How Far Back Can HMRC Go?
So, you’ve probably been asking yourself ‘How far back can HMRC go?’. This varies greatly. Depending on the nature of the error it could be as much as 20 years.
Careless – 4 years
If HMRC finds an error resulting from ‘careless’ behavior then the maximum it can go back is 4 years. This is an error that it considers has been brought about by an innocent mistake.
As an example, let’s take Mr Smith. Mr Smith lives in London and simply missed a ‘0’ off the end of his dividend income when completing his self-assessment return. HMRC are likely to consider this careless. Therefore HMRC can only ‘go back’ 4 years when looking at his tax affairs.
Negligent – 6 years
If HMRC believes that someone’s ‘negligence’ has caused an error, then it can investigate going back a maximum of 6 years.
In this example, let’s looks at Mr Jones. Mr Jones lives in Birmingham and runs a small corner shop with his wife. Mr Jones knows that his wife has very little understanding when it comes to accounts. She’s made several errors previously, but Mr Jones has always insisted that his wife completes his company’s VAT returns.
In this example, HMRC are likely to consider Mr Jones’ actions negligent. This is because he had just cause to be able to foresee errors being made but did nothing to stop this happening. How far back can HMRC go? The behavior is negligent. Therefore, HMRC can review Mr Jones’ tax affairs going back a maximum of 6 years.
Deliberate – 20 years
20 years is the maximum amount of time that HMRC can go back and is reserved for cases of deliberate behaviour. HMRC must be able to prove, on the balance of probability, that the tax loss to HMRC (or potential lost revenue/PLR) has been brought about as a result of deliberate behaviour; the burden of proof rests with HMRC.
Ultimately, if HMRC are unable to convince the First Tier Tax Tribunal that the individuals actions were deliberate then the actions can only be considered ‘negligent’ at most – the timescales and penalty levels will need to reflect this.
In our final example, let’s look at…Mr Singh. Mr Singh is a self-employed builder and his wife has recently had a baby. Much of the work that Mr Singh carries out is paid for in cash, so Mr Singh decides to not declare 25% of his earnings on his self-assessment tax return as the extra money will certainly come in handy.
HMRC subsequently investigates Mr Singh’s tax affairs and discover that things just don’t add up. In this case, HMRC will likely raise tax assessments for the ‘potential lost revenue’ based on what they think Mr Singh owes – whether HMRC are accurate or not is another matter to be discussed separately. How far back can HMRC go in this case? Theoretically, HMRC could go back a maximum of 20 years when raising their assessments (deliberate behavior). This will also impact on the penalty level and interest amounts with this in mind.
Other Implications – HMRC Penalty Levels
As well as the nature of the discrepancy (i.e. careless, negligent or deliberate) influencing the amount of time HMRC can go back, there are also penalty levels to be considered. As you may expect the penalty levels attributed to ‘deliberate’ behaviour is often far greater than ‘negligent’ and ‘careless’ actions respectively.
Therefore, it’s important to not only consider the amount of time that HMRC can legally assess. We must also consider the penalty levels attributed to each scenario. It’s important that you or your representative can effectively convince a tribunal judge that your behaviour was careless as opposed to deliberate. This will not only ‘save’ on the number of years that can be assessed but also the penalty levels attributed to each year.
To illustrate this, let’s look at one final example. For the past 10 years Mr Williams has underdeclared his income by £20,000 per year. HMRC has therefore raised assessments for 20% of the under declared income for the full 10-year period and added interest charges. HMRC consider Mr Williams actions to be deliberate. So, 10 years x £4,000 = £40,000 + penalty charges @75% = £70,000 + interest charges = £75,000.
Mr Williams’ representative appeals to First Tier Tax tribunal and effectively argues that the actions were careless. Therefore, HMRC are limited to assessing 4 years and to implementing lower penalty levels. Mr Williams’ liability may now look something like this. 4 years x £4,000 = £16,000 + penalty charges at 25% = £20,000 + interest = £21,500.
Ultimately, by being able to argue the Mr Williams’ actions are careless he has saved £53,500!
Clearly, all the example are based on assumed figures – but the principles behind ‘How far back can HMRC go?’ still apply.
If you have a tax problem that you need help fighting, then please call us today and we’ll arrange an initial consultation where we can identify the most effective way forwards.