What does HMRC’s guidance on making a disclosure mean for taxpayers and directors?

HMRC’s guidance on making a disclosure sets out the process for notifying, outlining and fully reporting any tax irregularities. It explains the behavioural expectations placed on taxpayers and confirms how HMRC assesses whether a disclosure is credible, complete and timely. For individuals, businesses and company directors, the guidance is a reminder that prompt and accurate disclosure can reduce penalties and prevent an issue escalating into a formal investigation.

This article explains what the guidance means in practice and how to prepare for the financial and legal consequences of a disclosure. Should you ever face this problem in a personal or business capacity, our tax dispute team at FWJ has been advising clients in this area for nearly 25 years. We can help you on any tax disclosure and investigations you are facing.

At a glance

• HM Revenue & Customs expects taxpayers to notify, outline and fully disclose all tax irregularities within set deadlines.
• The quality of the disclosure affects penalty reductions.
• HMRC assesses behaviour as careless, deliberate or deliberate and concealed.
• Incomplete disclosures may be rejected and escalated to a civil or criminal investigation.
• Directors must prepare for potential financial exposure if a disclosure reveals unpaid tax.

When should a business or individual consider making a disclosure to HMRC?

A tax disclosure should be considered whenever a person or business becomes aware that their tax position is incorrect. This may include

• undeclared income,
• errors in VAT returns,
• payroll inaccuracies,
• failure to notify a liability, or
• any other irregularity in accounting for tax.

HMRC’s guidance is clear that disclosure is expected as soon as the irregularity is identified. Waiting for HMRC to make contact reduces the taxpayer’s ability to argue that the disclosure was unprompted.

Unprompted and prompted disclosures

An unprompted disclosure is one made before HMRC opens an enquiry or signals that it is reviewing the taxpayer’s affairs. In these cases, penalties can be significantly lower. In contrast, a prompted disclosure arises after HMRC contacts the taxpayer. The available penalty reductions are narrower and HMRC may take a more sceptical view of the behaviour involved.

Businesses should also consider whether irregularities relate to systemic issues. For example, a payroll error may indicate broader problems with employment records. A discrepancy in VAT filings may reflect issues in the supply chain, particularly in sectors where fraud risk is higher. Directors should not assume that small errors are immaterial. HMRC can examine past years if the behaviour is considered deliberate.

Many disclosures arise because the taxpayer has been advised that they fall within a higher risk category.

• HMRC uses data analytics to assess patterns of behaviour and may already hold information that suggests an inconsistency.
• If a business operates in sectors such as hospitality, construction, wholesale or logistics, the likelihood of HMRC scrutiny may be higher.
• Taking early advice allows the taxpayer to understand whether a disclosure is required and how best to frame it.

FWJ Takeaway: A disclosure should be made as soon as any tax irregularity is identified. Acting promptly can help secure better penalty reductions and reduce the risk of HMRC escalation. We can guide you through this process

How does HMRC’s disclosure process work in practice?

HMRC’s disclosure process has three stages. Each stage has its own purpose and time limit. The process is designed to encourage full and honest reporting of irregularities.

Stage 1

The first stage is to notify HMRC of the intention to disclose. This is done through HMRC’s online service. Once notification is made, HMRC provides the taxpayer with a disclosure reference number. This step alerts HMRC that an issue will be disclosed and ensures that the disclosure is treated as unprompted, provided HMRC has not already taken action.

Stage 2

The second stage is to outline the disclosure. HMRC expects a brief but accurate description of the issue. This outline should identify the tax years involved, the type of irregularity and a broad estimate of the tax owed. HMRC uses this initial information to assess whether the matter can remain within the disclosure facility or whether it shows signs of deliberate dishonesty that might require a different approach. In more serious cases, HMRC may redirect the matter into Code of Practice 8 or Code of Practice 9. Taxpayers who believe that their behaviour might be viewed as deliberate should seek specialist advice before submitting the outline.

Stage 3

The final stage is the full disclosure. The taxpayer must provide a detailed calculation of the tax due, supported by accounting records and a clear explanation of how the irregularity occurred. This includes a statement of behaviour. HMRC expects transparency about the causes of the error, the steps taken to correct it and the measures implemented to prevent recurrence. If the taxpayer is a company, directors may need to explain their oversight processes.

Payment is normally due at the time the full disclosure is submitted. If the taxpayer cannot pay the full amount, they may request a time to pay arrangement. Requests must be supported by accurate and realistic financial information. FWJ frequently assists clients with such requests, which can help avoid enforcement action. Delays or incomplete financial evidence can result in HMRC declining the arrangement.

The process is time sensitive. HMRC usually expects full disclosure within 90 days of the notification. If this deadline is missed, HMRC may doubt the reliability of the disclosure or treat the behaviour as higher risk.

FWJ Takeaway: The disclosure process requires notification, an outline and a full disclosure with supporting evidence. Time limits are strict and HMRC expects accuracy and transparency. We can help you make sure you meet all the time limits and minimise your likely exposure to tax penalties.

What behaviour does HMRC expect taxpayers to explain as part of a disclosure?

Behaviour is central to the disclosure process. HMRC uses behavioural classifications to determine penalties under the Finance Acts. These classifications are

• careless,
• deliberate, or
• deliberate and concealed.

