29 05 2018

UK Criticized For Overzealous Offshore Tax Enforcement Plans

The Chartered Institute of Taxation has criticized a new UK government proposal to extend significantly the tax assessment time limits in cases involving offshore tax matters.

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 behavior, 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.

On May 14, 2018, in response to a consultation on the matter, the Institute said it believes 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.

The CIOT said it 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 said 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. This would have enabled stakeholders to engage on a range of possibly better targeted options at a much earlier stage."

In its 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.

Cullinane added: "It is perverse that this proposal comes at a time when HMRC have access to a bigger armory 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 analyze 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 says it 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.

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 behavior."

"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."