Another line in the sand

    As previously announced at the Autumn Budget 2017, HMRC has launched a consultation with a view to extending the time limit to assess tax involving offshore income. The deadline for responses is 14 May 2018 with draft legislation expected this summer.

    Despite the adoption of the Common Reporting Standard (CRS) and the automatic sharing of financial information which has now begun, HMRC believes it requires more time to gather information and establish the facts where offshore non-compliance is suspected. 

    It is concerned the existing assessing time limits provide an insufficient opportunity to act, particularly in complex cases where the undeclared offshore income has been held for many years and time consuming research is required, perhaps working alongside foreign jurisdictions to understand the quantum of tax at risk.

    Existing time limits

    For income tax (IT) and capital gains tax (CGT), the time limits are currently four, six and 20 years:

    • four years after the end of the tax year where a mistake has been made despite reasonable care being taken;
    • six years where the loss of tax was brought about by careless behaviour; and
    • 20 years where the understatement of tax was attributable to deliberate behaviour.

    Where a failure to notify position exists, the time limit is 20 years unless a reasonable excuse exists to explain the failure and HMRC is notified without delay after the excuse ended. In those circumstances, the four year limit applies.

    Similar rules exist for inheritance tax (IHT) where an error is discovered, with the time limits being:

    • 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 down to careless behaviour; and
    • twenty years where the error was made deliberately.

    Proposed change

    New legislation will see the introduction of an assessment time limit of 12 years in cases involving mistakes or non-deliberate errors relating to offshore tax, whether income, gains or chargeable transfers related.

    The time limit for assessing under declared tax involving deliberate behaviour will remain at 20 years.

    The extended time limit will apply to IT, CGT and IHT, with HMRC considering bringing corporation tax within scope as well.

    Wider measures

    The new extended time limit is part of a package of measures designed to tackle offshore tax evasion. The first exchanges of information about UK residents with offshore accounts began last September under the umbrella of the CRS. By September 2018, the CRS will see information being provided to HMRC about accounts held by UK residents in around 100 countries.

    The Requirement to Correct (RTC) legislation requires UK taxpayers with undeclared offshore tax liabilities, whether IT, CGT or IHT, to disclose them to HMRC on or before 30 September 2018. 

    From 1 October 2018, substantially higher penalties will apply for those who have failed to pay all of the tax due on foreign income and assets. 

    Failure to Correct (FTC) penalties will be charged. The maximum penalty will be 200% of the tax owed, which may be reduced to a minimum of 100% depending on the taxpayer’s cooperation with HMRC and the quality of disclosure.  

    There is also an Asset Based Penalty of up to 10% of the underlying asset value for serious cases.

    An additional Offshore Asset Moves Penalty will potentially be levied where HMRC can show the taxpayer moved their assets to avoid reporting. The penalty is equivalent to 50% of the amount of the standard penalty and is charged in addition to the standard penalty. This penalty provision applies to the RTC rule and will be equivalent to 50% of the FTC penalty.

    At the moment, if someone uses the Worldwide Disclosure Facility to disclose historic offshore evasion, a penalty of 30% of the tax due would be likely. However, after 30 September 2018, the average penalty may be around 150% of the tax due. In practice this means if someone owes £10,000 in tax now, the total bill for a disclosure would be around £13,000 plus statutory interest. In comparison, if the disclosure is made after 1 October 2018, the bill could be closer to £25,000 plus statutory interest.

    If you would like to discuss the content of this article further, please email the author, our Head of Technical Research, Guy Smith.