How Far Can HMRC Look Back? – Assessing Time Limits Explained

HM Revenue & Customs (HMRC) usually recovers tax identified outside a formal enquiry by issuing an assessment. If the assessment isn’t appealed, the tax becomes payable, along with interest and potentially penalties.

To ensure fairness, statutory safeguards limit how far back HMRC can go to correct underpaid or recover overpaid tax. These assessing time limits vary depending on the tax type and circumstances.

Why assessing time limits matter

Assessing time limits are a critical protection for taxpayers. They ensure that HMRC operates within a clear framework, rather than revisiting historic matters indefinitely.

From a practical perspective, assessing time limits:

·       Provide certainty and finality

·       Can significantly limit the number of years under review

·       Reduce tax exposure, penalties, and professional costs

If these rules are not properly understood or challenged, HMRC enquiries or disclosures may extend further back than necessary.

Enquiries vs assessments – a key distinction

Before considering time limits, first check if HMRC opened a formal enquiry, for example under Section 9A TMA 1970 (Income Tax) or Paragraph 24 Schedule 18 FA 1998 (Corporation Tax).

If a valid enquiry is opened on time, HMRC is not bound by normal assessment limits and will conclude via a closure notice. Enquiries must still be opened within strict deadlines.

If HMRC misses this, they must rely on discovery assessments, where the rules below apply. Some taxes, such as VAT and PAYE, do not have formal enquiry regimes, so HMRC mainly relies on assessments.

Time limits for direct taxes

For HMRC to issue an assessment outside an enquiry, there must generally be a valid “discovery”. This arises where HMRC identifies that insufficient tax has been assessed, or a relief has been incorrectly given outside of the information provided on a return.

If a taxpayer made a full and accurate disclosure, and HMRC failed to open an enquiry in time, HMRC may not be able to raise an assessment.

Where HMRC can assess, the following time limits apply:

• 4 years – where the taxpayer took reasonable care
• 6 years – where the error was due to carelessness
• 12 years – for offshore matters or transfers (unless HMRC already had sufficient information)
• 20 years – where behaviour is deliberate
• These time limits run from the end of the relevant tax period.

For example:

·       An error is identified in a tax return submitted for the year ending 5 April 2020:

o   Assessing Time Limit for Reasonable care → 5 April 2024

o   Assessing Time Limit for Careless behaviour → 5 April 2026

o   Assessing Time Limit for Deliberate behaviour→ 5 April 2040

Failure to Notify (FTN)

Where a taxpayer has failed to notify HMRC of a liability:

·       4 years – if there was a reasonable excuse and HMRC was notified promptly

·       20 years – in all other cases

This is an area where HMRC will often argue for longer time limits.

Other variations

VAT - VAT follows a different regime. The standard time limit is generally 4 years, with no separate 6-year limit for careless behaviour. HMRC must usually assess within one year of having enough evidence to quantify the liability, so delays can provide a defence.

VAT cases often involve additional complexities and should be considered separately.

NICs - National Insurance Contributions (NICs) are generally limited to 6 years, unless behaviour is deliberate.

Avoidance - Avoidance schemes may be subject to extended rules.

These variations add complexity and must be considered case-by-case.

The importance of behaviour

Behaviour is a key factor in determining the applicable time limit. HMRC will consider:

• Whether professional advice was taken
• The taxpayer’s intent and understanding
• The complexity of their affairs
• Whether information was withheld or omitted

The distinction between reasonable care, careless and deliberate behaviour can significantly affect outcomes. Importantly, HMRC bears the burden of proving careless or deliberate conduct.

HMRC may seek longer time limits by classifying behaviour as careless or deliberate, even with limited evidence. It’s important to review and challenge this where appropriate.

Final thoughts

Assessing time limits are a key way to manage HMRC exposure. A careful review can reduce the years under enquiry, limit tax, penalties and interest, and sometimes lead to assessments being withdrawn. They should always be actively reviewed and, where appropriate, challenged.