HM Revenue & Customs Increase Time Limits for Correcting Errors From 3 to 4 Years

By Andrew Needham, August 2009

HM Revenue & Customs (‘HMRC’) have changed the time limits for correcting errors, both by using the error correction procedures (what used to be called Voluntary Disclosures) and assessments issued by visiting officers from 3 years to 4 from 1 April 2009. This applies equally to input tax and output tax errors. The time limits in fraud cases remain unchanged at 20 years. The increased time limits also apply to the issue of credit notes that adjust the VAT amount and to the time limits for claiming bad debt relief which will now increase from 3 ½ years to 4 ½ years.

These new time limits will not only apply to VAT but also to Income Tax, Capital Gains Tax and Corporation tax. Aligning these time limits seems like a sensible move, bringing consistency across the taxes and simplifying the administration across the taxes.

In order to ensure that accounting periods that were out-of-time on 31 March 2009 are not brought back in-time by the change, transitional arrangements have been put in place.

Because of these arrangements, between 1 April 2009 and 31 March 2010 neither HMRC nor businesses can correct an error made in an accounting period ending before 1 April 2006.

For example, on 1 April 2009 the earliest accounting period for which an assessment or error correction can be made would still be for the accounting period ending on 1 April 2006 (same as the old three year rule).

Similarly, on 31 October 2009 the earliest accounting period for which you can make such an adjustment or claim would also be the period ending on 30 April 2006. The transitional period will roll out until by 1 May 2010 when the four-year time limit will have come fully into effect so that such an assessment or error correction made on that date can still go back to the accounting period ending 30 April 2006.

The same principle applies for non-standard tax periods.

The increase in the time limits for assessments and error corrections from 3 years to 4 has both benefits and pitfalls for taxpayers. On the upside, overpaid output tax and underclaimed input tax can be reclaimed from HMRC going back four years so that retrospective claims of this nature will increase in size.

On the downside, HMRC visiting officers can now go back an extra year when inspecting records (they have the power to go back 6 years but in practice have only gone back three years as that is as far as they can assess back) and issuing assessments so the size of assessments are likely to increase correspondingly.

It is important that businesses are aware of these changes as they will have the opportunity to claim back sums that would otherwise have gone out of time.

Andrew Needham