HMRC is considering a major overhaul of its assessment rules that could allow it to investigate taxpayers' financial affairs for up to 20 years, a significant extension from the current six-year limit. The proposal, launched under the purview of new Labour Chancellor John Healey, has sparked concern among tax experts and could reopen disputes over returns filed as far back as two decades ago.
What the draft proposals entail
Under the current system, HMRC can typically investigate non-deliberate errors on tax returns within a six-year window. An error is classified as deliberate if a taxpayer knowingly provides incorrect information. The new draft proposals, however, would permit HMRC to reclassify certain errors as deliberate if taxpayers fail to act after being notified.
Specifically, if a taxpayer receives a Customer Correction Notice within the six-year period and corrects a careless mistake, no penalty would apply. But if they ignore the notice, HMRC could treat the error as deliberate for penalty purposes, allowing tax assessments to be raised for up to 20 years. The proposals would also grant HMRC formal powers to compel taxpayers to review their affairs, either by amending previous submissions or providing a justification for why no correction is necessary.
Expert concerns and public consultation
Tax professionals have voiced worries about the lack of a clear statutory cut-off point. Nimesh Shah of accountancy firm Blick Rothenberg told The Telegraph: "Most people are not represented by a tax adviser and so taxpayers may genuinely not know when they have made an error and could find themselves exposed to higher penalties." Shah's comments highlight the potential risk for individuals without professional guidance, who might inadvertently face severe financial consequences.
The consultation, which opened recently, will accept responses until September. Following the consultation period, decisions will be made by HMRC, HM Treasury, and Chancellor Healey, who replaced Rachel Reeves in Andy Burnham's first Cabinet. This timeline gives stakeholders a narrow window to voice their opinions on the proposed changes.
HMRC's defense and potential impact
Defending the initiative, an HMRC spokesman said: "We know most of our customers act in good faith and want to get their tax right. These proposals are designed to help minimise penalties for those who swiftly correct mistakes when we flag them and make the process of doing so quicker and easier." The spokesman emphasized the aim to reward prompt corrections, but critics argue the extended timeframe could create uncertainty for taxpayers.
If implemented, the changes could have far-reaching implications for individuals and businesses, potentially affecting financial planning and compliance strategies. The extended investigation period would mean that historical errors, even those made inadvertently, could resurface years later, leading to unexpected tax bills and penalties. As the consultation progresses, taxpayers and advisers alike will be watching closely to see how the final rules shape up.
