Extension Of Offshore Time Limits: Collecting Lost Tax From Earlier Years

On 19 February HMRC published a consultation on proposals to extend the time period over which it can go back and assess tax on undeclared offshore income, gains and chargeable transfers to a minimum of 12 years. This follows on from another time limit extension related to offshore non-compliance introduced by new ‘Requirement to Correct’ rules. A link to the latest consultation can be found below:

• Extension of Offshore Time Limits

Current time limits and extension under the RTC rules

The current time limits for ‘non-deliberate’ offshore tax non-compliance are normally four years and six years, as follows:

• For income tax and capital gains tax HMRC can go back up to four years after the end of the tax year to which the loss of tax relates; six years if the loss of tax was brought about by ‘carelessness’. For example, HMRC has up until 5 April 2022 to assess lost income tax from the 2017/2018 tax year; 5 April 2024 in a case of ‘carelessness’.
• For corporation tax the time limits are four/six years after the end of the accounting period in question;
• For inheritance tax, where payment has been made and accepted in full satisfaction of the tax due, the time limits are four/six years from the later of the date on which the (last) payment was made (and accepted by HMRC), or the date on which the tax or last instalment became due.

However, the time limit is 20 years from the date of the chargeable transfer where an inheritance tax account hasn’t been delivered, or tax payments haven’t been made and accepted.

HMRC can also go back 20 years in cases of loss of tax due to ‘deliberate’ behaviour. And they can go back to any year, without time limit, where an inheritance tax account hasn’t been delivered, or tax payments haven’t been made and accepted, and a loss of inheritance tax has been brought about deliberately.

In the case of deceased taxpayers, the time limit is four/six years from the end of the tax year in which the taxpayer died. However, HMRC can’t go back more than six years before the date of death, even where the loss of tax is due to deliberate behaviour or the failure of the deceased to notify chargeability.

The time limit extension under the RTC rules

The new RTC rules extended the time limits for assessing income tax, capital gains tax and inheritance tax, but not corporation tax, related to offshore non-compliance committed before 6 April 2017.

For tax non-compliance to be within scope of the RTC rule, HMRC must have been able to make an assessment to recover the income tax or capital gains tax in question on 6 April 2017 or make a determination to recover the inheritance tax in question on 18 November 2017 (the day after Royal Assent was received for the RTC provisions).

The normal assessing rules set out above apply to decide whether HMRC is able to raise an assessment on 6 April 2017 / 18 November 2017.

The RTC legislation then allows for a longer period for HMRC to take action to recover any tax that is subject to the RTC rule.

This means that for any tax that HMRC could have assessed on 6 April 2017, it will continue to be able to assess that tax until the later of 5 April 2021 or the date on which an assessment can be raised using the normal rules.

The new proposals

The consultation proposes a new 12 year minimum time limit for income tax, capital gains tax and inheritance tax and it asks if this new time limit should also apply to corporation tax.

The 12-year time limit will apply to any year that is still in date for assessment when the new legislation comes into effect. It won’t apply to any year for which the time limit has expired before 6 April 2019.

Example 1

A taxpayer has underpaid income tax on offshore income due to careless behaviour for the tax year 2013/2014.

Under the existing time limit rules, HMRC can assess that tax at any time up to 5 April 2021 (ie. six years after the end of the year of assessment plus the RTC extension).

However, the new 12-year time limit will apply from 6 April 2019, before that existing time limit has run out. HMRC will therefore be able to assess lost tax until 12 years after the end of the 2013/2014 year of assessment, ie. until 5 April 2026.

Example 2

A taxpayer has underpaid income tax on offshore income due to careless behaviour for the 2009/2010 tax year.

Under the existing time limit rules, HMRC could have assessed that tax at any time up to 5 April 2016 (six years after the end of the year of assessment). That time limit expired before the new 12-year time limit legislation comes into force on 6 April 2019 so is unaffected by this proposal. It is also unaffected by the RTC rules because the time limit for assessing the lost tax for 2009/2010 ended before 6 April 2017.

Note that the current 20-year time limits mentioned above are not expected to change.

Full details of the RTC rules, including the current time limits, are available here.

This consultation closes at 11:45pm on 14 May 2018, after which time the Government will publish draft legislation (expected this summer) with a view to it taking effect from April 2019.