The government has launched a consultation that could allow HM Revenue & Customs (HMRC) to examine up to 20 years of taxpayers' financial records and impose significantly higher penalties on those who fail to correct errors in their returns.
Under the proposals, which are being overseen by Chancellor John Healey as head of HM Treasury, an uncorrected error could be treated as "deliberate" if a taxpayer does not amend it within a specified period after receiving a formal notification from HMRC. This would expose affected individuals and businesses to steeper fines, as well as reputational damage.
The consultation was initiated just before Andy Burnham became Prime Minister, but any legislative changes would be introduced under his government, with Mr Healey playing a central role. HMRC has invited taxpayers, accountants and industry groups to submit their views before the consultation closes in early September.
What the proposals mean for taxpayers
Currently, HMRC can typically investigate a taxpayer's affairs for up to six years. The new plans would extend that period to two decades, giving the tax authority far more time to identify and challenge potential inaccuracies. For many people, that could mean digging through old bank statements, investment records and business accounts from years gone by.
The definition of a "deliberate" error is key. If a taxpayer is notified of an inaccuracy and fails to correct it within the timeframe set out by HMRC, the error could automatically be treated as deliberate. That classification carries much heavier penalties than an innocent mistake, which is what has prompted concern among tax professionals.
Nimesh Shah, of accountancy firm Blick Rothenberg, told The Telegraph: "Most people are not represented by a tax adviser and so taxpayers may genuinely not know when they have made an error and could find themselves exposed to higher penalties."
Expert warnings over legal ambiguity
The proposals have also drawn criticism from legal experts, who argue that they fail to distinguish between genuine errors and legitimate disagreements over how tax law should be applied.
Helen Buchanan, a partner at law firm Freshfields, says: "The consequences of a deliberate penalty can be severe, both financially and reputationally."
Adam Craggs, from RPC, added: "A fundamental issue with the proposed legislation is that it does not distinguish between a genuine error and a bona fide disagreement over the correct interpretation of the law."
He went on to say: "This raises difficult questions about when a taxpayer can properly be said to have 'become aware' of an inaccuracy where the correct legal position is genuinely uncertain. If HMRC were to argue that awareness arose before the issue was finally resolved, taxpayers could face allegations of deliberate behaviour despite having advanced a reasonable legal interpretation of the correct tax position."
HMRC's response
HMRC has defended the proposals, insisting that they are designed to support the majority of taxpayers who want to comply. A spokesman said: "We know most of our customers act in good faith and want to get their tax right. These proposals are designed to help minimise penalties for those who swiftly correct mistakes when we flag them and make the process of doing so quicker and easier."
The spokesman's comments suggest that the intention is not to penalise honest mistakes but to encourage prompt correction once HMRC draws attention to an issue. However, the extended lookback period is still a significant change that could have wide-reaching implications.
Next steps and how to respond
The consultation remains open until early September, giving stakeholders a chance to influence the final shape of any legislation. Among the key questions being asked are how long taxpayers should have to correct a mistake after notification, and what safeguards might be needed to protect those who have relied on professional advice.
For individuals and businesses, the message from advisers is clear: if HMRC contacts you about a potential inaccuracy, do not ignore it. Seeking professional guidance early could be crucial, especially given the potential for penalties to escalate if an error is classified as deliberate.
The government has not yet indicated when a final decision will be made, but with the consultation closing in September, further movement is expected in the autumn. Any changes would likely be introduced in a future Finance Bill, meaning taxpayers could see the new rules take effect within the next year or two.
For now, the key takeaway is that HMRC is seeking to expand its powers considerably. Whether the final version of the legislation includes the full 20-year lookback and the tougher penalty regime remains to be seen, but the direction of travel is clear.
