HMRC’s draft Finance Bill measure on modernising the correction of errors is not a tidy housekeeping rewrite. It turns “we found something in diligence” into a live compliance question: has the taxpayer become aware of an inaccuracy that causes a loss of tax, and have reasonable steps been taken to correct it or tell HMRC?
Technical consultation closed on 7 September 2026. The draft remains under review, but the architecture is already clear enough for deal teams. Moore Kingston Smith’s 28 September 2026 analysis puts the M&A point bluntly: a diligence finding may no longer be only a warranty, price chip or indemnity problem. It may trigger a separate statutory duty. Macfarlanes frames the same shift as a deliberate move to make self-correction an explicit legal obligation, not a polite expectation.
If you run PE portfolio exits, bolt-ons, holdco clean-ups or management incentive reorganisations, this belongs on the tax risk register now — before appointed-day commencement locks behaviour that diligence has already surfaced.
What HMRC is actually drafting
Two mechanisms sit in the policy paper and the accessible draft legislation.
1. General duty to correct. Where a person has given HMRC a document of a kind listed in the Table in paragraph 1 of Schedule 24 to the Finance Act 2007, the document contains an inaccuracy that leads to an understatement of tax (or equivalent Condition 1 loss), the person later becomes aware of that inaccuracy, and the position is still correctable within existing time limits, they must take reasonable steps to secure correction. If they can amend, they amend. If they cannot, they inform HMRC.
2. Customer Correction Notice (CCN). HMRC may issue a notice where it has reason to suspect such an inaccuracy. The taxpayer must, by a stated deadline, either correct (or notify) or explain why there is no inaccuracy of the kind specified. CCNs are pitched as lighter-touch than a full enquiry — issue-specific, time-boxed, designed to free HMRC bandwidth for harder non-compliance under the HMRC Transformation Roadmap and the earlier Tax Administration Framework Review.
The sting is in the recharacterisation. Fail the duty to correct and the draft treats the inaccuracy as deliberate for Schedule 24 penalty purposes and for assessment time limits — via the proposed rewrite of section 118(6) TMA 1970 and related provisions. A position that started life as careless, or even as a defensible technical disagreement, can be pushed into deliberate territory with higher penalties and a window that can stretch toward 20 years.
There is a limited soft landing on the first CCN in a rolling six-year period: take reasonable steps to correct in response and you can avoid a careless penalty on that path. A second notice in the window loses that protection. Non-response to a CCN also brings a presumption of carelessness unless deliberate treatment already applies or the taxpayer shows reasonable care at the outset.
None of this invents open-ended exposure from cold. The duty only bites while correction remains available under existing limits. The practical risk is different: once awareness lands on the file, inaction becomes the expensive choice.
Why this rewires M&A tax files
Classic deal hygiene treats historic tax risk as commercial allocation:
- disclose it
- price it
- warranty / tax covenant it
- indemnity the known item
- insure what is underwritable
That stack still matters. The draft regime adds a compliance fork that sits beside it.
Tax due diligence routinely flags incomplete filings, thin transfer-pricing files, borderline VAT classifications, employment-tax edge cases, R&D claim stretch, stamp tax misses and “HMRC might challenge X” language. Reports use materiality, assumptions and limited access. A finding can support a price adjustment without the report concluding that a filed return is definitely wrong.
Under the draft duty, that distinction is no longer academic:
- Confirmed error + loss of tax + still correctable → reasonable steps to amend or notify.
- Judgemental risk / incomplete facts / genuine technical dispute → may not yet be “awareness of an inaccuracy,” but you need a contemporaneous paper trail explaining why.
- Grey zone → the most dangerous place on a live deal. Sellers want quiet completion. Buyers want clean post-deal books. Insurers want known risks out of cover. HMRC will later ask what the company knew and when.