Taxpayers are expected to provide a truthful and accurate statement of behaviour. HMRC compares this statement with the evidence supplied and any information it holds from third party data.

Careless behaviour includes mistakes or misunderstandings where the taxpayer did not take reasonable care. Examples may include incorrect record keeping or a misinterpretation of guidance. Penalties for careless errors can be reduced if the disclosure is voluntary, prompt and supported by strong evidence.

Deliberate behaviour involves knowingly submitting an incorrect return or failing to declare income. This is treated more seriously. Penalties are higher and HMRC will examine whether the disclosure is genuinely full and honest. A director who knowingly allowed incorrect VAT returns to be filed, or who failed to report certain income streams, may fall into this category.

Deliberate and concealed behaviour is the most serious classification. This applies where the taxpayer took active steps to hide the irregularity. Examples might include false invoices, hidden accounts, or the use of structures designed to disguise taxable income. In these cases, HMRC may consider whether a civil disclosure is appropriate or whether the matter should be redirected into Code of Practice 9. It may also consider whether criminal investigation is necessary.

Accurate behavioural categorisation is essential. Incorrectly claiming carelessness where the evidence suggests deliberate actions can lead HMRC to reject the disclosure or pursue harsher penalties. Equally, overstating the severity of behaviour may expose the taxpayer to unnecessary consequences. Professional support helps ensure that the behavioural statement is credible and supported by evidence.

FWJ Takeaway: Behaviour determines the level of penalty and the credibility of the disclosure. HMRC expects a clear and truthful account supported by evidence.

What are the risks of an incomplete or inaccurate disclosure?

Incomplete or inaccurate disclosures carry significant risks.

• HMRC may reject a disclosure if it considers the information unreliable or inconsistent with other data.
• A rejected disclosure can lead to a formal investigation, including a potential Code of Practice 9 enquiry where fraud is suspected.
• The penalties for an incomplete disclosure are higher because HMRC interprets omissions as signs of dishonesty.

If HMRC decides that the disclosure is not full, it may examine earlier tax years. HMRC can look back up to 20 years in cases involving deliberate behaviour. This can lead to substantial additional liabilities. If the disclosure is found to omit key information, HMRC may also consider whether to issue penalties for obstruction.

There is also a risk that a poorly prepared disclosure will be treated as evidence of ongoing non compliance.

• HMRC may question whether the taxpayer has the systems and processes necessary to ensure accurate reporting.
• For companies, this can have implications for directors.
• If HMRC concludes that directors allowed tax irregularities to occur, further action may be taken, including claims for misfeasance or allegations of unfit conduct.

If the tax arising from a disclosure is significant and cannot be paid, HMRC may take enforcement action. This can include taking control of goods, issuing statutory demands and winding up petitions as well as bankruptcy for individuals, FWJ regularly assists clients facing these forms of escalation. We commonly defend and dispute statutory demands and winding up petitions. Requests for time to pay need to be realistic and supported by full financial information.

The most serious risk is criminal investigation. While most disclosures remain within the civil framework, HMRC may escalate to criminal enquiry where there is evidence of deliberate concealment or fraud. Submitting inaccurate information during a disclosure can increase the likelihood of this outcome.

FWJ Takeaway: Incomplete disclosures risk rejection, higher penalties, wider investigation and, in serious cases, criminal enforcement.

How should companies and directors prepare for the financial impact of a disclosure?

A disclosure can result in significant tax liabilities. Companies and directors should prepare for the financial impact well before submitting the full disclosure. HMRC expects payment alongside the disclosure, unless a time to pay arrangement has been agreed. This requires accurate forecasting and consideration of cash flow.

• Directors should assess whether the business can absorb the liability without affecting trading.
• If liabilities are large, restructuring or refinancing may be required.
• FWJ regularly advises on options such as repayment plans, creditor negotiations or, where necessary, formal insolvency processes.
• Early planning helps reduce the risk of a sudden liquidity crisis.

Where a company is unable to meet its obligations, directors must consider their duties under the Companies Act 2006 and insolvency legislation. Continuing to trade while insolvent exposes directors to personal risk. FWJ’s insolvency and director defence teams assist directors in navigating these complex issues.

For individuals, a disclosure can lead to personal financial consequences. If they cannot pay, HMRC may take enforcement action such as obtaining a charging order or commencing bankruptcy proceedings. Early advice may help mitigate these risks.

It is also important to plan beyond the immediate payment. HMRC will expect future compliance. Businesses should review their systems, strengthen their record keeping and ensure staff are trained to avoid future errors. Demonstrating improved compliance can assist in eventual penalty mitigation.

FWJ Takeaway: Directors and businesses should prepare for the financial impact of a disclosure, consider payment options and address future compliance. Early planning reduces the risk of enforcement.

Conclusion

HMRC’s guidance on making a disclosure outlines a structured process for correcting tax irregularities. It highlights the importance of prompt action, full transparency and credible evidence. For businesses and directors, the guidance confirms that behavioural explanations and payment readiness are central to the success of a disclosure. With penalties influenced by the quality of the disclosure, early and accurate preparation is essential. Where liabilities are substantial or behaviour is complex, professional advice can help manage both the process and the wider financial impact.