As a basic rule, HMRC tax investigations will go back 4 years if they feel the mistake was innocent, six when it is deemed careless, and as far back as 20 years where they suspect tax evasion or fraud.

Evidence suggests they’re doing this more often, as a part of a larger strategy of minimising tax avoidance.

» MORE Read our full article on Accelerated Payment Notices

With multiple departments within HMRC, however, and a wide range of situations that offer myriad liability limitations, understanding how far into the past HMRC are permitted to investigate can be complicated.

This article aims to explain the different areas of HMRC tax investigation and their permitted timeframes.

Tax Affairs

How Many Years can HMRC go Back into a Tax Investigation?

4 YearsIn the Case of Innocent or Clerical Errors
Six Yearsfrom the filing date in cases of incomplete disclosure
20 Yearsfrom the filing date in cases of tax fraud or neglect

What is the Time Limit for HMRC to Open an Enquiry?

HMRC tax enquiries must begin up to 12 months after the date a tax return was filed.

HMRC Discovery Assessments into Historical Tax Affairs

‘Discovery Assessment’ is the term HMRC use to refer to their powers to examine an individual or company’s historical tax affairs. If your company has received a letter about this then this means they suspect you have either:

  1. Underpaid on your tax return
  2. Received too much tax relief
  3. There is a suspicion of tax evasion via incomplete disclosure, negligence, or fraudulent behaviour

The legislation surrounding Discovery Assessments is found in the Tax Management Act 1970, s 29 (for income tax and capital gains tax) and the Finance Act 1998, Sch 18 para 41(2) (for companies).

What are the Rules Around How Far Back HMRC Can Investigate?

  • There must have been some incomplete or false disclosure leading to tax loss
  • How far back HMRC can look depends directly upon the conduct they discover
  • No discovery is permitted from HMRC without evidence (the burden of proof rests with them)
  • Even without direct evidence, the ‘presumption of continuity’ means that what HMRC finds true for one year may prove to be true for another. On this basis, anything that makes them suspicious in a current return may provoke a deeper investigation.

How Long Does a Tax Investigation Take?

How long the actual investigation takes will depend on the complexity of the case, the severity of the potential tax evasion, and the size of your company.

For smaller cases 3-6 months would be fair average, rising to about 18 months for more protracted investigations.

What are the Limits to HMRC’s Tax Investigations?

Although HMRC has far-reaching powers to enforce tax compliance, the limitations on this are clearly stated in the law. They cannot proceed with a DA in the following situations:

Practice Generally Prevailing

No assessment can be made if the return was filed by a “practice prevailing’. This means that HMRC cannot hold taxpayers to account by today’s legislation for something they may have filed years ago when different rules applied. Historical tax returns need only to be correct according to the standards of the day.

Carelessly or Deliberately

No assessment can be made unless the loss of tax was brought about ‘carelessly or deliberately’ (s 29(4)) The distinction between these two is important in that it has direct implications on how far back they can look. HMRC’s default time limit of six years after the end of the relevant tax year (for income or capital gains assessments) is extended to 6 years if the loss of tax was brought about carelessly.

If the tax loss was deliberate (i.e. fraud), the time limit extends to 20 years.

Reasonable Aware

HMRC are also permitted to undertake discovery if, due to lack of information provided by the taxpayer, there were facts they were unaware of.