HMRC extends investigation time limits

17 February 2016


When income tax self-assessment was introduced 20 years ago, a very important safeguard was built into the new system. This was to ensure that taxpayers were given an entitlement to certainty over finality in their annual tax affairs. Without this ‘protection’, HMRC could simply delay in challenging a tax return, potentially long after the year in question and when relevant details could be lost over time.

Parliament legislated for this certainty by imposing on HMRC a strict time limit, known as the ‘enquiry window’ (usually 12 months from the date a return is submitted for individuals). Within this time frame the department is permitted to raise queries on tax return entries. With the odd exception, HMRC has until now respected parliament's wishes by abiding by the enquiry window.

Recent experience

Therefore the recent examples of HMRC seeking to unfairly expand on the strict time period envisaged within the legislation is concerning. In such cases, HMRC officers have formally commenced the enquiry procedure within the statutory window. However, the inspector has gone on to suggest - we can only assume because HMRC has run out of time and people to carry out a full risk review of the tax return - that another letter will follow asking any questions they have in connection with the return and requesting information or documents. The issue here is that the inspectors have said that the detailed queries will come within a period of up to the next three months. In all those cases, the statutory 12 month time limit for HMRC to challenge the return was about to come to an end.

A cynical view might therefore be taken that inspectors are being encouraged to speculatively protect HMRC’s future position before carrying out a proper risk analysis, and making a decision on whether there really are any relevant questions to put to the taxpayer.

Where could this end up?

Taking HMRC’s apparent position to the extreme, we could potentially end up with the extraordinary position of the taxman opening an enquiry into every submitted self- assessment tax return. This could provide the department with infinite time to ‘risk-score’ the case and, if appropriate, go on to ask for any documents and information they require to check the accuracy of the return’s contents.

Why is this a concern?

In our view, this development is against the spirit of parliament’s intentions and indeed contradicts the guidance set out in HMRC’s published internal instructions.

HMRC might argue that any taxpayer under enquiry is permitted to approach the Tribunal to ask it to instruct HMRC to bring the enquiry to a close. Whilst perfectly true in theory, taxpayers will in future have to incur a fee to pursue a tax appeal to Tribunal and incur additional costs of professional advice and lost time. Accordingly, in practical terms, many in this position will understandably think twice about seeking ‘closure direction’, thus giving HMRC a potentially endless time period to ask questions.

If you have received such a letter, please get in touch with Ivan Woolgrove or your usual RSM contact.

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