HMRC tax assessments: time limits increased in relation to offshore matters

The government announced in the 2017 Autumn Statement that it would seek to increase the time limit for HMRC to open an enquiry into a taxpayer’s affairs in cases involving ‘offshore matters’ and ‘offshore transfers’. Despite an overwhelmingly negative response to the proposals during the consultation process, the government has decided to press ahead, and draft legislation is contained in the Finance Bill.

Once enacted the legislation will allow HMRC to open an enquiry into a taxpayer’s affairs up to:

• 12 years after the end of the relevant tax year for income tax and capital gains tax
• 12 years after the date of the chargeable transfer in relation to inheritance tax.

The extended time limits will apply to all non-deliberate non-compliance, therefore covering both innocent and careless mistakes. The existing time limits are four years (innocent mistakes) and six years (careless mistakes), so the legislation marks a significant increase. The existing 20 year time limit will remain for deliberate tax evasion.

Discussed in more detail below are some of the key points to note, including:

• the partially retroactive nature of the legislation
• the need for there to be an offshore matter or an offshore transfer
• the restriction where HMRC receives information under automatic exchange of information, including the Common Reporting Standard (CRS)
• record-keeping.

Retroactive nature

The extension of the time limits is partly retroactive. For careless mistakes, it will apply from the 2013/14 tax year allowing assessments to be opened into matters arising from that year until 5 April 2026. For other mistakes, it will apply from the 2015/16 tax year, allowing assessments to be opened for that year until 5 April 2028.

The requirement to correct (‘RTC’) legislation enacted in 2017 has already extended the assessment deadline to 5 April 2021 for tax years since 2013/14 (innocent mistake) and 2011/12 (careless mistake) in relation to offshore tax non-compliance.

The below tables show the old position (prior to the RTC legislation) and the proposed position for offshore matters (taking into account the RTC legislation) for all tax years from 2011/12 onwards. This serves to highlight the very significant increases being proposed.

Innocent mistake assessment deadline

Careless mistake assessment deadline

Deliberate mistake assessment deadline

Offshore matters and offshore transfers

The extended time limits will only apply where there is an ‘offshore matter’ or an ‘offshore transfer’ as defined in the legislation.

For income tax and capital gains tax, an offshore matter involves:

• income arising from a source outside of the UK
• assets held outside of the UK
• activities carried on wholly or mainly outside of the UK
• anything having effect as if it were income, assets or activities of a kind described above.

An offshore transfer in relation to income tax or capital gains tax occurs where there is not an offshore matter, but the income, or proceeds of disposal of an asset, are (wholly or partially) received outside of the UK, or transferred outside of the UK prior to the taxpayer filing their tax return, or in a case where no tax return is filed, by 31 January following the relevant tax year.

For inheritance tax, an offshore matter involves property situated or held outside of the UK at, or immediately after, the time of the chargeable transfer. An offshore transfer occurs in relation to inheritance tax where there is not an offshore matter but property is transferred outside of the UK after the chargeable transfer, but before the date on which an inheritance tax return is submitted to HMRC.

In broad terms, anything that is outside of the UK or occurs outside of the UK is likely to qualify as an offshore matter or transfer.

However, it does not follow that the affairs of an individual who is non-resident and/or not domiciled in the UK are automatically offshore matters or involve offshore transfers. Therefore, in any case where HMRC opens an enquiry using the extended time limits, the first thing to ascertain will be whether the enquiry does in fact involve an offshore matter or an offshore transfer.

Automatic exchange of information

A key restriction on the extended time limit is that it cannot be used by HMRC in cases where HMRC receives information from another jurisdiction under mandatory automatic exchange of information. This includes information received under the CRS. If the information received by HMRC under automatic exchange of information is such that a tax officer could reasonably have been expected to be aware of the lost tax and could reasonably have been expected to make an assessment within the usual time limits, then the extended time limits will not apply.

This is an important restriction that ensures that HMRC cannot just sit on information it receives under CRS – it has to take a proactive approach. Where HMRC seek to rely on the extended time limits, checking the information that may have been disclosed to HMRC under CRS will be crucial.

Record-keeping

Record-keeping will be an important practical consideration for anyone affected by the new rules.  While the notes to the legislation state that organisations will need to consider how long to retain information in light of the new time limits, there is no statutory extension of the existing record-keeping requirements (usually 6 years).

Careful thought should be given as to how long records should be retained in any particular case. In the new GDPR era, data protection must, of course, also be a consideration when considering record retention.

How can Burges Salmon help?

For more information, please contact John Barnett, Emma Heelis-Adams or your usual Burges Salmon contact.