So, How Far Back Can HMRC Investigate Your Tax Returns? | FreshBooks (2024)

9 Min. Read

September 11, 2023

An investigation by HM Revenue and Customs (HMRC) is a daunting prospect. This universal dread is totally understandable. In the most extreme, worst-case scenario, consequences are severe. And they can go back pretty far back to investigate. Thankfully, this is rare.

So, let’s stop the worry spiral there. We’re not saying, “It’s not that bad.” But you don’t have to be paralysed with fear if a tax investigation letter drops on your mat. Your FreshBooks account organises most of the information you need as a matter of course. And knowing a bit about how and why HMRC conducts enquiries should give you extra reassurance.

Here’s What We’ll Cover:

Who Can Be the Subject of a Tax Enquiry?

Can HMRC Go Back More Than 4 Years? 6 Years?

How Long Do I Have to Keep My Records For?

What Penalties Can HMRC Give You After an Investigation?

What Triggers an HMRC Tax Investigation?

What Information Does HMRC Ask For?

Can HMRC Look at Your Bank Account?

Can HMRC Debt Be Written Off?

No Fear!

Entities Who Can Be the Subject of a Tax Enquiry

Any UK taxpayer can be subject to a tax investigation, as an individual or business. HMRC can investigate any taxes they administer and collect, including: Income tax, capital gains tax, corporation tax, value added tax (VAT), insurance premium tax, stamp duty land tax, stamp duty reserve tax, petroleum revenue tax, aggregates levy, climate change levy, landfill tax and excise duty.

With that in mind, now is a good time to look at your record-keeping and administrative processes. If a tax investigation were launched against you next week asking for far-back information, how long would it take you to find what you need? How many tax returns would you sift through? And it’s not like you have all the time in the world—there are time limits on this process. On top of that, the more taxes you pay, the trickier tax investigations could be.

As any taxpayer or company can be subject to an HMRC tax investigation, it’s probably best to be prepared. Perhaps start with this list. Go through each one that applies to you and your business. If they asked about your corporation tax or capital gains, how confident do you feel about having all the information? If you’ve got FreshBooks, the answer is likely to be, “Quite confident, thank you.” Just knowing what you know gives great peace of mind.

And knowing what you don’t know is incredibly valuable. Because then you can find out. (Before HMRC ever wants to know.)

Can HMRC Go Back More Than 4 Years? 6 Years?

How far back HMRC can go is always a consideration when subject to tax investigations. The HMRC can go very far back, as far back as 20 years of your financial history. Depending on the initial reason for the tax investigation, they might need to dig deeper. Here’s a general ‘go back’ breakdown:

• 4 years for genuine mistakes
• 6 years for carelessness
• 12 years for “an offshore matter or offshore transfer”
• 20 years for deliberate tax evasion

All these are measured backward from as far back as the end of the period that triggered the investigation.

HMRC can change its opinion of the severity of your situation as it investigates. What starts as a shorter look at a seemingly genuine mistake can turn into a full tax investigation, if your personal or company finances lead them in that direction.

How Long You Should Keep Your Records

HMRC hasstrict record-keeping requirements when it comes to company tax returns that vary depending on your business setup.

• Self-employed and partnerships need to go back five years after the January 31st self-assessment tax return filing deadline. For example, the 2019-20 tax year deadline is 31st January 2021. You must keep records until 31st January 2026.
• Companies need to go back six years from the end of the accounting period. For example, the accounting period ended 31st December 2018. You must keep all records until 31st December 2024.

In its record-keeping guidance (tax-evasion penalties UK), HMRC states: “If you send in your tax returns late it is subject to a compliance check, then the time limit for keeping necessary records may be extended.”

The Penalties HMRC Can Give You After an Investigation

HMRC’s tax evasion penalties are given on the basis of intent. The tax investigation assesses if you have been careless with your admin, declared less on purpose to avoid payment, or underestimated and then tried to hide it. Each one has its own range of penalties used:

• Carelessness: 0-30% of the extra tax you owe
• Deliberately putting a lower amount: 20-70% extra tax owed
• Underestimating on purpose and trying to hide it: 30-100% extra tax owing

The Things That Trigger an HMRC Tax Investigation

HMRC opens investigations into individuals and businesses because they suspect one of three things:

• You have not paid enough
• You have applied for and received too much relief
• You have deliberately avoided paying through fraudulent behaviour

As a pay as you earn (PAYE) employee, all your liabilities are taken care of by your employer before you even receive your wages from the company. But if you use the self-assessment system because you also have other income streams, or you’re self-employed, it all gets a bit trickier. It’s really easy to make a genuine mistake in your self-assessment tax return, either with declaring income or claiming tax reliefs.

