HMRC extends investigation time limits


Written by: Fiona Fernie

Following the introduction of the Requirement to Correct (“RTC”) legislation which, among other things, extends the time limits for HM Revenue & Customs (“HMRC”) to assess outstanding tax in relation to offshore matters or transfers, the draft Finance Bill 2019 includes legislation to increase those time limits again in relation to the assessment of non-deliberate non-compliance.

The legislation provides HMRC with 12 years after the end of the year for which the tax is due in which to make an assessment and is part of HMRC’s No Safe Havens strategy which was launched in 2013 in a bid to “close the tax gap”. The stated aims of the No Safe Havens strategy were:
  • there are no jurisdictions where UK taxpayers feel safe to hide their income and assets from HMRC
  • would-be offshore evaders realise that the balance of risk is against them
  • offshore evaders voluntarily pay the tax due
  • those who do not come forward are detected and face vigorously enforced sanctions
  • there will be no place for facilitators of offshore evasion.

The strategy was the start of a move away from encouraging taxpayers to come forward and willingly disclose unpaid taxes in return for beneficial treatment, to a regime which is far more draconian and involves huge penalties for those who are non-compliant in relation to the UK treatment of their offshore tax affairs.

How will the proposed legislation affect the UK taxpayer?

The measures will affect income tax, capital gains tax and inheritance tax (but not corporation tax) and will take away the distinction between the time limits for assessment of tax which remains unpaid because of an innocent error and those in relation to tax which remains unpaid as a result of carelessness. The time limit for the assessment of unpaid tax as a result of deliberate non-compliance remains unchanged at 20 years following the end of the year for which the tax is due. The legislation will take effect from April 2019.

Although there was a consultation (between February and May 2018) on the proposals which were set out in the 2017 Budget, that consultation was largely confined to how to make the changes and did not address at all whether it was appropriate to make them. 

Despite that, the published summary of responses to the consultation makes it clear that the respondents to the consultation were not in favour of the decision to extend time limits and were particularly concerned about the resulting lack of distinction between a mistake despite taking reasonable care and carelessness.  Other objections included the lengthy period of uncertainty for taxpayers, the interaction with the extended time limits under the Requirement to Correct rules and the retrospective nature of the proposals in that they apply to all in date years at the time of implementation of the law. 

In almost all respects the draft legislation has taken no account of any of the objections with the summary of response document stating, 'Due to the additional time that can be needed in offshore cases, HMRC may discover an under-declaration too late to assess the tax due under the four or six-year rules. The time limits are therefore being extended to a minimum of 12 years to allow HMRC more time to establish the facts in offshore cases.' '

The Extended Time Limit (“ETL”) change will give HMRC more time to assess offshore cases and therefore will help protect the UK tax base from those who carelessly or accidentally fail to pay all the tax they owe.'

The one obvious amendment to the initial proposal is that the ETL rule cannot be used where HMRC receives accurate information under the Common Reporting Standard and is able to raise an assessment without having to investigate further. In these circumstances the normal four or six year time limits for assessment will continue to apply.
Fiona Fernie, partner, said, 'the summary of responses to the consultation document suggests that the government is aware of the importance of giving taxpayers tax certainty as early as possible and also that the government does not want to increase the administrative burden on taxpayers, but it seems inevitable that these measures will result in excessive periods of uncertainty for taxpayers with all the attendant stress and anxiety, and the extended time limits will automatically mean that taxpayers will need to keep records for longer periods in case HMRC decides to investigate them.'

For more information, please contact Fiona Fernie.