral.
Engaging with HMRC
A thorough, well-documented disclosure reduces the risk of HMRC concluding that a wide-ranging investigation of its own is necessary: a process that tends to be more costly and considerably more intrusive. Some further questions from HMRC are to be expected; the manner and quality of the taxpayer's responses will be critical to bring matters to a close efficiently.
Osborne Clarke comment
The discovery of a tax error can be frustrating, but it is almost always best to deal with the error head on, make a full disclosure to HMRC, and draw a line under the matter as far as possible. HMRC does not expect perfection, but it does expect transparency. Ignoring tax errors could, at best, simply store up greater problems for the future. At worst it could constitute deliberate, and potentially criminal conduct. By contrast, a thorough, structured investigation followed by a full disclosure can provide certainty and closure, while significantly mitigating the impact of the error.
