Receiving a letter that says HMRC has found an error can feel alarming.
However, an initial question from HMRC does not always mean that it has reached a final decision. HMRC may have noticed a difference between a tax return and information from another source. Alternatively, an officer may have identified a figure that needs further explanation during a compliance check.
The taxpayer should therefore understand exactly what HMRC believes is wrong before agreeing to any adjustment.
Sometimes the taxpayer accepts the error and corrects it quickly. In other cases, the apparent error has a valid explanation. For example, HMRC may have misunderstood a bank transaction, overlooked an allowable expense or used incomplete information.
What happens next depends on the facts, the amount of tax involved and the behaviour that caused the error.
How Might HMRC Identify an Error?
HMRC can identify possible errors in several ways.
For example, it may compare a tax return with:
- PAYE and pension information;
- VAT returns;
- company accounts;
- Construction Industry Scheme records;
- property and land transaction information;
- information supplied by banks or other third parties;
- overseas financial information;
- previous tax returns; and
- records obtained during a compliance check.
A difference does not always prove that the return is wrong.
A bank credit may represent a transfer between accounts rather than undeclared income. A figure reported by a third party may relate to a different tax year. Equally, an expense that appears unusual may still qualify for tax relief when the taxpayer provides the full documents.
Therefore, HMRC will often ask questions or request evidence before making a formal adjustment.
First, HMRC Will Explain the Possible Error
HMRC should normally identify the figure or part of the return that concerns it.
The officer may ask the taxpayer to explain:
- where a particular figure came from;
- why it differs from information held by HMRC;
- whether income was left out;
- how an expense or tax relief was calculated;
- whether the same issue affects other periods; and
- what records support the return.
The taxpayer should read the request carefully. They should also check the tax year, tax type and response deadline.
A reply should address the actual question and include relevant evidence. However, it should not contain guesses or unsupported explanations.
If the taxpayer does not understand HMRC’s concern, they or their adviser can ask the officer to clarify it.
What If the Taxpayer Agrees That the Return Is Wrong?
If the taxpayer accepts that an error occurred, the next step is to calculate the correct position.
That may involve:
- identifying the incorrect figure;
- finding the records that support the correct amount;
- calculating the tax difference;
- checking whether the same problem affects other returns;
- explaining how the error happened; and
- sending the correction or disclosure to HMRC.
The taxpayer should not simply accept HMRC’s proposed figure without checking it.
HMRC may have enough information to identify a problem but not enough information to calculate the correct tax. For instance, HMRC may identify undeclared sales without allowing all related business expenses.
A careful calculation can therefore prevent an excessive assessment.
What If the Taxpayer Disagrees With HMRC?
Taxpayers do not have to agree with an adjustment merely because HMRC proposed it.
If the original return is correct, the taxpayer should explain why and provide supporting records. Depending on the issue, useful evidence may include:
- invoices and receipts;
- bank statements;
- contracts;
- loan agreements;
- completion statements;
- mileage records;
- payroll documents;
- accounting ledgers;
- emails or business correspondence; and
- calculations prepared when the return was completed.
The response should connect the documents to the disputed figure.
For example, sending several years of bank statements without identifying the relevant entries may not answer HMRC’s question. A short explanation that refers to specific dates and amounts will usually help more.
HMRC may accept the explanation, ask further questions or maintain its proposed adjustment.
Will HMRC Correct the Tax Return?
HMRC can correct or amend a return in several ways. The correct route depends on the tax, the time that has passed and whether a formal compliance check remains open.
The result may include:
- the taxpayer amending the return;
- HMRC correcting an obvious error;
- HMRC issuing a closure notice with an amendment;
- HMRC making an assessment;
- the parties agreeing a contract settlement; or
- HMRC confirming that no adjustment is needed.
A contract settlement is an agreement to pay tax, interest and, where relevant, penalties without HMRC issuing separate formal assessments for every item.
Before agreeing to a settlement, the taxpayer should check the periods, calculations and payment terms carefully.
Additional Tax and Interest
If the correction increases the tax due, HMRC will usually charge late-payment interest.
Interest compensates HMRC for receiving the tax after the original payment date. It is separate from a penalty and can arise even where the taxpayer made an innocent mistake.
Therefore, a taxpayer may have to pay interest even if HMRC accepts that they took reasonable care and does not charge an inaccuracy penalty.
The calculation may include:
| Amount | Why it may arise |
| Additional tax | The corrected return shows that more tax was due |
| Late-payment interest | HMRC received the tax after its original due date |
| Inaccuracy penalty | The error resulted from careless or deliberate behaviour |
| Other penalties | A separate filing or payment failure may have occurred |
The taxpayer should ask for a clear breakdown if HMRC presents only one total.
What Happens If the Error Means Too Much Tax Was Paid?
Not every HMRC correction produces a further bill.
Sometimes the review shows that the taxpayer paid too much tax. For example, they may have omitted a valid expense, reported income twice or used the wrong figure.
