Always Check the Time Limits
When considering HMRC investigations always ensure that the relevant time limits have been met. In any HMRC tax investigation the time limits must be observed by HMRC. In income tax, under HMRC’s tax investigation procedure they can open a civil enquiry into a tax return if they give notice to the taxpayer and do so within the time limit. The time limit allowed is in section 9A(2) Taxes Management Act 1970 and is basically 12 months from when the return was filed if that occurred on or before the filing date (the 31st January following the end of the tax year on 5 April).
The notice of enquiry must be given to the taxpayer before then end of enquiry period and this means received by the taxpayer. HMRC allow 4 working days by 2nd class post and 2 working days by 1st class post for the notice to reach the taxpayer. HMRC will on review cancel enquiry if notice is issued less than 4 working days before end of enquiry period and they cannot show that it was sent by first class post.
When the notice was sent late and HMRC cancel it, the enquiry will be treated as settled by agreement between the taxpayer and HMRC. Contrast this with the issue of a tax assessment where it is the date of issue of the tax assessment that counts and not the date that it reaches the taxpayer.
The Tax Enquiry
HMRC’s tax investigation process and investigation into the return can vary from concentrating on a single entry in the return because it looks wrong, looking at the deductibility of various expenses shown in the profit and loss figures, e.g. section 24 interest claimed by landlords, through to an in-depth review of the taxpayer’s tax and financial affairs sometimes known in the trade as a “drains-up investigation”.
How many years can HMRC go back?
HMRC cannot open a section 9A enquiry once the 12 month time limit referred to above has passed. However, that does not mean they cannot look at your tax affairs once the 12 month limit has expired. If they can show that a loss of tax has been brought about carelessly or deliberately (i.e. dishonestly) by the taxpayer or his agent, then they can issue a “discovery assessment” for the missing tax using their powers in section 29 Taxes Management Act 1970.
The rules governing the issue of discovery assessments are complicated, but basically, HMRC normally have four years from the end of the tax year concerned to issue a discovery assessment, but this is extended to six years where the taxpayer has been careless, and 20 years if he has been dishonest.
How do HMRC obtain the information to support a discovery assessment?
HMRC use their information gathering powers in Schedule 36, Finance Act 2008 to support their investigation. The important point to note is that Schedule 36 contains no effective time limits on how far back HMRC can request information.
What are the practical limits on how far back HMRC can get information?
Because Schedule 36, FA 2008 does not lay down effective time limits, the courts and tribunals have developed a principle that before HMRC can force a taxpayer to hand over information that is more than four years old, HMRC must show that they have an arguable case that the entries on the tax return were either careless (up to 6 years then allowed) or dishonest (up to 20 years then allowed): see Hegarty  UKFTT 774 (TC)and Brannigan  EWHC 885 (Admin) quoted in Hegarty.
In other words, HMRC cannot go on fishing expeditions if they suspect that the correct amount of tax may not have been paid more than four years ago. In order for the taxpayer to be required to supply the information requested, HMRC must first show that they have a reasonable chance of being able to issue a discovery assessment for that tax within the time limits allowed. For example, if there has not been any dishonesty, they would not be able to issue an assessment going back more than six years anyway, so there is no point in requiring the taxpayer to provide such information.