Finance (No.3) Bill

Written evidence submitted by the Low Incomes Tax Reform Group (LITRG) of the Chartered Institute of Taxation (FB03)

Clauses 79 & 80: Time limits for assessments involving offshore matters: IT, CGT and IHT
Finance (No. 3) Bill 2018

1 Summary

1.1 LITRG remain deeply concerned about the impact of these changes on low income, unrepresented taxpayers. Although we agree that HMRC needs powers to administer and enforce the tax system effectively, those powers have to be proportionate and contain accessible and effective safeguards. This measure tips the balance of power too far in favour of HMRC and does not contain adequate safeguards for taxpayers.

1.2 These changes only affect those who have acted non-deliberately and they erode the distinction in the current rules between those who take reasonable care and those who are careless. They target those who are unlikely to be aware that they may have an unreported liability and we do not believe that HMRC has presented enough evidence to justify the need for this change given both its potential impact and the precedent it sets in terms of time limits for assessment by HMRC based on behaviour.

1.3 We strongly believe that the current time limits are adequate and fair. However, if the measure is introduced, then it is important that further safeguards are included in the legislation.

What is being proposed?

1.4 These measures extend the existing time limits for HMRC to raise an assessment of tax involving offshore matters to 12 years, from the existing time limits of 4 years (in the case of the taxpayer taking reasonable care) and 6 years (where the loss of tax is as a result of careless behaviour). The time limit where the loss of tax is brought about deliberately remains unchanged at 20 years. The new rules take effect from 6 April 2019, whereupon HMRC will be able to raise assessments for tax years from 2015/16 (where there is reasonable care) or as early as 2013/14 (where there is careless behaviour).

The impact of this measure on low income taxpayers

1.5 Threatening letters from HMRC cause a great deal of unnecessary distress, especially when the taxpayer is vulnerable and even if the amounts involved are trivial. Many people assume that ‘offshore’ tax matters relate only to the wealthy. However, 24% of daily enquiries to the charity Tax Help for Older People (THOP) in September 2018 were related to the Worldwide Disclosure Facility. The average age of the callers was 76 and they had small amounts of foreign bank interests and/or pensions.

1.6 In our experience and from insight garnered from THOP, the vast majority of taxpayers who have undisclosed liabilities related to offshore investments will want to be compliant upon simply being made aware of the error; the threat of penalties or criminal prosecution is unnecessary. In most of the cases seen by THOP, the person thought that as tax had been deducted at source in the other country, there was no need to do anything further. They were not trying to avoid tax. They are not aware of the reliefs or exemptions which may reduce or extinguish their UK liability (such as foreign tax credit relief, relief under a double tax treaty or the remittance basis of taxation) and they are fearful of the consequences of being on the wrong side of the law, often for the first time in their life. It is not uncommon for taxpayers to be fearful that they will lose their home.

1.7 Migrants, whose first language is unlikely to be English and who may therefore struggle to navigate the complex rules on the taxation of offshore income and gains, are another group likely to be affected because they are more likely to have offshore investments prior to their arrival in the UK.

1.8 The measure adds complexity to the question of taxpayer certainty on when a tax year is ‘closed’ and impacts on a taxpayer’s record-keeping obligations – effectively requiring people to keep records for 12 years just in case they need to make a disclosure to HMRC. This is well beyond the current statutory time limit for keeping records.

1.9 In addition, the proposals erode a general feature of the current law that the circumstances leading to the error determine the length of time which HMRC have in order to raise a discovery assessment. The incentive to take reasonable care is therefore reduced under the proposals, because an individual will have the same time limit applicable when they make a non-deliberate error, whether or not that error is careless. This is a worrying development and we do not believe the Government has presented sufficient justification for doing so.

2 Recommended amendments to the legislation

Addition of a de minimis limit

2.1 In order to reduce the impact of the measure, the Government should introduce a de minimis threshold for the extended time limits to apply. For example, the approach taken by HMRC in assessing trivial amounts under the Worldwide Disclosure Facility (WDF), e.g. where the net amount due after applicable reliefs is no more than £50, may be suitable.

Restricting HMRC’s power to make an assessment

2.2 We also recommend the deletion of sub-paragraph 7(b) of the new section 36A of TMA 1970:

‘(7) But an assessment may not be made under subsection (2) if -
(a) before the time limit that would otherwise apply for making the assessment, HMRC received relevant overseas information on the basis of which HMRC could reasonably have been expected to become aware of the lost tax, and
(b) it was reasonable to expect the assessment to be made before that time limit.’

2.3 The reason for this additional sub-paragraph and condition is not clear to us. There does not appear to be anything which prevents HMRC from relying on sub-paragraph 7(b) to claim that, for example, owing to internal resource constraints they were unable to make the assessment within the normal time limits, which is the argument being used for the introduction of ETL in the first place. This could render the safeguard provided in sub-paragraph (7)(a) ineffective.

2.4 If sub-paragraph 7(b) is to be retained, we recommend that what is ‘reasonable’ be defined clearly. For example, we consider that it is reasonable for HMRC to make any assessment within 30 days of receiving the relevant information and no later, rather than effectively a variable time period depending potentially on the size and complexity of the data set received from overseas.

Removal of retrospective impact of the measure

2.5 Finally, we fail to see how the Government can claim that the rules do not have retrospective impact where sub-paragraph (5) of the Clause makes it clear that the amendments apply to 2015/16 and subsequent years (or 2013/14 in the case where the loss of tax has been brought about carelessly). The original consultation stated, in paragraph 4.13, that ‘the new legislation will not apply retrospectively’, so to effect the legislation as intended sub-paragraph (5) should be amended such that the rules apply for tax years 2019/20 onwards only.

2.6 In addition to the above suggestions, we trust the HMRC will consider carefully the language used in taxpayer communications so as to minimise distress caused to the taxpayer. At a minimum, HMRC should provide taxpayers with guidance on any reliefs which may be applicable to offset any potential liability and avoid at all costs language which is not appropriate for a taxpayer who conducts their affairs in good faith.

3 About Us

3.1 LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998, LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes. Everything we do is aimed at improving the tax and benefits experience of low-income workers, pensioners, migrants, students, disabled people and carers.

3.2 LITRG works extensively with HM Revenue & Customs (HMRC) and other government departments, commenting on proposals and putting forward our own ideas for improving the system. Too often the tax and related welfare laws and administrative systems are not designed with the low-income user in mind and this often makes life difficult for those we try to help.

3.2.1 The CIOT is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.

6 December 2018


Prepared 6th December 2018