Time Limits for Assessments
If HMRC wants to collect extra tax from you or your business for earlier years, as part of a Tax Enquiry, it needs to be in a position where the law allows it to issue a formal "Tax Assessment". There are strict legal time limits in which the Tax Inspector can issue an Assessment to you. But in some cases HMRC can claim extra tax off you for the last 20 years!
The basic rules for PAYE, Income Tax, Capital Gains Tax and Corporation Tax and VAT are "behaviour" driven. If the Tax Inspector believes you have under-declared your tax for previous years they can make further assessments - as long as they do so within the following time limits. And those limits depend on what behaviour caused the under-declaration. The rules for VAT are slightly different than those applying to other taxes: see more below.
Since September 2018 there have been different (and generally harsher) assessing time limits where Offshore Matters are concerned.. These special rules apply ony to individuals (and not companies) where so-called Offhore Matters are involved, and then only to Income Tax and Capital Gains Tax. Se our separate page: Assessing Time Limits for Offshore Matters.
HMRC Deadlines to Claw More Tax: Errors in Tax Returns: Onshore matters
Where the taxman reasonably demonstrates (on the balance of probabilities) that a Tax Return is likely to be incorrect, then HMRC can re-open a number of earlier years: dependent on the behaviour of the taxpayer, or somone acting on their behalf, that led to the error. The relevant years and behaviours are:
- 1 year: In direct tax cases where HMRC have opened an Enquiry within the statutory time limit (normally a year from when it was filed) they can normally collect any additional tax that they can prove is due; regardless of the reason for the under declaration; and can do so even if a number of years have passed from the opening of the Enquiry to the time they prove the extra tax is due.
- 2 years. For VAT assessments normally have to be made within two years of the end of the period: unless HMRC get factual evidence that the return was incorrect. Then the time limits below apply: with an additional restriction as follows.
- Once the HMRC officers have material evidence to issue a VAT assessment for earlier periods (i.e. in Direct Tax terms they have made the Discovery) then they must issue their "best judgement" assessment within 12 months of obtaining that material evidence.
- There is no similar rule for direct tax. There an assessment may be issued years after the discovery, as long as it is within the other time limits below.
- 4 years: the Normal Time Limit, in all cases, even innocent error. But the taxman has to show that he has made a Discovery. The burden of proof is on the balance of probabilities. Usually if more tax would have been due if the Return had been correct originally, then a Discovery has been made. But Discovery can be a very complex area - and successful challenges can sometimes be made.
- 6 years: For direct taxes there is an Extended Time Limit for Errors caused by Failure to Take Sufficient care (aka Carelessness). However, for VAT the limit is 4 years (i.e the same as simple errors). The onus is on the tax officer to prove that tax was understated as a result of failure to take sufficient care by the taxpayer, or someone acting on their behalf (such as an accountant). The burden of proof is the same as in criminal cases, i.e. beyond reasonable doubt. This is another area where challenges can succeed.
- 20 years: Extended Time Limit for Deliberate Errors. The onus is on the taxman to prove that they have made a Discovery of a tax irregularity and that the relevant behaviour causing the irregularity was Deliberate: in other words, fraudulent. This is a key area where our challenges are often successful - and where significant amounts of tax, interest, and penalties can be at stake.
HMRC Deadlines to get Tax: Failure To Notify
- 20 years is the Normal Time Limit for: Failure To Notify chargeability to tax. That is, you had a tax liability for a tax year and you did not get issued with a Tax Return and you did not tell HMRC you had tax to pay by 5 October following the tax year end; also Failure to Register for VAT; and Failure To Notify tax avoidance schemes.
- Unless the taxpayer has a "Reasonable Excuse" HMRC can normally assess back 20 years: However, there is an overriding limit for Income Tax and Capital Gains Tax, in that to assess 2008/09 and earlier the loss of tax must be attributable to "Negligent" conduct (aka failure to take sufficient care).
- For Failure to Notify ("FTN") there is a let out if you have a "Reasonable Excuse" and then you also notified HMRC promptly once the circumstances of that excuse ended. Reasonable Excuse claims succeed in only very limited situations. The definition of Reasonable Excuse is fairly limited: but it suitable cases this can be a vaild defence.
Working Out The Deadlines
The simple way to calculate the so-called assessing time limit is to add the relevant number of years as above (e.g. 2; 4; 6; 20) to the tax year where HMRC allege that more tax is due.
For example, if HMRC think you owe more Income Tax for the year 2016/17 as a result of the Careless behaviour (of you or your agent), they have to operate within the 6 year limit. So, they would have to issue a formal assessment before 6 April 2023 - or else they are “out of time”. However, in the same case, for VAT HMRC would have to assess the quarter ended 31 March 2017 before 1 April 2021 at the latest. But, taking into account the over-riding limit, if they got the relevant material evidence on say 14 March 2020, they would have had to issue the assessment before 14 March 2021.
During a tax enquiry the Inspector may issue a so-called “Protective Assessment” to stop the year going out of time. For example, a Tax Enquiry may have started in July 2022 into the 2021 Income Tax Return - which had been filed in October 2021. HMRC then suspect earlier returns are incorrect. At 6 April 2023 the year 2016/17 would normally go out of time (on the basis of Careless behaviour). So in February 2023 the inspector might issue a protective assessment for 2016/17, even though the Tax Investigation is not finished. The Tax Compliance Check might not be concluded until say May 2024; more than 6 years after the end of 2016/17. But as the Income Tax assessment for 2016/17 was issued within the 6 year window, then that year would still be included in the investigation settlement (although, of course, the actual figures assessed could still be appealed and negotiated).
Interest, Penalties, Offshore Matters
Where there's additional tax to pay, then interest is always charged on that tax (at 2.5% above the base rates applying in the period of non-payment).
Where the taxman demonstrates that tax had been underdeclared as a result of your Carelessness or Deliberate behaviour: then tax-geared penalties will be charged. For more information about this, see our separate pages regarding Onshore Penalties and Penalties for Offshore Matters.
Since September 2018 there have been different (and generally harsher) assessing time limits where Offshore Matters are concerned. These are covered in our Offshore Disclosures section.
How Can Lynam Tax Dispute Specialists Help me?
Is the taxman alleging you owe extra tax? Lynam Tax Dispute Experts have a great track record in challenging such claims, and saving clients significant sums in tax, interest, and penalties.
If you need advice and help in a tax dispute where HMRC want to assess an earlier year then call:
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ANDREW NUTBROWN : 0771 877 8710
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