The UK tax system is designed in such way as to provide the taxpayer with important safeguards. One of the most important restrictions over HMRC’s powers concerns their ability to assess historic liabilities they believe to be due, in years where they would be out of time to open an enquiry.
To balance HMRC’s power to raise an assessment with protecting the taxpayer, specific time limits are imposed on HMRC to raise an assessment for a loss of tax. Once the relevant time limit has elapsed and HMRC are out of time to raise an assessment, the taxpayer then enjoys some finality in their tax affairs.
How long do HMRC have to raise an assessment?
Unfortunately as with many aspects of the UK tax system, the answer to this question is not straightforward. There are three main factors that influence the answer to this question which are –
- The behaviour giving rise to a loss of tax.
- The nature of the “offence”.
- Whether or not the “offence” relates to a UK or non-UK matter
Behaviour giving rise to a loss of tax
The starting point when determining how far back HMRC can assess is to consider the behaviour of the taxpayer or someone acting on their behalf. The standard time limits are as follows –
- 4 years – Where the taxpayer has taken reasonable care to avoid a loss of tax, but nevertheless there is still an error or omission in their tax filings.
- 6 years – Where the error or omission arose from “careless” behaviour.
- 20 years – Where the error or omission arose from “deliberate” behaviour.
These 4, 6 and 20-year time limits run from the end of the tax year. So, for example, in May 2023 any errors or omissions in the 2018/19 tax year could only be assessed if the taxpayer, or someone acting on their behalf, had acted either carelessly or deliberately.
It is important to note that the test to determine whether a taxpayer or someone acting on their behalf has acted carelessly or deliberately is subjective. This means there is scope to challenge HMRC if it is felt they have miscategorised the relevant behaviour.
Nature of the offence
The time limits mentioned above are slightly different where the offence involves a failure to notify HMRC of a liability to tax. In such cases the following time limits will apply instead –
- 4 years – Where the taxpayer has a reasonable excuse for not notifying HMRC of their liability to tax on time.
- 20 years – In all other cases.
As with the error or omission time limits, these time limits apply from the end of the tax year when the failure to notify occurred.
Also, where there is a loss of IHT brought about because of deliberate behaviour there is no time limit in certain circumstances.
Where the matter is “offshore”
The standard 4 and 6-year time limits mentioned above are extended to 12 years when the underlying issue relates to an “offshore matter” or “offshore transfer”. This extended time limit was introduced because HMRC argued that it typically took them longer to investigate matters with an offshore aspect.
At the start of this article we referred to legislative safeguards that are there to give some protection to taxpayers. This applies in the case of the extended 12 year time limit which will not be imposed if HMRC received information from an overseas jurisdiction, and on the basis of this information they could reasonably have been expected to be aware of the loss of tax before the relevant assessment time limit had elapsed but then failed to act.
Understanding the rules
This article provides a high-level explanation of the rules concerning tax assessment time limits as they apply in most cases where the tax concerned is either income tax, capital gains tax, corporation tax or inheritance tax. Different rules may apply to other heads of tax.
There is a significant amount of case law concerning HMRC’s ability to raise assessments and it is not possible to cover all the relevant points in one article. For example, s29 Taxes Management Act 1970 contains examples of when HMRC may be time-barred from raising an assessment where sufficient disclosure had been made to HMRC on the relevant return.
The key message is that tax assessment time limits can be a complex area and a detailed understanding of the underlying facts needs to be obtained before determining how far back HMRC can assess. Advice from an advisor such as Menzies with significant experience in this area is always highly recommended.
If you would like to discuss time limits as they relate to tax assessments, or challenging HMRC decisions further, please contact Menzies’ Tax Disputes and Disclosures team on our free confidential helpline – 07813 003 194