HMRC time limits and taxpayer behaviour

This article was first published in Taxation magazine on 10 March 2025.

Unless otherwise stated, this article refers to rules in relation to self-assessment income tax and capital gains tax for individuals. Broadly speaking, the same rules apply to companies (e.g. in terms of behaviour of directors) however the time limits may relate to financial years instead of tax year.

The end of the tax year is often a time when advisers will see an increase in assessments issued by HMRC. There are a number of criteria that need to be met for assessments to be valid and one of these is that they have to be issued in time.

The time limits governing assessments change depending on ‘behaviour’ of the taxpayer and ‘source’ of the underpaid tax as well as whether we are discussing inaccurate tax returns or a failure to notify.

Inaccurate returns

UK source tax and behaviour

Where the assessment relates to tax arising from UK assets (e.g. rental income from a UK property), HMRC has a standard time limit to raise the assessment, of four years from the end of the tax year to which the return relates.

These limits are extended to six years where there is careless behaviour (or failure to take reasonable care) and to 20 years where there is deliberate behaviour. In both cases, the burden of proof rests on HMRC to show the behaviour on the balance of probabilities.

If the taxpayer disagrees with HMRC’s categorisation of behaviour and appeals to Tribunal on this basis, the burden of proof is on the taxpayer to show that HMRC’s belief is incorrect. In practice, this usually means demonstrating that the taxpayer took reasonable care.

Overseas source UK tax

Where the additional tax arises from overseas assets, HMRC has 12 years to raise an assessment regardless of whether the taxpayers took reasonable care or was ‘careless’. However this legislation only applies in relation from and after the 2013/14 tax year for carelessness and from the 2015/16 tax year for reasonable care. This is because when the legislation was brought in (Finance Act 2019), 2013/14 was open to assessment for careless behaviour and 2015/16 for reasonable care. i.e. the government ensured that the legislation did not reopen previously closed years (was not retroactive).

This time limit applies for income tax, capital gains tax and inheritance tax.

If the taxpayer acted deliberately to understate their UK tax liability, then the maximum time limit of 20 years remains.

Inheritance tax

For inheritance tax, the time limits are similar but different with varying starting points from which to calculate them depending on the situation.

If HMRC discover that additional tax should be paid then the four year period runs from the date of HMRC’s issue of form IHT421 accepting the IHT account (IHT400). If instead of issuing from IHT421, HMRC advise that the IHT account is being reviewed in more detail, then the time limit starts from the end of 12 weeks after submission of the account unless HMRC opens a compliance check in that time.

Where HMRC does not issue and IHT421 or raise any questions in relation to the IHT400, then the taxpayer can apply for a certificate of discharge under s239, IHTA1984. The time limits start from the date the certificate is issued.

Similarly for IHT100, HMRC has 12 weeks to ask any questions. If the taxpayer does not hear anything from HMRC (beyond acknowledgement of receipt of the IHT account), then the clock starts ticking again at the end of that 12 week period. If no receipt is provided, again the taxpayer can apply for the certificate of discharge.

For the above, the time limits are extended to six years for loss of tax brought about as a result of careless behaviour and 20 years for deliberate under-declaration.

For IHT arising from offshore sources, the four and six year time limits are extended to 12 years. The 20 year limit remains as is.

Discovery

In order to raise a discovery assessment, HMRC must make a discovery, the meaning of which has been discussed extensively in court. The legislation for VAT also provides that having made a discovery, HMRC has a limited amount of time to raise the assessment.

This is a further protection for taxpayers, so that having provided relevant information to HMRC they have some certainty over their affairs. If having given the information, HMRC does not act on it within a given period of time, then HMRC will be precluded from doing so in the future.

The tricky part however then may be demonstrating when HMRC ‘discovered’ the relevant information.

Careless behaviour

In terms of careless behaviour, the time limits are extended whether the taxpayer was careless or whether the carelessness took place by a third party acting on behalf of the taxpayer. However, you mist consider whether the taxpayer’s behaviour trumps that of the adviser.

