Lords oppose extension to HMRC investigation time limits
A House of Lords committee scrutinising the Finance Bill has written to the Chancellor to recommend the removal of clauses that would extend the time limit on assessing offshore tax matters from four years to 12.
In a scathing letter from committee chair Lord Forsyth to Philip Hammond, the committee called the measure “unnecessary and undesirable” and recommended it be withdrawn from the bill, or at least replaced by something “more proportionate and targeted”.
The committee noted that there was “deep and consistent” opposition to the measure from witnesses to its inquiry, primarily because the impact would extend beyond the high net worth individuals supposedly targeted.
Giving evidence to the committee, the Low Incomes Tax Reform Group expressed concerned that many individuals affected would be elderly people on low incomes.
‘Many thousands’ could be affected
The proposed measures look to extend the time limits for making assessments involving offshore matters to 12 years. This extension is justified in the consultation document by the reasoning that offshore matters are complex and take a long time for HMRC to resolve.
However, witnesses who appeared before committee disagreed. International law firm Pinsent Masons expressed concerns that while the powers would tackle the intricacies of offshore structures, they would also apply where there was no complexity or where only a small amount of tax was at stake.
“Offshore does not equal complexity in the drafting of this measure,” stated the letter, “having a holiday home, shares in an overseas listed company, an overseas bank account or small pension would be enough to bring a taxpayer within its scope.” The letter went on to state that many thousands of taxpayers could potentially be affected.
The committee also questioned the timing of the measure, given that the common reporting standard has been adopted by over 100 countries and it should be more straightforward for HMRC to obtain information from overseas tax authorities.
Another aspect of the measures that troubled the committee was how the proposed period of 12 years was arrived at, and the letter criticised the lack of consideration given to alternative time periods.
The committee pointed out that the proposals would treble to the normal time limit for compliant taxpayers and double it for those who fail to take reasonable care. The 12-year period also removes the distinction between fully compliant and careless taxpayers, disregarding “an important design principle in the tax system; that honest taxpayers have a fundamental right to certainty and closure after a reasonable time.”
As the letter points out, under the proposed changes those with offshore tax affairs would have to wait a lengthy period for this certainty, retaining records to deal with any questions HMRC might raise. The committee felt this was “unreasonably onerous and disproportionate to the risk”.
‘Disproportionate burden’ on the taxpayer
A number of witnesses to the committee stated that the proposal had been brought about by staffing issues at HMRC. Without the proper level of appropriately trained staff needed to deal with the complexity of offshore tax cases, it has become more difficult for the tax authority to complete them in a reasonable timescale. Therefore extending the time periods made sense for HMRC.
The committee was highly critical of this alleged approach, stating that it would be wrong for the government to place “disproportionate burdens” on taxpayers and erode important taxpayer safety instead of funding HMRC sufficiently to conduct offshore investigations in a timely manner.
Lack of consultation
The letter also criticised the process by which the measure was added to the Finance Bill. Lord Forsyth pointed out that the government’s own tax consultation framework sets out five stages of the development and implementation of tax policy, and although the measures were the subject of consultation, HMRC did not consult at the first stage of policy-making: setting out objectives and identifying options.
Consultation began at the second stage and HMRC “did not give stakeholders a realistic opportunity to challenge that decision or offer alternatives.”
Sharing its interim conclusions and recommendations, the committee stated that the proposals were “unnecessary and undesirable,” and recommended they be withdrawn from the bill. Further to that, it suggested the government start a fresh dialogue with the tax profession to consider how to manage offshore tax matters more effectively.
Giving evidence to the committee, the Association for Taxation Technicians (ATT) suggested the legislation be amended to exclude from the extended time limits those taxpayers who have made all the necessary information available to HMRC at the appropriate time.
“Subsection 7 of Clause 33 contains an exclusion for situations where HMRC has received the information it needs from an overseas tax authority within the normal time limits and could make an assessment within those time limits,” stated the letter. “Inexplicably, there is no parallel provision for the situation where the information has been provided by the taxpayer”.
Commenting on its proposal Jon Stride, co-chair of ATT’s technical steering group, said: “Treating taxpayer-provided information in the same way as information received under automatic exchange would produce a win-win scenario: taxpayers would have a strong incentive to make a full and early disclosure of relevant information, and HMRC would benefit from the earlier receipt of that detailed and specific information, speeding up the assessment and collection of the tax due”.
Balance of power
The letter concluded with the assertion made by witnesses that the government’s approach was indicative of a system where the “balance of powers has started to tip in HMRC’s favour”.
As part of an ongoing inquiry into draft Finance Bill 2018, the House of Lords economic affairs sub-committee has also examined proposals which extend HMRC's powers and looked at the government’s Making Tax Digital scheme.
It will publish a report on each theme in the coming weeks.