HMRC tax bill errors spotted during a routine review or audit, should give a business sufficient cause to reassess their tax return history. While they might seem insignificant, errors found in business tax affairs are not uncommon. According to HMRC’s own data, 15% of the total tax gap [taxes owed vs taxes collected] is due to error, which amounted to approximately £7 billion in the tax year 2023 to 2024. Though not all tax errors require a formal disclosure, some can be corrected through amended returns or statutory correction mechanisms.
In the majority of cases, disclosing to HMRC provides a simple means of resolving the issue. In addition, taking a proactive approach to HMRC tax bill errors, as opposed to being reactive, enables the business to explain what occurred and to remediate the situation while substantially reducing the risk of penalty and/or further examination from HMRC. Likewise, timely and transparent disclosures to HMRC allow the business owner/director to regain control of his/her business and protect the reputation of that business, knowing that the business’s tax affairs are now being managed correctly.
This blog helps UK businesses understand how to make tax disclosures to HMRC, including the methods and the actual processes for each method.
How on Make Tax Disclosures to HMRC
There are several methods for making tax disclosures to HMRC, depending on the nature of the error, the type of tax involved, and the circumstances. While the Digital Disclosure Service (DDS) is a common and suitable option for many businesses, each method has its own process, requirements, and appropriateness. The following details outline these methods.
Digital Disclosure Service (DDS)
The Digital Disclosure Service is the default means for businesses and Individuals to self-disclose a tax obligation to HMRC UK tax rates where they have failed (voluntarily) to submit a Voluntary disclosure of Unpaid Tax and to pay it to HMRC using the Digital Disclosures channel. This route is also used for reporting historic tax irregularities like unpaid Income Tax, Capital Gains Tax, National Insurance contributions, Corporation Tax and ATED. This could also include instances where the business or individual was careless or lacked reasonable care. This generally applies where a voluntary disclosure is still an option (in cases of deliberate conducts it’s best to seek specialist professional advice). When there is evidence of errors occurring in one or multiple financial periods, this is the appropriate route to take to correct these errors.
Process:
Notification: In order to make a Debt Disclosure to HMRC, you must first complete a Digital Disclosure Service form and notify them of your intention. There is no requirement to provide any information about the error during this notification stage, other than letting them know via your notification (e.g. via email) that you are making a Debt Disclosure of unpaid taxes. Once your notification has been acknowledged by HMRC, a unique disclosure reference number will be assigned to you. You will normally have a 90-day period after your notification date to calculate, prepare and file the complete Debt Disclosure.
Disclose and pay: During this period, you must calculate the total amount of taxes owed for all relevant tax years. This will include the tax that you owe, plus any penalties and statutory interest applicable to those years. You will also have to provide a full explanation of how the HMRC errors occurred, why they were not detected earlier, and what you would like to do about them once the Debt Disclosure has been submitted. You will be required to pay the tax, penalties and statutory interest at the same time that you submit your Debt Disclosure, although you may want to consider making an application for a Time to Pay agreement with your Debt Disclosure.
Disclosure of Behaviour: The disclosure must include a description of the behaviour which caused the mistake. HMRC identifies behaviours as Reasonable Care, Careless, Deliberate & Deliberately Concealed. The type of behaviour that falls within these categories will affect the amount of penalty imposed for that conduct. Submitting mistakes to HMRC UK tax rates on a voluntary basis and offering a full and accurate explanation can greatly reduce the level of penalty imposed, especially if the behaviour was considered careless rather than intentional.
Worldwide Disclosure Facility (WDF)
The Worldwide Disclosure Facility is designed so that those businesses that have not submitted the appropriate tax returns for the UK’s taxation of offshore income, assets, and Gains can do so on a voluntary basis. Examples of offshore income and/or gains may include Offshore Bank Accounts; Foreign Investments; Offshore Properties; and other forms of Non-UK Income that have been improperly reported to HMRC.
The Worldwide Disclosure Facility lets businesses disclose offshore tax liabilities via the Digital Disclosure Service, even without prior reports to HMRC. HMRC treats offshore tax issues separately and has international data-sharing agreements. Penalties for non-compliance, like not reporting income, can increase if these matters are not voluntarily disclosed.
Process:
Notification via DDS:
The beginning of the disclosure procedure is the same as for a regular DDS disclosure; however, until HMRC has received the notice that the individual wishes to disclose offshore tax issues. HMRC will confirm receipt of the WDF notification and provide a reference number indicating that a disclosure has been opened, which will be used for future correspondence. This letter establishes a 90-day window from the date of notification within which the disclosure must be submitted to HMRC.