E.g. if the taxpayer provided information to the adviser but in the midst of January madness, the adviser forgot to include the information on the taxpayer’s tax return, arguably the adviser was careless. However, depending on the return, should the taxpayer have noticed (on careful review of the return, which of course any reasonable taxpayer would undertake before approving the return..) that the information had been missed? If the transaction was easy to overlook then perhaps the taxpayer took reasonable care and therefore the time limits should not be extended… As with many tax disputes, the issues will be determined on a case by case basis.

As readers may know, the behaviour also impacts penalties. However, even if time limits are extended because an adviser was careless, careless penalties will not apply unless HMRC can demonstrate fault on the part of the taxpayer.

Deliberate behaviour

For a detailed review of deliberate behaviour, readers are directed to paragraphs 37-47 in Tooth v HMRC.

The Supreme Court discussed the interaction between extension of time limits for assessment provision in s29(4), TMA1970, which states that “…the situation mentioned …was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf” and the interpretation of ‘deliberate’ as per s118(7) “…references to a loss of tax … brought about deliberately by a person include[s]…a situation that arises as a result of a deliberate inaccuracy in a document…”. The SC determined that for behaviour to be classed as deliberate in terms of penalties and time limits, both the declaration of the incorrect amount of tax and the inaccuracy of that declaration must be intentional.

It is not enough for HMRC to state that the return was intentionally submitted and therefore any under-declaration subsequently discovered must therefore be deliberate.

Failure to notify

Where there is a Failure to Notify chargeability to tax, the time limits are simpler.

For a failure to notify, HMRC can go back up to 20 years though the department can only go back to 2008/09 and earlier if there was negligent conduct (either of the taxpayer of someone acting on their behalf).

A failure to notify is either deliberate or non-deliberate (carelessness is not relevant for penalties) and penalties are mitigated depending on how long it has taken the taxpayer to bring their affairs up to date and whether or not the declaration was prompted by an HMRC intervention.

Note that there must be a direct connection between the failure to notify and a loss of tax. If there is no tax loss then there is no failure to notify.

IHT

In line with the above failure to notify rules, if no IHT account is delivered, then HMRC has 20 years from the date of death to recover the IHT where the non-submission is not deliberate. However, is the non-submission is deliberate then theoretically, there is no time limit for HMRC to recover the tax.

Claims and elections

Other areas that are governed by strict time limits are claims and elections. With most claims/elections, the taxpayers has four years from the end of the relevant tax year. HMRC has discretion to allow late claims, sometimes conferred by legislation directly applicable to the particular claim and sometime under their general tax collection powers.

Where a claim is late and the taxpayer believes that HMRC has not correctly exercised its discretion to allow the claim (e.g. the taxpayer had a good reason for the late claim and HMRC’s decision is unconscionable in the circumstances), then the only option the taxpayer has is to go to Judicial Review to challenge HMRC’s decision.

Also note that where HMRC raises an assessment, the taxpayer may make a consequential claim to be included in the revised tax computation even if the four year time limit has expired. This may help reduce liabilities in the event that the taxpayer forgot to include a claim previously.

Is the Discovery Assessment valid?

Time limits tend to be near the top of an adviser’s list when considering whether an assessment is valid and the basis on which to appeal them. However it is important to remember there are other criteria that need to be fulfilled as well. These include:

• the assessment needs to be made to HMRC’s best judgement;
• there must have been a discovery;
• the assessment must be notified correctly to the correct person.

These points are discussed further in this article.

Further, there are other provisions within the taxes acts which may give rise to determinations or assessments and which are governed by the same rules.

For example, 2003/2682 Income Tax (PAYE) Regulations 2003, Regulation 80. Regulation 80 states “A determination under this regulation is subject to Parts 4, 5[, 5A]3…2 and 6 of TMA (assessment, appeals, collection and recovery) as if—

(a) the determination were an assessment…”

HMRC may issue these determinations in relation to tax avoidance arrangements, particularly when approaching the tax year end. However, if full information had been given on the tax returns as regards the arrangements, arguably, a discovery has not been made.

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