Should HMRC have more time to investigate offshore tax?

A recent proposal to amend HMRC rules for offshore is about to make tax investigations even more onerous, writes Colin Senez

UK tax is complicated and convoluted and in certain circumstances can be tortuous. If you then add offshore taxation to the equation then the position can be even more complex. It follows therefore that compliance with UK tax rules both in respect of your domestic matters and your offshore matters can be a seriously challenging enterprise which has even the most experienced advisers furrowing their brows and poring over reams of tax legislation to ensure that their clients are fully UK tax compliant.

But, and as we all know, mistakes happen and the current legislation allows a 4, 6 and 20 window for HMRC to reopen tax returns. Currently, the base rule for income tax, capital gains tax and inheritance tax is that HMRC have 4 years to query errors or failures which have resulted in a loss of tax owed to them.

If it considers an error or failure to be careless then they have 6 years to revert, and in the event that they consider an error or failure to be deliberate then HMRC has 20 years to query an error or failure in a taxpayer’s tax return. The time-limits naturally follow the motive (or lack thereof) of the taxpayer.

There are, mercifully for the taxpayer, some safeguards in place. Taxpayers have a right of appeal against an assessment by HMRC and in respect of certain tax returns; an application may be made to the Tax Chamber to require HMRC to issue a closure notice, for example where a taxpayer is concerned that an investigation is taking too long.

There has recently been a considerable and commendable push by the UK government to put a stopper on tax evasion. This was clearly evidenced when in the last budget the UK government announced it would be introducing legislation to enable HMRC to look at 12 years worth of back taxes in cases involving an offshore element with effect from April 2019, rather than five, or six years when careless. The 20 year limit it is proposed should remain unchanged for deliberate errors or failures.

The safeguards which existed under the 4, 6 and 20 rule continue to apply even under the new proposed rule.

The UK government has also suggested proportionate and targeted applications of the new time limits where information has been supplied to HMRC under the various international automatic information exchange agreements, such as the Common Reporting Standard.

So what are the reasons for giving HMRC longer to consider a taxpayer’s affairs when offshore elements are involved? Well, ‘because establishing the facts can take longer’ as they put in their consultation paper. There is no denying that this is sometimes true – matters involving an offshore element can be extremely complex and the taxpayers (and their advisors) will attest to this. But with the advances in technology available which allow for the analysis of large amounts of the data brought about by international exchange agreements, does HMRC need a further 8 or 6 years to make an enquiry on a return?

There is no criticism from the author on the UK government’s drive to fight tax evaders and recoup the tax that should rightfully be paid, but there it becomes complicated when the rules are being potentially changed in such a manner to focus on those taxpayers where reasonable care has been taken, rather than simply enforcing the considerable powers and information now available to them to catch those who fall squarely within the 20 year limit.