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15 Feb 2019

Could you fall foul of HMRC's new tax investigation deadlines?

Those with overseas income may be under threat of investigation for 12 years

From April onwards, HMRC will have 12 years to investigate taxpayers with foreign income it suspects of making errors - tripling the current time limit.

The extended timeframe was introduced in the the government's Finance Bill 2018-19, which received Royal Assent earlier this week. Currently, HMRC must launch an investigation within four years where it suspects errors on tax returns.

HMRC already has a 20-year time limit to investigate taxpayers who are suspected of deliberately evading tax, which won't change.

Which? explains what counts as offshore income, and who is likely to affected by this change.

What tax errors are HMRC targeting?

Under the new rules, outlined in Chancellor Philip Hammond's Finance Bill 2018-19, HMRC will have up to12 years after the end of the tax year to look into any 'loss of tax that involves an offshore matter or offshore transfer'.

So, if HMRC suspects that you didn't pay enough tax from income coming from abroad in the 2017-18 tax year, it would have until 6 April 2030 to launch an investigation.

In cases where HMRC suspects you've deliberately avoided tax, it can investigate for up to 20 years. So the new time limits are primarily to allow HMRC to look into errors that might cause you to underpay.

An HMRC spokesperson said the measures will stop the risk of 'some very complex offshore cases falling outside of the time limits for investigation and assessment'.

However, several accounting bodies and tax groups have spoken out against the rule change. And in a report scrutinising the change, the House of Lords Economic Affairs Committee went so far as to call the extension 'unreasonably onerous and disproportionate to the risk'.

The report also said the changes would place 'disproportionate burdens on taxpayers', as it will require them to store paperwork for more than a decade.

Who will be affected?

The extension is limited to those who receive income from abroad, but it's not just globe-trotting high-flyers that could be targeted.

Several accounting and taxation bodies told The Times that the people likely to be caught out include:

  • elderly people with small incomes from overseas pensions
  • anyone receiving interest from a foreign bank account
  • people who own holiday or retirement properties abroad.

That said, HMRC says those on lower incomes are unlikely to be affected, with the personal allowance increasing to £12,500 on 6 April, and the personal savings allowance (which allows basic-rate taxpayers to earn up to £1,000 in savings interest every tax year without paying any tax),

What counts as offshore income?

According to theFinance Bill, income tax or capital gains that 'involve an offshore matter' could include:

  • income from a source outside of the UK
  • assets situated or held outside of the UK
  • activities carried out wholly or mainly outside of the UK
  • anything that has an effect of being income, assets or activities as described here.

This would include interest earned from an offshore savings account and rent received from an overseas property.

Meanwhile, lost income tax or CGT that 'involves an offshore transfer' include assets:

  • received in a territory outside the UK
  • transferred outside the UK before the individual's tax return was submitted.

In either case, however, you can't be investigated after the usual four-year limit if HMRC could reasonably have been expected to launch its investigation in that time and failed to do so.

What happens if HMRC finds a tax error?

We recently found that one in six people believe they've overpaid their tax bill after making mistakes in their tax return - but that's not the worst that can happen.

If HMRC finds you've paid too little tax as a result of making an error, it has the power to fine you.

The fines vary depending on what the mistake is, and whether HMRC believes you were careless when filing your tax return, or believes you acted deliberately.

HMRC may charge you a percentage of your tax bill on top of what you're already required to pay:

  • if you've been careless: a penalty of 0-30% of extra tax owing
  • if you've deliberately underestimated your tax: a penalty of 20-70% of extra tax owing
  • if you've deliberately underestimated your tax and attempted to conceal it: a penalty of 30-100% of extra tax owing.

If you've made an error but shown 'reasonable care', you won't have to pay a penalty - but you will need to pay the difference if you haven't paid enough tax.

If you receive a penalty notice from HMRC that you feel is unfair, you can challenge it by making an appeal in writing within 30 days of receiving the notice.

Find out more:late tax returns and penalties for mistakes