Moore KS is right that SPA conduct clauses need a rethink. After completion the buyer controls the target. If the target sits on a known correctable inaccuracy to protect a negotiated narrative, deliberate treatment can inflate tax, interest, penalties and adviser cost beyond the indemnity cap that felt adequate at signing. Buyer-side conduct rights must allow reasonable correction steps. Seller-side consultation rights must not, in practice, veto compliance that prevents a 20-year problem.
Warranty and covenant duration also needs a hard look. Seven-year tax covenants are market muscle memory. Deliberate treatment can outrun that calendar. Specific indemnities should state whether they cover:
- uplifted penalties from failure to correct
- extended assessment windows
- CCN response costs
- adviser fees on voluntary disclosure after signing
W&I and specific tax insurance follow the same logic. Known risks and fairly disclosed diligence items are already fragile cover. Underwriters will ask whether awareness triggered a correction duty, whether HMRC was told, and whether delay changed the penalty profile. Data-room disclosure is not the same as discharging a statutory correction duty.
What CFOs should lock before the next process letter
You do not need Royal Assent text to tighten the operating system. You need decision hygiene that survives a later CCN or enquiry.
1. Separate “risk” from “inaccuracy” in every diligence memo.
Label each finding: confirmed error; probable error pending facts; judgemental position with a defensible filing; open enquiry; out-of-time. If the label is “confirmed” or “probable,” run the correction analysis in the same week — not after SPA mark-up wars.
2. Timestamp awareness.
Who saw the finding, on what date, with what materials? Knowledge splits across FD, tax manager, counsel, vendor diligence and PE operating partner. Attribution arguments in groups will be ugly. Build the trail as if HMRC will ask for it.
3. Pre-completion correction protocol.
For clear underpayments still inside time limits, prefer amendment or structured notification over “we’ll indemnify it.” A quiet wrong return is not value preservation once deliberate treatment is in play. For borderline items, minute why the point is not yet an inaccuracy — and diary a post-completion revisit.
4. Rewrite SPA tax schedules with correction mechanics.
Cover who may approach HMRC; mandatory vs optional correction; seller consultation windows that cannot block reasonable steps; allocation of tax, interest, penalties and costs from post-signing correction; CCN responses; survival periods stress-tested against deliberate windows; escrow where a live correction is inevitable but unquantified.
5. Align payroll, VAT, ERS and CT workstreams.
Schedule 24 documents are not only CT returns. VAT, employment filings, claims and elections sit in the same ecosystem. BIK payrolling prep, MTD catch-up and ERS clean-up generate exactly the “we now know the old file was wrong” moments this regime is built to catch.
6. Board and IC language.
“Tax risk is covered by W&I” needs a second sentence: covered commercially is not the same as compliant under a duty to correct. Sitting on a known error through a locked-box period is a governance decision with a named owner.
The CFO read
HMRC’s policy objective is straightforward: push routine error-fixing onto taxpayers so compliance resource concentrates on complex non-compliance. Fair enough as a tax-gap story. The deal-room consequence is sharper. Awareness becomes an event. Once diligence, a board paper, a whistleblower, a systems migration or a CCN puts a correctable loss-of-tax inaccuracy on the record, silence is no longer neutral risk allocation. Silence is the behaviour the draft rewrites as deliberate.
That does not mean every red-flag diligence bullet requires an immediate voluntary disclosure. It does mean CFOs need a repeatable test:
- Is there an inaccuracy, or only a risk?
- Is there a loss of tax?
- Are we still inside time?
- Who is now aware, and can we prove the chronology?
- What are the reasonable steps — amend, notify, or documented non-correction with reasons?
- Do the SPA, insurance and post-deal conduct rights still work if HMRC treats delay as deliberate?
Appointed-day commencement will arrive on HMRC’s timetable. PE processes, vendor diligence and locked-box negotiations are already running on yours. Build the correction file before the statute forces the label.
Further primary reading: the draft legislation PDF, the explanatory materials package, Schedule 24 FA 2007 on legislation.gov.uk, and the firm notes from Moore Kingston Smith and Macfarlanes. For live deal questions, take specific advice — this post is analysis, not a clearance.