Disclosure and payment:
During the 90-day period, you must work out and report to HMRC the correct amount of UK tax liability due on the offshore income/gains as well as the applicable statutory interest and penalties. You also need to provide detailed information regarding the offshore arrangement and how the income/gains were generated along with your reasons why the income/gains had not previously been reported to HMRC. As well as paying the amount due on submission of your disclosure, if relevant, you may also request ‘Time to Pay’ arrangements for any unpaid amount to be arranged if appropriate.
Taxes Not Covered by These Disclosure Routes
Amending Corporation Tax Returns
Errors in Corporation Tax returns can often be amended without formal disclosure by submitting an amended return within 12 months of the deadline, especially for straightforward HMRC errors like computing mistakes or omitted income or expenses. This allows quick correction without extensive disclosure. The amended return, submitted electronically, replaces original figures, and if additional tax is due, it must be paid with statutory interest.
If the amendment window has closed or errors are complex or span multiple periods, you typically need to notify HMRC through voluntary disclosure, which may involve resubmitting calculations, explanations, and paying extra tax, interest, or penalties under an agreed ‘Time to Pay’ plan.
VAT Error Correction Process
VAT errors are subject to a separate correction process and are not generally disclosed through the Digital Disclosure Service. The appropriate method depends on the size and nature of the error identified.
Where the net value of VAT errors does not exceed the greater of £10,000 or 1% of box 6 (up to a maximum of £50,000), the correction can usually be made by adjusting the next VAT return. This allows businesses to correct minor errors quickly without the need for a formal disclosure.
For larger errors, or where adjustments cannot be made through a VAT return, a formal disclosure must be submitted to HMRC using Form VAT652. This form requires details of the VAT periods affected, the amounts involved, and an explanation of how the errors occurred. Any additional VAT due must be paid, together with statutory interest and any applicable penalties. Prompt voluntary disclosure can significantly reduce penalty exposure.
Research and Development (R&D) Tax Relief Claims
Incorrectly identifying qualifying activities for Research and Development (R&D) tax relief, overstating expenditures, and misunderstanding eligibility criteria can cause errors in the R&D Tax Credit claims of businesses.
Businesses should make every effort to rectify any errors as soon as they are aware of them. Where the error has been found in the time period allowed for amending claims, amending the Corporation Tax return is usually the best way to correct an R&D Tax Credit Claim. If the error was found after the time allowed for amending claims is over, or if the error affects multiple tax periods, it is likely that filing a voluntary disclosure with HMRC will be necessary. In these cases, it will be required to submit a revised calculation, supporting documentation and a written explanation of how the error occurred.
With the increasing number of audits on claims for R&D Tax Credits, it is especially crucial to correct mistakes quickly and openly to minimise the risk of penalties, repayments, or jeopardising future claims through broader investigations into R&D claims. HMRC has greatly intensified its scrutiny of R&D tax credit claims due to high levels of error and fraud. This heightened compliance activity has caused a sharp rise in enquiries, many of which result in reduced claims or penalties.
PAYE Error Corrections and Disclosures
Errors in PAYE payroll processing can occur from incorrect processing, misapplied tax codes, or misclassified workers. Employers must rectify PAYE errors promptly. Mistakes for the current or prior tax year can be corrected by filing amended FPS and EPS via payroll software, without additional disclosures. Significant errors involving a prior year that result in underpayment to HMRC usually require formal disclosure, including full calculations of owed PAYE, National Insurance, interest, and penalties. Timely voluntary disclosures help reduce penalties and facilitate resolution.
Key Takeaways
If there is one thing to be noted, it is to treat disclosures as an ongoing part of the accounting and HRMC tax filing process. Keep in mind that HMRC disclosures generally involve multiple steps from gathering information to scrutinizing the extent of the HMRC tax bill errors; all of which take time and validation with reporting documentation. Being proactive and open-minded about resolving any HMRC errors that your company may have, is always the best approach to resolve things at the earliest. To provide additional assistance with this issue, UK businesses should conduct an annual review of their financial statements, maintain precise and accurate records relating to their company’s activities, and get advice from a qualified UK tax professional.
HM Revenue & Customs (HMRC) has several self-disclosure options available to businesses that would allow them to voluntarily disclose any discrepancies without incurring large penalties. Businesses that take advantage of these self-disclosure options can end up paying less in penalties and having their disputes resolved quickly. As a general rule, the sooner a business advises HMRC of an error or discrepancy, the better chance the business has of receiving a favourable outcome from the self-disclosure. This would typically result in reduced costs and protect their company’s reputation.
