The Chartered Institute of Taxation (CIOT) is highly critical of the Government’s proposal to extend significantly the tax assessment time limits indiscriminately in cases involving offshore matters. The Institute believes that the case for such a large and broadly applied increase has not been made and risks resulting in unfairness for taxpayers and perverse incentives toward the care taken with tax returns.
At the Autumn Budget 2017, the Government announced that the assessment time limit for cases of mistakes or non-deliberate offshore tax non-compliance will be increased to at least 12 years after the end of the relevant tax year or relevant period. Where there is deliberate non-compliant behaviour, the current time limit of 20 years will remain, whether offshore matters are involved or not. HMRC say the additional time is needed to address situations where the current assessment time limits of four and six years are not sufficient to establish the facts and determine and assess the amount of tax due.1
The CIOT supports HMRC’s efforts to tackle offshore tax evasion and agrees that the Government should have appropriate powers and resources for combatting and investigating it. However, it has concerns about the plan to extend offshore time limits in the way proposed.
John Cullinane, CIOT Tax Policy Director, said:
“In our view a better policy outcome would have been achieved if the consultation process had started earlier when the objectives were being set and options first discussed, the kind of approach we argued for strongly in the Better Budget report.2 This would have enabled stakeholders to engage on a range of possibly better targeted options at a much earlier stage.”
In a recent submission to HMRC, the CIOT said there is no evidential explanation for the rationale behind the measure and challenged the tax authority to publish its analysis to support it.3
John Cullinane said:
“It is perverse that this proposal comes at a time when HMRC have access to a bigger armoury to deal with offshore non-compliance than at any time in the past. They are receiving very large amounts of taxpayer data through Exchange of Information Agreements with overseas tax jurisdictions and they have showcased powerful internal systems to analyse the data. Public and media opinion, fuelled by recent data leaks, may not have caught up with this fundamental change but that is not a good reason for policy decisions to be made disregarding it.
“One suggestion we are making is that the extended time limits should only be applied to offshore matters involving ‘high risk’ jurisdictions which attract a Category 3 territory classification; that is those that have not agreed to share any tax information with HMRC. This seems a more proportionate approach.”
The Institute is also concerned at the removal of certainty for taxpayers and businesses over the resolution of their tax affairs. This is because a 12 year time limit that can apply even where a taxpayer has taken reasonable care with their tax affairs, does not strike the right balance between the public interest in collecting the right amount of tax, and the right of taxpayers to finality in their tax position after a reasonable period of time.
John Cullinane said:
“Currently for assessing tax due from periods more than four years in the past, HMRC must demonstrate that the taxpayer failed to take reasonable care or acted deliberately non-compliantly. If they were careless HMRC have six years to assess the tax and if there was deliberate non-compliance, 20 years. By this unprecedented merging of time limits for failure to take reasonable care and accidental errors, applying to a wide range of matters just because there is an ‘offshore’ element, it risks setting a dangerous precedent and potentially undermining and devaluing carefully compliant behaviour.
“Another possible option is to build a process into the proposal which enables HMRC within the existing time limits to issue a notice to inform the taxpayer that an existing investigation will, for specific reasons, be subject to extended time limits. This would provide taxpayers with more certainty over their tax affairs.
“In addition, the planned measure will mean that taxpayers will have to keep records of offshore matters for 12 years against the risk that they have, entirely accidentally, not paid the right UK tax despite taking reasonable care. This is a big increase on the current length of time that legislation dictates records must be kept for which will come with a significant cost and will not be attractive from an international competitiveness perspective.”
Notes for editors
1. Existing assessment time limits depend upon both the type of tax being charged and the reasons for any errors or failures that might result in the loss of that tax. For income tax (IT) and capital gains tax (CGT), the time limits are as follows:
- ordinarily, any time within four years after the end of the tax year to which the assessment relates; but
- the time limit is six years if the loss of tax was brought about by carelessness; and
- the time limit is 20 years if the loss of tax was brought about deliberately by the taxpayer
In the case of a loss of inheritance tax (IHT) brought about by an error in the IHT account, and where payment has been made and accepted in full satisfaction of the tax due, the time limits for proceedings to be brought for recovery of the tax are as follows:
- Four years from the later of the date on which the (last) payment was made and accepted, or the date on which the tax or last instalment became due;
- Six years where the error is attributable to careless behaviour; and
- 20 years where the error is attributable to deliberate behaviour.
For corporation tax (CT) purposes, the same time limits apply but are determined by reference to the end of the accounting period rather than the tax year.
2. Published by the Chartered Institute of Taxation (CIOT), Institute for Fiscal Studies (IFS) and Institute for Government (IfG), the Better Budgets report outlines ten steps toward making better tax policy. See here.
3.Non-compliance involving an offshore matter is an inaccuracy, failure to notify or deliberate withholding of information that leads to a loss of revenue that is charged on or relates to: income arising from a source in a territory outside the UK; assets situated or held in a territory outside the UK; activities carried on wholly or mainly in a territory outside the UK.
4.HMRC Consultation: Extension of Offshore Time Limits, response by the Chartered Institute of Taxation can be read here.