Treasury report – CIOT warns against retrospection and lengthy look backs

“The CIOT has a longstanding view² that retrospection and lengthy look backs should be avoided wherever possible in the tax system.

“Technically, the disguised remuneration loan charge is retroactive rather than retrospective, in that it imposes a tax charge on the amount of loan outstanding at a future point. However, given that the loan balance arises from transactions entered into before the legislation was passed, and some taxpayers may have thought, justifiably or not, that some past years were closed, it has a retrospective feel. We drew attention to this in our representations when the legislation was going through Parliament³ and warned at the time of the risks associated with this.

“The extension of the look back on offshore time limits⁴ is not retrospective but does mean taxpayers with offshore income will have to be scrupulous about keeping records for long periods. Strong powers to tackle offshore tax evasion are justified, but we need to remember that this measure is about non-deliberate errors and carelessness.

“When this legislation was going through we took the view that, if the extended time limits were to be introduced, they should only be applied to offshore matters involving ‘high risk’ jurisdictions - those that have not agreed to share any tax information with HMRC. That would have been a more proportionate approach.

“These two measures have now been enacted and largely implemented, but we hope the government will listen to the concerns of CIOT, the Lords Economic Affairs Committee and others, and exercise caution in future policy-making.

“Taxpayers are entitled to be able to understand the tax impacts and risks when entering into transactions, and a reasonable expectation of how long it may take to reach certainty in relation to their tax affairs. Retrospective and retroactive legislation tackling abuses of the system must be targeted as narrowly as possible and should not look back further than is necessary.”

With the deadline for contacting HMRC just a week away the CIOT is encouraging those affected by the loan charge to contact HMRC if they have not already done so.

CIOT is also encouraging all those potentially affected to read LITRG’s series of articles about the loan charge.⁵

Notes for editors

1. Government report on time limits and the disguised remuneration loan charge available online or by emailing [email protected]

2. In November 2010 CIOT published a 10 page discussion paper on retrospective taxation. The context for this was the government’s Tax Policy Making: a new approach paper published in June 2010. The paper stated:

The fundamental principle is that taxpayers should be taxed on the wording of the legislation in place at the time of their actions. To do otherwise is to damage the fundamental principle of certainty, something that should be at a cornerstone of any tax system.

• The Government should make a clear statement of when, if at all, it sees retrospection as appropriate.
• The CIOT is not opposed to retrospective action in all circumstances but believes it is something “that should be used with extreme care and justified at length.” The Institute argued that use of retrospection by the Government should always have to be justified by the Government in Parliament.
• The Government should adopt a general principle that includes a presumption against retrospection. That said, this principle could set out certain very limited circumstances where the Government could make the argument that retrospection can be used because it is considered necessary (rather than desirable).

3. Having initially been included in the pre-election Finance Bill in 2017 the legislation introducing the loan charge was deferred when the election was called and reintroduced in the year’s second Finance Bill, in the autumn. A CIOT briefing for parliamentarians, circulated on October 13th, Our concern with Clause 34 is that because of the time lapse and HMRC’s previous inaction, which has effectively resulted in many believing that the arrangements entered into were legal and not tax avoidance, the April 2019 charge could cause manifest injustice in particular circumstances, e.g. where an individual’s circumstances have changed and they no longer have the funds to meet the tax charge.

4. These measures in sections 80 and 81 of Finance Act 2019 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).

5. LITRG has published a series of articles on its website designed to help low-paid workers affected by the Loan Charge understand what is happening and outline their options - visit www.litrg.org.uk .