United Kingdom Tax: Changes to statute of limitations now in effect

Changes to the U.K. statute of limitations become effective on 1 April 2010.

The general rule in the U.K. is that a company's corporation tax return is due to be filed with the U.K. tax authorities (HMRC) within 12 months of the end of each accounting period. Provided the return is filed on time, HMRC has 24 months from the end of the accounting period to launch an enquiry into the return. Where the return is filed late, HMRC has between 12 and 15 months from the date of filing to launch an enquiry, depending on the precise date on which the return was filed.

The only way that HMRC can extend the normal statute of limitations is in cases of inadequate disclosure by the company in its return or where there has been fraudulent or negligent conduct. Until 1 April 2010, in these cases, the statute could be extended to six years and 21 years, respectively, from the end of the accounting period.


New rules

The standard enquiry window remains unchanged, i.e. HMRC will generally have 24 months from the end of an accounting period to launch an enquiry into a return. However, with effect from 1 April 2010, the normal U.K. statute of limitations is reduced from six years to four years from the end of the accounting period in most cases of inadequate disclosure by a company. A six-year time limit remains only for HMRC to launch an enquiry into a return where a company has acted "carelessly."

In a case involving "deliberate misstatement" (previously fraudulent or negligent conduct) on the part of the company (or a person acting on behalf of the company or a person who was a partner of the company at the relevant time), the period in which HMRC can open an enquiry into the return is reduced from 21 years to 20 years after the end of the accounting period with effect from 1 April 2010.


Impact

The reduction in the time limit for inadequate disclosure from six to four years means that HMRC had until 31 March 2010 to open an enquiry into all periods ending on or after 31 March 2004. From 1 April 2010, HMRC will be limited to all periods ending on or after 1 April 2006 only (assuming no "carelessness" on the part of the company), i.e. 31 December 2006 for a calendar year-end group.

The change to these time limits for HMRC to launch an enquiry may have a significant impact, in the context of the expiry of the statute of limitations and the timing of the recognition and release of tax provisions. For example, if HMRC did not open any enquiries into a company's tax return for the year ended 31 December 2004 or 31 December 2005 before 1 April 2010, and the company did not act carelessly in its returns, these years would now be closed (assuming no deliberate misstatement has taken place).