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