Here are a few other reasons for a enquiry:

• HMRC random check
• An anonymous tip-off reporting you for dodgy tax dealings
• Your figures have fluctuated between years
• The numbers for your business are different from the norm for your sector
• You often miss filing or payment deadlines
• Your industry is being targeted by HMRC because it is considered “high risk” for fraud

HMRC will probably have already started the enquiry before they get in touch with you to ask for your cooperation.

The Type Of Information HMRC May Ask For

The information they need depends on the type of tax investigation they’re doing. It might be a random check, “aspect inquiry,” or a “full enquiry.” An aspect inquiry is one that focuses on a particular aspect of your tax life. For example, a mistake in the figures on your self-assessment tax return. A full enquiry will dig into every area of your personal and business finances, including the directors of a limited company.

For their investigations, they can ask to see everything you have stored on your FreshBooks account: Reports, balance sheets, expenses, etc. The great news is that you have it all stored digitally and it’s easy to find and sort through. You’re not spinning around last minute, trying to file invoices and organise receipts you’ve chucked in an old shoebox. You’ll calmly provide everything to HMRC, without taking excessive amounts of time away from your company and clients, because FreshBooks has got your back.

Depending on your status, HMRC might require company info for their investigations relating to:

• Accounts
• How much tax you pay and your calculations
• A self-assessment tax return
• PAYE records
• Your company’s tax return and VAT return

Can HMRC Look at Your Bank Account?

Developments in technology mean that HMRC has many new ways of gathering information about taxpayers for their investigations—and potential tax avoiders. They also have extensive powers which include access to your personal and company bank accounts, other government departments, and any social media apps.

There are also international treaties that help countries work together to eliminate tax avoidance on a global scale. Within these necessary regulations, financial institutions in other countries must also give HMRC access to information about UK citizens.

Writing Off HMRC Debt

HMRC pursues payment of tax bills relentlessly and writing off any debt is a last resort, as its primary role is collecting the country’s taxes. But this also means it has processes in place to help people pay their tax bills when they are in financial difficulty.

‘Time to Pay’

HMRC’s Time to Pay (TTP) policy helps taxpayers settle their bills by paying in installments. There are different ways to use this service, depending on your position (if you have any debt) and how much you owe. For example, if you need time to pay your self-assessment tax bill and it’s under £10,000, you can set up a TTP arrangement online.

If you’ve already missed payments and received a demand from HMRC, then you’ll need to contact whichever department has been in touch to discuss it.

Either way, you don’t have forever to pay, there is still a time limit.

All the contact details are on GOV.UK.

Enforcement Action

If you don’t respond to HMRC’s letters, it will start using ‘enforcement action’ powers to recover the debt. These powers are used to recover owed money and can include the following:

• A debt collection agency
• Directly debiting your bank account
• Debiting your pension or earnings
• Taking items of value and selling them
• Court proceedings
• Forcing you to declare bankruptcy
• Closing your business

Within these options, only an Individual Voluntary Arrangement (IVA), Company Voluntary Arrangement (CVA), and bankruptcy would see any HMRC debt written off. IVAs and CVAs are drawn up by qualified insolvency practitioners, which declare how much is paid off, at what rate, and over how long (usually over five or six years). Some debt may also be written off. IVAs and CVAs halt all further demands and interest, and provide a manageable repayment plan. You do have to meet a particular set of criteria in order to be eligible.

Bankruptcy might end up being the best option for you, but there are some hefty consequences as you look beyond it. HMRC rarely wants to pursue this, partly because the whole process has a price tag.

These are all very scary prospects. But the way to avoid a worst-case scenario is to communicate with HMRC. One phone call can stop any escalation.

No Fear!

Just have a look through your FreshBooks accounting software account right now. See how much information you’ve got right there on your screen. If you ever get the dreaded letter, get synced up with your accountant and confidently provide all the accurate information you’re being asked for. Overall, reduce stress and minimise time away from clients and your company.

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