Extension of Offshore Time Limits
Introduction
The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 19 February 2018. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee is provided on the previous page.
We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area that there may be in the future. We wish to comment on some specific aspects of this consultation.
HMRC’s stated strategy for tackling offshore evasion outlined in No Safe Havens11, sets out five key objectives. One of these reads “There are no jurisdictions where UK taxpayers feel safe to hide their income and assets from HMRC”. We are in complete agreement with this objective.
Firstly, we wish to make clear that Chartered Accountants Ireland is wholly against tax evasion behaviour of any type, irrespective of location. The powers and sanctions available to HM Revenue & Customs (“HMRC”) to tackle evasion should be robust but fair and contain appropriate safeguards.
However, the current consultation on extending offshore time limits is not aimed at offshore evasion but is targeted at extending the time limits for non-deliberate behaviour. We are concerned that this unfairly penalises those taxpayers who inadvertently underpay, without intent to do so, their UK income tax, capital gains tax (“CGT”) or inheritance tax (“IHT”) liability as a result of non-deliberate, offshore behaviour.
The rationale set out in the current consultation for the proposed divergence on assessable periods for onshore and offshore taxpayers, where the behaviour is non-deliberate and offshore, is simply not fair and punishes offshore non-deliberate behaviour where there was no intent to evade and where there is no objective distinction to be made between onshore and offshore non-deliberate behaviour.
Defining offshore
Chapter 4 of the consultation sets out the definition of offshore and proposes that this will follow the definitions of “offshore matter” and “offshore transfer” in the Requirement to Correct rules in paragraphs 9 to 11 of Schedule 18 to Finance (No. 2) Act 2017.
Whilst this may seem like a logical conclusion, we believe there is a strong case to exclude the Republic of Ireland from the definition of “offshore” for the purpose of these proposals.
Many businesses and/or individual taxpayers in Northern Ireland have either made investments or established a business presence, in their nearest geographical neighbour, the Republic of Ireland. This is a natural extension of their private or business affairs and whilst the Republic of Ireland is a different tax jurisdiction it is not viewed as “offshore”, given its close proximity. Supplying goods or services to a local market or buying a holiday home in the nearest seaside resort often requires taxpayers in Northern Ireland to cross the border.
To introduce extended time limits which include the Republic of Ireland as an offshore jurisdiction will mean that many taxpayers in Northern Ireland will subsequently face two different sets of time limits where there is no objective distinction to be made for that difference, especially where a non-deliberate error is made.
As Northern Ireland is the only part of the UK to have a land border with another jurisdiction (the Republic of Ireland) we believe that special consideration is required for taxpayers and businesses resident in Northern Ireland.
Framing of consultation
This consultation, the first on this matter, is framed around establishing the design principles for the legislation on extending the current time limits to 12 years (which would take effect from April 2019).
It seems clear from the current consultation that the government has settled on the policy of extending the time limit having previously not consulted, or invited any comment, on whether the limit should be extended and the case for doing so, if any. We feel it is important to explore this aspect before considering the proposed design and implementation of the legislation.
Case for extending the time limits
Firstly, the proposal to extend to 12 years should be set in the context of the current time limits. For discovery cases, the current time limit is four years. Where careless behaviour is in point, the time limit is currently six years with no distinction currently made between onshore and offshore behaviour (except where the new Requirement to Correct legislation applies – see later).
An extension to 12 years represents a trebling of the four year time limit and a doubling of the six year time limit. In addition, the proposed commencement rules (see more, later) would also have retrospective effect in many cases.
We are not convinced that the case for such significant increases in the time limits has been established via evidence of significant amounts of tax lost as a result of the current time limits. The Exchequer Impacts outlined at Part 5 of the consultation document are negligible in the initial years increasing to only £10 million by 2022–2023. If the case for an extension is, in HMRC’s view, proven, one would expect an immediate significant Exchequer Impact which is not borne out in Part 5.
The consultation document cites the rationale for extending as, as we see it, purely logistical – to allow HMRC more time to establish the facts in offshore cases because the time taken to gather facts and evidence can be longer.
Whilst offshore cases may take longer for the aforementioned reasons, they can also take longer because HMRC has not sufficient resources at its disposal to conduct the enquiry in a timely manner. It strikes us that a further extension would seem very much like granting HMRC time for “a fishing expedition” which, it would seem, would bear minimum return for the additional time and resource invested, not to mention the additional stress and worry for the taxpayer involved.
Requirement to Correct
The new Requirement to Correct (“RTC”) legislation introduced by the Finance (No. 2) Act 2017 already extends the time limit for offshore income tax, CGT and IHT non-compliance, so that tax that is assessable on 6 April 2017 will remain assessable until 5 April 2021.
In the context of careless behaviours this would mean that careless offshore non-compliance for the tax year 2011–12 which would still be assessable on 6 April 2017 is now assessable until 5 April 2021, an extension of the six year time limit by three years. For discovery cases, the time limit of four years is also extended by three years until 5 April 2021.
We do not see how a further extension is currently justified given the minimal exchequer impact outlined and in the context of the published Exchequer Impacts for RTC12 which show much higher immediate returns within that extended assessment window.
We note from the original RTC consultation13 that the starting point for RTC was to “cast as widely as possible to ensure……capture as many instances of UK tax loss that involve offshore interests as possible….within a single, simplified and tougher set of sanctions”.
The current proposals seem to suggest that RTC has not achieved its objectives, yet the deadline for correcting under RTC remains a number of months away on 30 September 2018 with the time limit for HMRC to assess another two and a half years after that on 5 April 2021.