Depending on the circumstances and statutory time limits, HMRC may:
- amend the return;
- reduce an existing liability;
- repay the overpaid tax;
- offset the amount against another tax debt; and
- add repayment interest where the rules require it.
Therefore, taxpayers should review the entire calculation rather than focus only on the error first identified by HMRC.
Does Every Error Lead to a Penalty?
No. HMRC should not charge an inaccuracy penalty merely because a return contained an error.
For an inaccuracy penalty to apply, the error must generally have caused tax to be understated, a false or inflated loss to be claimed, or an excessive repayment to be requested. HMRC must also consider the behaviour that caused the error.
If the taxpayer took reasonable care, HMRC should not charge an inaccuracy penalty.
HMRC generally divides behaviour into four categories:
| Behaviour | General meaning |
| Reasonable care | The taxpayer took appropriate care, but an error still occurred |
| Careless | The taxpayer failed to take reasonable care |
| Deliberate | The taxpayer knew that the return or document was inaccurate |
| Deliberate and concealed | The taxpayer knowingly submitted an inaccurate document and took steps to hide the error |
These categories matter because they affect both the penalty range and how many earlier years HMRC may examine.
HMRC should consider the taxpayer’s knowledge, abilities, circumstances and experience. It must also gather evidence to support its view of the behaviour involved.
What Does “Reasonable Care” Mean?
Reasonable care depends on the person and the circumstances.
A straightforward mistake by someone with simple tax affairs may receive different treatment from the same mistake made by an experienced finance professional dealing with a familiar issue.
Evidence of reasonable care may include:
- keeping suitable records;
- checking unusual transactions;
- reading relevant guidance;
- asking an adviser for help;
- giving the adviser complete and accurate information;
- reviewing the return before submission; and
- correcting an error promptly after discovering it.
Using an accountant does not automatically protect a taxpayer from penalties. The taxpayer must give the adviser accurate information and take reasonable steps to check the completed return.
However, the taxpayer may have taken reasonable care if they chose a suitable adviser, provided all relevant facts and had no reason to believe the advice was wrong.
How Does HMRC Calculate an Inaccuracy Penalty?
HMRC normally calculates an inaccuracy penalty as a percentage of the potential lost revenue.
In simple terms, potential lost revenue represents the tax that the error put at risk.
The applicable percentage depends mainly on:
- whether the behaviour was careless or deliberate;
- whether the taxpayer disclosed the error before HMRC prompted them;
- whether the error involved concealment;
- the quality of the disclosure; and
- whether offshore matters or other special rules apply.
A taxpayer who tells HMRC about an error before HMRC has reason to investigate it may receive an unprompted-disclosure range. By contrast, a disclosure made after HMRC has contacted the taxpayer will normally count as prompted.
However, contacting HMRC first does not automatically produce the maximum reduction. HMRC also considers what the taxpayer does during the disclosure.
Why Cooperation Matters
HMRC describes the quality of a disclosure under three broad headings:
- telling HMRC about the inaccuracy;
- helping HMRC understand and calculate it; and
- giving HMRC access to relevant records.
Good cooperation can reduce a penalty within the permitted range.
For example, a taxpayer may improve their position by:
- explaining the error fully;
- supplying calculations promptly;
- identifying all affected periods;
- answering reasonable questions;
- preserving relevant records; and
- allowing HMRC to verify the figures.
However, cooperation does not change deliberate behaviour into careless behaviour. HMRC first considers what caused the original error. It then considers the disclosure when calculating any reduction.
Can HMRC Suspend the Penalty?
HMRC may suspend certain penalties for careless inaccuracies.
A suspended penalty does not disappear immediately. Instead, HMRC sets conditions that the taxpayer must meet during a suspension period.
The conditions should help prevent a similar error from happening again. For example, HMRC might require a business to introduce a new bookkeeping check, reconcile an account regularly or improve a particular record-keeping process.
If the taxpayer meets the conditions and avoids further relevant inaccuracies, HMRC may cancel the suspended penalty at the end of the period.
However, suspension does not normally apply to penalties for deliberate inaccuracies. It is also not suitable where HMRC cannot set a practical condition that would prevent the error from happening again.
Could HMRC Look at Other Tax Years?
Yes. If HMRC finds an error in one return, it may ask whether the same problem affects other periods.
For example, an incorrect method for calculating private use, expenses or undeclared income may have been used for several years.
HMRC may then:
- widen the current compliance check;
- ask for calculations covering additional years;
- request more records;
- seek voluntary corrections; or
- issue discovery assessments where the legal conditions and time limits allow.
However, one error does not prove that every earlier return was wrong. The taxpayer should examine each period and explain any differences.
If the same issue continued for several years, dealing with it openly and consistently can help bring the wider position to a conclusion.
How Does HMRC Close the Case?
Once HMRC has reviewed the figures and any penalty position, it should explain the outcome.
The case may end with:
- no adjustment;
- an agreed amendment;
- a closure notice;
- one or more tax assessments;
- a penalty decision;
- a repayment; or
- a contract settlement.
