The dog ate the books  

In the last Tax Tip, we looked at time limits in VAT.  In this one we’re looking at time limits for direct taxation.  And there are some differences.
Here we are looking at Income tax, PAYE, Capital Gains Tax and Corporation Tax.
The regular time limit for assessment (as well as refunds and claims) is four years.
The time limit for “careless behaviour” assessments is six years.
The time limit for deliberate behaviour is twenty years.

Unlike VAT there is no one year after evidence of the facts or two years after the end of the tax period concerned rules.  However, a closure notice may be used by the taxpayer in certain circumstances to bring an enquiry to a close.  And there is also Human Rights legislation concerning a swift trial where HMRC is seeking a high percentage penalty (or worse).

Once again, the period of assessment for each of the rules is measured against the end of the tax year concerned (except for corporation tax where it is the end of the accounting period).  So, assuming an income tax error which was not careless was made on in the tax year ended 5 April 2013, HMRC would need to have assessed by 5 April 2017 otherwise it would be out of time.  However, if the error was “careless”, HMRC has until 5 April 2019 to assess (and I cannot find an extension to six years for careless errors which cost you money, even where based on an HMRC error!).   And if the error was “deliberate” then HMRC has until 5 April 2033 to assess.

HMRC says careless “is where you failed to take reasonable care to get things right”.  HMRC when training professional advisers on the then new penalty regime explained that the bar over which a taxpayer would need to jump to show that it had not been careless would be lower for a little old man on Dartmoor, than it would be for a small company using an accountant, and that company’s bar would be lower than one employing a professionally qualified finance director, and that company’s bar would in turn be lower than that of a major corporation employing a tax manager.

HMRC is clear that if you make a mistake it will not charge a penalty if the taxpayer has taken “reasonable care”.  And this is a big point – HMRC’s starting point seems to be that you get a penalty for making a mistake, but the starting point before considering a penalty is whether you have taken “reasonable care”.
So, what is “reasonable care”?  Well case law will continue to develop, but the starting point is always what HMRC thinks (after all, who wants to be a test case?).  And HMRC says that ways a taxpayer can take reasonable care include keeping enough records to make accurate tax returns, keeping those records safe (“the dog ate the books” does not help), and asking HMRC or a tax adviser if you’re not sure about anything and following any advice given.  The amount of tax involved is NOT a factor as regards reasonable care, even though we have evidence that some HMRC case workers see it as overriding their published guidance.

Just taking the last point now, the rest I will come back to in a later article, given that HMRC’s view is that you need to prove yourself innocent (and the case worker taking this view will not be correct, but let’s talk about the real world) then you need to have at least contemporaneous notes as to the conversation with your professional adviser or HMRC (and save the note somewhere you can find it again say four years hence).  Normally, your professional adviser will put his or her view in writing,
so that is helpful.  But if you are contacting HMRC’s helpline, then there is no such written confirmation.

And they do make mistakes. So always make a contemporaneous note of your conversation with HMRC and ask them for the “CCELL Reference” for the call.  If the matter is later challenged the CCELL reference will help HMRC to find their record of the call.  Otherwise you risk HMRC arguing that it has no record of your call.

“Deliberate” is where the taxpayer knew that a return or document was inaccurate when it sent it to HMRC.

Examples of deliberate inaccuracies include deliberately (sorry for the tautologous sentence, but here I am quoting HMRC):

  • Overstating your business expenses
  • Understating your income
  • Paying wages without accounting for Pay As You Earn and National Insurance contributions

HMRC fails to tell us what “deliberately” means, although to be fair to them, in the majority of cases it is clear.  However, we recently handled a case where a taxpayer followed an accountant’s advice, which on challenge by HMRC turned out to be incorrect, and instead of treating the error as being after taking “reasonable care”, because a transaction was not reported as a result, HMRC saw this is being “deliberate” and “hidden”.  They backed down eventually.