Recent offshore developments
Part 2.4 of the consultation document sets out recent developments in HMRC’s strategy to tackle offshore evasion. In conjunction with these measures, returns made to HMRC under various Automatic Exchange of Information Agreements and the new trust registration requirements across the EU as a result of adoption of the Fourth Money Laundering Directive, HMRC is now receiving more timely information and has more powers than ever before at its disposal to investigate offshore matters.
These powers and measures are likely to speed up offshore investigations making it easier and faster than ever to tackle offshore non-compliance. There is no doubt that these will take a period of time to bed down but, by the time the RTC 5 April 2021 deadline has been reached, it is clear that these will be established practice.
In addition, RTC and the incumbent failure to correct penalties that flow therefrom should “flush out” many offshore disclosures, including non-deliberate. As a result, we would suggest that HMRC delay the introduction of extended time limits until at least April 2021 when it should only then assess if there is a solid and clear case for extending the current time limits.
Commencement rules
As mentioned previously, RTC already extends the time limits for non-deliberate offshore non-compliance still within time at 6 April 2017. The current proposals would extend these further and would apply to any year that is still in date for assessment when the new legislation comes into effect in April 2019.
Whilst the consultation suggests that the proposed new legislation would not apply retrospectively, this would clearly not be the case for any cases of careless behaviour in respect of the tax years 2011–12 to 2018–19 inclusive and any discovery cases in respect of 2013–14 to 2018–19 inclusive.
Despite these years all being pre April 2019, these would immediately be caught by a further time limit extension (having already been retrospectively caught under RTC) when such taxpayers might have considered their position to be certain and “final” under RTC. This is simply unfair.
We would recommend that the commencement date for any extended time limit only catches offshore non-deliberate behaviour occurring on or after April 2019.
Penalties
Part 4.10–4.11 deals briefly with penalties in the context of the proposals. According to the consultation, an increase in the tax assessment time limit will mean that more periods are also subject to penalties.
Whilst this may seem a natural consequence of extending the time limit, the stated rationale of the proposal is to allow HMRC more time to investigate and not to collect additional penalties or be unduly penal on what is non-deliberate behaviour, without intent to defraud the Exchequer.
Therefore it seems fair that penalties should only be applied to the years which would have been caught in any case under the normal rules (or under RTC) with earlier years falling out of scope for penalty consideration. To apply penalties to the additional years would further underline the retrospective nature of these proposals.
The consultation document is also silent on the calculation and level of potential penalties for the additional years and the position on repayments that might arise in these years. These points require clarification.
At a minimum, we would suggest that if penalties are to be applied to these additional years, any penalties should be lower than those that apply to the normal assessment periods for discovery and careless behaviour. The Exchequer should not find itself enriched because HMRC simply took too long to decide to enquire within the normal assessment window when it had the information at its disposal to do so.
Miscellaneous
Paragraph 4.12 refers to how these proposals will interact with Automatic Exchange of Information Agreements. According to the consultation document “The government will ensure the new legislation is proportionate and targeted to account for certain income or gains notified to HMRC under automatic Exchange of Information agreements”. Further clarification is needed on exactly what this will mean on a practical level.
The consultation document also briefly refers to the time limits for deceased persons (paragraph 3.5). The current proposals should not be used as an opportunity to extend the time limit for this category of taxpayer beyond the current maximum of six years. An extension to the time limit for deceased taxpayers could cause untold stress and financial pressures for their legatees and executors and could lead to problems with probate.
A further question in the consultation asks whether these proposals should be extended to corporation tax (“CT”). As RTC does not apply to CT, we do not believe that these extension proposals should apply to CT either.
We note that those safeguards outlined in part 3.10–3.13 of the consultation document will remain. Should HMRC proceed with the introduction of these extended time limits, consideration should be given in a later consultation to what further safeguards are appropriate in cases of extended time limits.
In particular we would suggest that the ability of a taxpayer to apply to Tribunal to close an enquiry should be available in these extended time limit cases once an enquiry has extended beyond a period of three years.
Conclusion
In the context of the above, as a minimum we believe that the following four key recommendations are critical and merit serious consideration:
- The Republic of Ireland should be excluded from the definition of “offshore”, otherwise many taxpayers in Northern Ireland will effectively be subject to a 12 year time limit for enquiry;
- HMRC should delay the introduction of extended time limits until at least April 2021 and assess the case for their introduction at that point;
- If time limits are extended, penalties should not apply to additional years or lower penalties apply to any additional years in scope; and
- The commencement date for any extension to the assessment time limits only catches offshore non-deliberate behaviour occurring on or after the commencement date.
Freedom of Information
We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website in due course and will be available to all of our members and the general public.
Finally, do not hesitate to contact Brian Keegan (brian.keegan@charteredaccountants.ie) or Leontia Doran (leontia.doran@charteredaccountants.ie) of this office should you require anything further.
Yours sincerely,
Alan Gourley
Chairman
Northern Ireland Tax Committee
Chartered Accountants Ireland
Source: Chartered Accountants Ireland. www.charteredaccountants.ie
11 https://www.gov.uk/government/publications/no-safe-havens
12 https://www.gov.uk/government/publications/tackling-offshore-tax-evasion-requirement-to-correct/tackling-offshore-tax-evasion-requirement-to-correct
13 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/547778/Tackling_offshore_tax_evasion-a_requirement_to_correct.pdf