This is a freeview 'At a glance' guide to time limits for assessment for offshore matters.

What are the time limits for assessment for offshore matters? When do the Discovery rules apply?

At a glance

The discovery time limits for assessment of offshore Income Tax (IT), Capital Gains Tax (CGT) and Inheritance Tax (IHT) are extended from four or six years to twelve years from 6 April 2019.

The new measures extend the period in which HMRC can raise Discovery Assessments for non-deliberate errors involving offshore tax.

This policy decision is made on the basis that it takes longer to establish the facts in cases involving offshore assets and structures as it can be more difficult to access the information needed to understand the transactions.

The changes take effect from April 2019. 

  • They cover IT including PAYE, CGT and IHT but not Corporation Tax (CT) or indirect taxes.
  • They extend the time limits for raising assessments involving offshore tax to twelve years except where a longer period of 20 years for deliberate behaviour applies.
  • They apply to the four years still in date at 6 April 2019 (2015-16 or 1 April 2015 for IHT) together with the two earlier years in cases where there has been careless behaviour (2013-14 or 1 April 2013 for IHT).
  • The definitions of offshore are aligned with those in the Requirement to correct (RTC) rules.
  • The 12 year time limit will not apply where HMRC has received information from another tax authority under automatic exchange of information including under the Common Reporting Standard (CRS)  in circumstances where they could reasonably have been expected to identify the lost tax and raise the assessment within the normal time limits.

HMRC have in their guidance provided some examples of when and offshore matter could result in a PAYE liability for an employer:

Example 1

Offshore matters

Michael has been working in the UK on assignment to a UK employer since 6 April 2011. His salary is paid by an employer, resident in Canada, into the employee’s UK bank account; and pension contributions are paid by the UK employer to an overseas pension scheme (not tax exempt). Michael earns the right to exercise share options in the Canadian entity on 30 December 2014 and leaves the UK on 6 April 2015 becoming resident in Canada. Michael exercises his share options on 30 September 2015 when he is resident in Canada.

The following amounts of income are considered to involve an offshore matter:

  1. Salary paid by Canadian employer to UK bank account — income or assets received in a territory outside the UK.
  2. Pension contributions paid by UK employer to overseas pension scheme — income or assets received in a territory outside the UK.
  3. Share option exercised on 30 September 2015 — income or assets received in a territory outside the UK.

Example 2

Short business trips to UK where Treaty relief isn’t available

Sandra is resident and works in Germany for a branch of a UK company, she performs short business trips each year to the UK to carry out work duties. The German branch pays the salary into the employee’s German bank account.

This is income or assets received in a territory outside the UK. The UK taxable amounts will generally be apportioned for days spent in the UK.

Example 3

Employee going on overseas assignment for a short period

Magda is UK tax resident/domiciled and is sent on assignment by her UK employer to China on 1 January 2014. She returns to the UK on 30 September 2014. During her time in China Magda does not return to the UK or perform any duties in the UK. Due to the amount of time she spends in China, her UK employer must register her as an employee with the Chinese Tax authorities and deduct local payroll tax. The UK employer also agrees to pay any Chinese tax arising on her behalf.

Considering the Statutory Residence Test, Magda will still meet the First Automatic UK test as she spends more than 183 days in the UK in both 2013 to 2014 and 2014 to 2015 tax years. Magda therefore remains tax resident in the UK.

The overseas tax paid on Magda’s behalf is income received in a territory outside the United Kingdom. Although HMRC have deemed the UK employer to have acted carelessly we cannot apply the six-year time limit under Section 36 of the Taxes Management Act 1970 as both 2013 to 2014 and 2014 to 2015 have now gone out of time. However, the rules in Section 36A can apply and it is still in time to assess 2013 to 2014 and 2014 to 2015 under those rules instead.

This is income or assets received in a territory outside the UK.

Background to the extension of the time limits

HMRC published ‘’Extension of offshore time limits – summary of responses” alongside draft legislation which extends the time limits in which HMRC can raise assessments where there is “non-deliberate offshore non-compliance”. This follows the consultation opened in February 2018 'Extension of offshore time limits'

  • The majority of respondents were not in favour of corporation tax being included in the measure and almost all said that the measure should not apply to rules concerning Controlled Foreign Companies (CFS) or transfer pricing.
  • Some respondents thought it unreasonable to extend the time limits once under Requirement To Correct (RTC)  and again under this measure. The government response was that RTC is a short-term measure and the two measures are intended to complement each other.

The full response document can be found here. The legislation is to be found at s80 and 81 of Finance Act 2019.

Treasury Review 30 March 2019

Section 95 FA2019 confirms that:

(1) The Chancellor of the Exchequer must review the effects of the changes made by sections 80 and 81 of FA2019 to TMA 1970 and IHTA 1984, and lay a report on that review before the House of Commons not later than 30 March 2019.

(2) The review under this section must include a comparison of the time limit on proceedings for the recovery of lost tax that involves an offshore matter with other time limits on proceedings for the recovery of lost tax, including, but not limited to, those provided for by Schedules 11 and 12 to the F(No. 2)A 2017 (the Disguised remuneration loan charge).

(3) The review under this section must also consider the extent to which provisions equivalent to section 36A(7)(b) of TMA 1970 (relating to reasonable expectations) apply to the application of other time limits.

The conclusion of the review was that the new time limits are a proportionate response to the challenges of offshore tax compliance.

  • It is not retrospective legislation and does not reopen closed years. The new rules increase the number of tax years potentially subject to assessment prospectively, from the existing limits of 4 or 6 years, one year at a time, until the period that HMRC can assess reaches 12 years.
  • A 12 year period was chosen arbitrarily, it is based on compliance data and has been identified as the optimum period for providing the most benefit to the Exchequer.
  • The new time limit will not apply where HMRC receives information from another jurisdiction which is sufficient to permit them to identify the lost tax and where it is reasonable for them to be able to make an assessment before the existing time limit has expired.
  • The 12-year time limit only applies where the offshore transfer makes the undeclared tax significantly harder to identify and does not apply to assessments arising from transfer pricing adjustments.

Useful guides on this topic

Discovery assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Offshore income toolkit
This toolkit provides an outline of the tax issues for UK resident individuals with offshore income and investments.

External links

Section 95 of the Finance Act 2019: report on time limits and the charge on disguised remuneration loans

 


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