The taxpayer should receive enough information to understand:
- what HMRC changed;
- which periods the decision covers;
- how HMRC calculated the tax and interest;
- whether HMRC charged a penalty;
- what behaviour HMRC alleged;
- the payment deadline; and
- the right to appeal.
Do not assume that a case has formally closed simply because correspondence has stopped. Ask HMRC to confirm the position in writing where necessary.
What If You Cannot Pay the Additional Tax?
A taxpayer should not ignore the bill because they cannot pay it in full.
First, check that the calculation is correct. Then contact HMRC before the payment deadline if possible.
HMRC may consider a Time to Pay arrangement. It will usually want information about:
- income and spending;
- available savings;
- business cash flow;
- assets;
- other debts;
- the amount the taxpayer can pay immediately; and
- how quickly they can clear the balance.
HMRC considers payment proposals individually. Therefore, the taxpayer should offer an amount they can genuinely maintain.
A payment arrangement does not normally stop interest from running. It also does not replace the need to file current returns and pay new liabilities on time.
Practical Guide: What to Do After HMRC Finds an Error
- Read HMRC’s letter and identify the tax, period and response deadline
- Ask HMRC to clarify the alleged error if the letter is unclear
- Compare HMRC’s information with the return and original records
- Decide whether you agree, partly agree or disagree
- Calculate the correct tax rather than accepting an unsupported estimate
- Check whether the same issue affects other returns
- Prepare a clear timeline explaining how the error happened
- Provide relevant evidence and keep copies of everything sent
- Review the tax, interest and penalties separately
- Check your appeal rights before accepting a formal decision
- Discuss payment promptly if you cannot pay in full
- Improve the process that caused the error so it does not happen again
Frequently Asked Questions
Will HMRC automatically fine me if it finds an error?
No. HMRC should consider why the error occurred. If you took reasonable care, an inaccuracy penalty should not apply. However, you may still need to pay additional tax and interest.
Should I accept HMRC’s calculation?
Only after checking it. HMRC may have identified omitted income without considering allowable expenses, payments already made or other relevant information.
Can I correct the error before HMRC finishes its check?
Often, yes. However, discuss the correct process with HMRC or your adviser. The method will depend on the tax, period and stage of the enquiry.
Will admitting an error make the penalty worse?
Not necessarily. A full and accurate disclosure can reduce a penalty. Trying to hide the problem or providing false information can make the position much more serious.
Can HMRC accuse me of deliberate behaviour without evidence?
HMRC must consider the available evidence and explain its conclusion. If you disagree with the behaviour category, you can provide evidence and challenge the resulting penalty.
Can I appeal HMRC’s decision?
Usually, yes. A formal decision letter should explain the appeal rights. In many cases, the taxpayer has 30 days to appeal and should explain what they believe is wrong, provide the correct figures and include supporting evidence.
Does an appeal stop HMRC collecting the tax?
Not always. Depending on the tax and decision, you may need to apply to postpone the disputed amount or discuss payment while the appeal continues. Undisputed tax should normally still be paid.
Can HMRC reopen earlier years?
Potentially. The available time limits depend on the tax and the behaviour involved. HMRC may have longer to assess where it believes the taxpayer acted carelessly or deliberately.
What if my accountant made the error?
You remain responsible for your tax return. However, HMRC should consider whether you selected a suitable adviser, provided complete information and had any reason to doubt the advice.
Where to Find Official HMRC Information
You can find current guidance here:
- Penalties for inaccuracies in returns and documents, explaining reasonable care, behaviour and penalty reductions.
- HMRC guidance on establishing behaviour, covering the evidence HMRC considers when deciding how an error arose.
- Appeal against a tax decision, explaining the appeal, review and tribunal options.
- General information about compliance checks, covering how HMRC conducts and concludes checks.
- If you cannot pay your tax bill on time, explaining how to contact HMRC about payment support.
- Tax compliance checks, providing an overview of the compliance-check process.
Tax rules and time limits depend on the facts and the type of tax involved. Therefore, check the latest guidance and seek professional advice where necessary.
💡 Key Takeaway
An error does not automatically lead to the highest tax bill or a penalty.
First, HMRC must establish the correct figures. It should then calculate any additional tax and interest before considering whether the taxpayer took reasonable care or acted carelessly or deliberately.
The taxpayer’s response matters. A clear explanation, reliable evidence and constructive cooperation can help resolve the case and may reduce any penalty.
However, do not accept an adjustment simply to bring the enquiry to an end. Check the figures, behaviour category, penalty calculation and appeal rights before agreeing to HMRC’s decision.
Need Help?
If HMRC says it has found an error in your tax return, Accounts Tax Group can help you understand what the officer has identified and whether the proposed adjustment is correct.
We can review the records, calculate the correct tax, prepare a clear response and examine whether HMRC has applied the right behaviour and penalty rules. Where the error affects several years, we can also help you present the wider position consistently.
If additional tax is due, we can review the settlement figures and help you prepare a realistic payment proposal.
Contact Accounts Tax Group before accepting a significant HMRC adjustment or penalty.
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