The extended time limits for offshore assessments: practical points

On 6 July 2018, draft legislation was published for inclusion in Finance Bill 2019 to extend the tax assessment time limit (during which HMRC may investigate non-compliance and issue notices of determination) to 12 years in cases of mistakes or non-deliberate errors involving offshore income, capital gains or chargeable transfers.

Currently, the time limit for HMRC to make an assessment to income tax and capital gains tax where the taxpayer took reasonable care is four years from the end of the tax year (six years for careless behaviour and 20 years for deliberate behaviour, see TMA 1970, ss 34, 36).

Important points relating to this change are:

• it applies to income tax and CGT (new TMA 1970 s 36A) and to IHT (new IHTA 1984 s 240B);
• personal representatives are excluded from the changes, with the time limits in TMA 1970 s 40 continuing to apply
• the extension will not be made for corporation tax;
• the draft legislation prohibits an assessment being raised to the extent that lost tax arises due to transfer pricing adjustments; and
• the extended time limit will not apply if, through receipt of information via automatic exchange arrangements, it was reasonable to expect HMRC to be aware of and have assessed the lost tax before the end of the normal time limit.

The effective date of the change is the date on which Finance Act 2019 receives royal assent. It will have limited effect for past years as follows:

For cases in which there has been more egregious behaviour, the usual 20-year time limit will continue to apply.

Note that for IHT, the extension applies to chargeable transfers taking place on or after 1 April 2015 (reasonable care) and 1 April 2013 (carelessness).

Practical implications

The extended time limit will be an unfortunate diminution in certainty that past tax affairs are resolved for affected taxpayers.

There is a no doubt welcome bar on applying the extended time limit if HMRC could, through receipt of information via automatic exchange arrangements, have been expected to assess the lost tax before the end of the normal time limit.

However, this safeguard relies on the concept of whether it was reasonable to expect HMRC to have been aware of and have assessed the lost tax before the end of the normal time limit. Readers cannot have escaped the parallel with discovery assessments and the requirement in TMA 1970 s 29(5) that ‘the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation’. Deciding on what is reasonable in this context, together with what is a ‘reasonable excuse’ against penalties being imposed, has taken up a considerable amount of the courts’ time over recent years. A certain amount of scepticism as to the value of this safeguard (without a battle!) might therefore be expected.

Taxpayers and their advisers need to keep adequate records to defend their position in the event of HMRC seeking to raise an assessment. Indeed, concerns were raised during the consultation regarding the increased administrative burden that the 12-year time limit would place on taxpayers.

Although the law is not being amended to require taxpayers to keep records for the extended 12 year time limit (which is said in the consultation response document at para 2.10 to ‘minimise the administrative burden’), it is arguable that anyone with offshore interests has a de facto record-keeping requirement for that period. Failure to do so could leave them struggling to defend a later assessment.

Given that, as described above, the change affects years back to 2013, advisers may well wish to consider informing all clients with offshore interests and advise them to keep records for the full 12 years. 

Kelly Sizer, Tolley Guidance