In summary, I am never sure that “the dog ate the records” argument ever worked, but clearly if the records have been lost through some awful event, like a fire, the taxpayer will have evidence, but will still need to reconstruct those records.  Given that records tend to be kept on the computer that reminds all of us about the need to make back-ups.

What I hope I have made clear is that the time limits for assessment in direct taxes are a little more complicated than sometimes we are led to believe, and that there are examples where HMRC have just got it plain wrong.  Hence, a taxpayer is best advised to seek good quality professional advice from the outset – doing it yourself, a bit like my plumbing, tends to be a false economy.

Steve Botham

It ain’t over until the fat lady sings

This peculiar phrase originated in the United States of America, but has come into popular use in the UK. It normally means the game is not over until the final whistle or something similar. But equally, we know that when the fat lady has sung (one attribution of the saying is that it came from a Wagner opera where the soprano took twenty minutes to wrap up the opera) the game is over. And so it is with tax.

In tax there are rules to the game and we do have a fat lady singing scenario, although as you’ll find out, in VAT at least, she can take two years to shut up. They apply to both sides, although sometimes you would be forgiven for thinking that the home side (HMRC for every match) sometimes loses sight of them. And sadly, the referee is not there at the time, and it is only later that you get to challenge the decision – without the use of a video referee.
There is also a set of rules about the length of the game. These are part of your rights as a taxpayer. I’m going to have a look at them using VAT as an example in this first article. A further article will follow about similar rules for direct taxation. And in a further article I’ll address the importance of penalty negotiations in this context. Finally, in my last article, I’ll look at what is meant by “evidence of the facts”.

So, let’s assume that HMRC has alleged that there is something wrong with a taxpayer’s VAT compliance, perhaps after a routine inspection. Let’s also assume that HMRC have got it 50% right, but that it has taken a very long time to get to this stage – on complex cases a couple of years is not unusual (and is why every taxpayer should have professional fee insurance cover).

For a regular error, the first rule relates to how far back HMRC can go with an assessment. This is four years from the end of the tax period concerned. It is also, incidentally, the time limit for a taxpayer to go back and make a repayment claim AND for voluntary disclosures where the taxpayer owes HMRC money.
So, let’s assume that a recurring error has been made since 1 January 2010, VAT periods end on 31 March, 30 June, 30 September and 31 December and that HMRC decides to assess on 2 June 2017. This means they can go back to the tax period ended 30 June 2013. The periods from 1 January 2010 to 31 March 2013 are out of time for HMRC to assess.

But there is another rule. HMRC must issue its bill within one year of the evidence of the facts sufficient to decide to assess or two years after the end of the tax period concerned. It is complicated, but let’s take the same basic example and add in one fact – HMRC knew about the error and could have assessed on 2 June 2015. This brings both the one year rule and the two-year rule into play. Under the one year rule, HMRC would be unable to assess at all – extra time has finished and they’ve failed to score. However, they then get to go to penalties, and this is where the two-year rule comes into play. This brings in all tax period ended within the previous two years, starting with the one ended 30 June 2015. However, they cannot go back earlier.

Ah, I hear you ask, what happens if the error was “careless” – surely HMRC can go back six years, like they do with direct taxation. No, they cannot. They are still limited to four years in VAT. However, the twenty year “deliberate” time limit does apply to VAT – so in our example, if this was, say, “cash no invoice”, then HMRC can assess right back to 1 January 2010. However, HMRC must still follow the one and two-year rule. We recently had a look at a case and it was clear that whilst the twenty year “deliberate” rule applied, HMRC had completely ignored the one and two-year rule, thus ruling out 18 years of assessments.

So, you can see, there are rules to the game, HMRC are not always as good as they should be at knowing those rules and abiding by them, but if you check out the application of the time limits legislation against the activities of HMRC on a particular case, as we do on every case, it is not unusual to find HMRC is breaking the rules of the game.

So, remember to check out whether the fat lady has sung.