Posted On: 17 Jul 2018
Extension of time limits for assessments involving offshore matters: Income tax (IT), capital gains tax (CGT) and inheritance tax (IHT)
On 6 July 2018, HMRC published draft legislation on the extension of statutory time limits to raise formal assessments. The new legislation notably affects ‘non-deliberate’ behaviour resulting in a loss of IT, CGT or IHT as a result of offshore matters or offshore transfers, e.g. where taxpayers took reasonable care with their tax affairs or were a little careless.
Offshore matters or transfers are where the source of income, gains or assets (for IHT) is/are held outside of the UK or where the relevant income or gains arising are transferred out or received outside of the UK.
The effect of the legislation is to extend the time limits for non-deliberate behaviour to up to 12 years after the relevant tax period. The new limits affect 2013/14 for careless behaviour and 2015/16 where reasonable care is in point. By way of example, if careless behaviour has taken place, then HMRC have until 5 April 2026 to raise an assessment into 2013/14. However, on the same date (5 April 2026), if it can be shown that reasonable care was exercised, the assessments can only cover 2015/16 onwards.
In relation to IHT, the time limits are to be extended to 12 years from the date that the final IHT payment concerned was made or fell due.
The exception to these rules is where HMRC receive information under the Common Reporting Standard, or other automatic information exchange agreements, which would also have been sufficient for them to have raised an assessment within the normal four or six year time limits. This applies where HMRC would have “reasonably” been expected to be aware of the lost tax as a result of that information and it would be “reasonable” for the assessment to have been made at that time.
Our experience suggests that this “reasonableness” test would be very difficult to police in practice. We have seen numerous discovery assessments, that have been upheld on challenge on the basis that a different officer had reviewed the information, or that the information provided (e.g. as a whitespace disclosure on a tax return) was insufficient to show that a loss of tax had occurred. Similarly, if the information provided by other jurisdictions is in a format from which it cannot easily be seen that a loss of tax has occurred, clients and their advisers may find it difficult to assert that the exception above applies.
The policy case made by HMRC for needing the additional time to raise assessments is that information in relation to offshore assets and structures can be more difficult to obtain. The new legislation effectively places the vast majority of individuals in the same boat as that minority group making ‘deliberate’ errors. It also means that businesses may need to retain records for longer than the (current) legally required period of 6 years. For deliberate behaviour, strictly the current time limit of 20 years remains unchanged.
The definitions of offshore matter and offshore transfer are the same as the definitions used in the Requirement to Correct (RTC) legislation. The RTC is a requirement for all taxpayers with offshore structures to disclose any tax irregularities to HMRC prior to 30 September 2018. Should HMRC discover any irregularities after this date, then new draconian penalties will apply, based on the tax due, as well as potentially a new asset-value based penalty and being publicly named and shamed. Once the extended time limits are in force, HMRC will effectively have up to 12 years to levy the significantly higher penalties. In addition, the penalties will be due on 12 years’ worth of tax liabilities, rather than the more reasonable 6 years at the moment, for careless behaviour.
Even if an individual has taken reasonable care, HMRC propose being able to request up to 12 years’ worth of information so taxpayers are likely to be subject to significant professional fees for collating relevant information, reviewing it and presenting it to HMRC.
The new Failure to Correct (FTC) penalties coming into force from 1 October 2018, are severe. The result of the FTC penalties together with the new time limits, could be crippling. To avoid the punitive financial repercussions of HMRC ‘enquiries of the future’, it is imperative that clients review their overseas interests now and make any relevant disclosures before 30 September 2018, on the best terms available.
Please contact Lancaster Knox on 0203 757 5669 or via [email protected] if you have any questions or would like assistance with a disclosure.