How far back can HMRC investigate Self Assessment tax returns?

According to government figures, more than 12m people file a Self Assessment tax return each year. Whether innocently or otherwise, some Self Assessment tax returns contain errors that can result in HMRC receiving less Income Tax than is due, which may not be discovered. There can be other consequences. HMRC puts a lot of resources into combating tax avoidance and evasion and it is towards this key objective that it conducts a reported 300,000-plus investigations each year into Self Assessment tax returns. These are also called “compliance checks” and you’re no more or less likely to be investigated because you are a sole trader than you are a much larger business.

What can trigger an HMRC investigation?

HMRC cross-references information contained in new Self Assessment tax returns against data it already holds from previous Self Assessment tax returns. If anything is significantly different, for example, your costs have increased considerably or your earnings have plummeted, which lowers your Income Tax liability, it creates a red flag, which can trigger an HMRC investigation. Highly sophisticated data tools automatically identify anything extraordinary and HMRC may indeed want to investigate. That’s why it’s essential to enter truthful and accurate figures into your Self Assessment tax return, and get help to fill it out if necessary. HMRC investigations are more likely in sectors where concealing earnings by working “cash in hand” or “off books” is easier and more common. Suspicion can also arise if your Self Assessment tax return data entries differ greatly from norms for your sector or business type. HMRC can decide to investigate businesses that fail to make a profit year after year. Late-filing your Self Assessment tax returns every year can also prompt an HMRC investigation, while HMRC sometimes acts on third party tip-offs.

How far back can personal tax investigations go?

• According to HMRC: “Where tax has been lost or too much has been repaid because of careless behaviour [by] the person or another person acting on their behalf, we can make an assessment within six years of the end of the relevant tax period.”

• Moreover: “Where tax has been lost or too much has been repaid because of deliberate behaviour, [by] the person or another person acting on their behalf, we can make an assessment within 20 years of the end of the relevant tax period.”

HMRC is more likely to investigate your finances over a longer period if your tax return contains many mistakes or you have attempted to conceal or mislead to avoid paying tax. Relatively minor errors might mean HMRC focuses on the past few years, providing this doesn’t reveal other errors.

What powers does HMRC have?

As stated on government website GOV.uk: “HMRC has similar criminal investigation powers to other UK law enforcement agencies, but the use of these powers is limited to HMRC-related offences, for example, fraudulent evasion of tax.” HMRC can apply for orders, so that you must produce information and documents on request. In more extreme cases, HMRC can apply for and execute search warrants, make arrests and search suspects and premises.

What happens when HMRC investigate?

HMRC will send you an official letter informing you that it plans to investigate your tax affairs. You may be asked to share your financial records and produce documents such as bank statements, receipts for expenses, invoices, etc. HMRC may ask you visit you at your home, premises, accountant’s offices or even the nearest tax office. HMRC will search premises if deemed necessary. The more serious the issue, the more extensive the investigation. You must cooperate fully with an HMRC investigation. Never simply ignore an inspection notification or refuse a visit, because it could make things much worse for you.

Consequences of an HMRC investigation

When considering a penalty, HMRC will assess the nature of your error(s), how it affected your tax liability, whether you acted deliberately or accidentally and your willingness to cooperate with its investigation. The severest penalties are given to those who deliberately hide earnings or falsify their costs to significantly reduce their tax bills. As well as having to pay the tax you actually owe, HMRC can issue you with an additional penalty of up to 100% of tax due. Unintentional, minor mistakes usually result in lesser consequences, while an investigation may show that your Self Assessment tax return figures are indeed accurate, so no further action will result. After an investigation, HMRC will send you a “decision notice” summarising its findings and you can appeal if you disagree or simply pay the unpaid tax.

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.