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 when 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.

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

Tax Affairs

How Far Back Can HMRC Investigate?

HM Revenue and Customs (HMRC) in the UK can investigate tax affairs going back up to 20 years. However, the standard time limit for a tax investigation is usually four years from the end of the tax year in question. If HMRC suspects that you made an innocent error on your tax return, they can investigate as far back as six years. In cases of suspected tax fraud or deliberate evasion, HMRC has the authority to look back up to 20 years.

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

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

HMRC Discovery Assessments into Historical Tax Affairs

A ‘Discovery Assessment’ refers to HMRC’s authority to review past tax records of an individual or a company. Receiving communication regarding a Discovery Assessment typically indicates HMRC’s belief that there may have been an underpayment of tax, an over-claiming of tax relief, or possible tax evasion due to incomplete disclosure, negligence, or fraudulent actions.

The legal basis for Discovery Assessments is set out in Section 29 of the Tax Management Act 1970, pertaining to income tax and capital gains tax, and in Schedule 18, paragraph 41(2) of the Finance Act 1998 for companies. These provisions empower HMRC to investigate historical tax affairs and make additional assessments if they discover that tax has been underpaid or inaccurately reported.

Businesses and individuals should be aware of these regulations and ensure compliance to avoid potential penalties and legal issues arising from HMRC’s investigations

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

The rules governing the scope of HMRC’s investigations into past tax affairs are nuanced and depend on the nature of the discrepancies discovered. Key aspects include:

  1. Incomplete or False Disclosure Leading to Tax Loss: HMRC can only initiate a Discovery Assessment if there is evidence of incomplete or inaccurate disclosure resulting in a loss of tax revenue.
  2. Dependence on Conduct: The extent to which HMRC can investigate retrospectively hinges on the nature of the conduct uncovered. For instance, innocent errors typically permit a review of the past four years, whereas deliberate underpayment or fraud can extend the investigation up to 20 years.
  3. Requirement of Evidence: HMRC must have substantial evidence to initiate a Discovery Assessment. The responsibility to provide proof of tax irregularities lies with them.
  4. Presumption of Continuity: This principle allows HMRC to infer that if an error or irregularity is found in one tax year, similar issues may exist in other years. Therefore, a discrepancy or cause for suspicion in a current return can lead to a more extensive investigation covering multiple years.

These rules underscore the importance for businesses and individuals to maintain accurate and comprehensive tax records, as HMRC has significant authority to investigate and assess historical tax affairs based on these criteria.

How Long Does a Tax Investigation Take?

The duration of a tax investigation by HMRC varies based on several factors, including the complexity of the case, the severity of the suspected tax evasion, and the size of the business involved.

  • For less complex cases, typically involving smaller businesses or straightforward tax matters, the investigation might conclude within 3 to 6 months.
  • In more complex cases, where the issues are intricate or involve significant amounts of money or larger companies, the investigation can extend to approximately 18 months.

What are the Limits to HMRC’s Tax Investigations?

HMRC’s powers for tax investigations are extensive, yet there are specific legal limits:

  1. Practice Generally Prevailing: HMRC cannot assess tax based on current rules for actions taken in the past when different regulations were in place. Tax returns are judged based on the laws and practices at the time they were filed.
  2. Careless or Deliberate Actions: Assessments are only permitted if HMRC believes the tax loss was due to careless or deliberate actions.
    • Carelessness: If the loss of tax is due to carelessness, HMRC can investigate up to six years after the end of the relevant tax year for income or capital gains assessments.
    • Deliberate Tax Loss: In cases of deliberate tax evasion or fraud, this time limit extends to 20 years.