Tax avoidance consultation launched (detailed update)

Practical Law UK Legal Update 0-520-5954 (Approx. 8 pages)

Tax avoidance consultation launched (detailed update)

by PLC Tax

Background

At part of the 2011 Budget, the government announced a new HMRC anti-avoidance strategy, which involves four legislative strands:

Introducing regulations to reduce the cash flow benefit of using tax avoidance schemes. (Respondents to the government's proposal to remove the cash flow advantage of using certain tax avoidance schemes by imposing an additional tax charge on them questioned the proportionality and effectiveness of the measure proposed. Accordingly, HMRC confirmed that it would not implement the proposal in the Finance Bill 2012, but would continue to discuss the issues with interested parties.)
Embarking on a rolling programme of review of high risk areas. (For the first two of these, see Legal updates, Consultation on preventing avoidance involving unauthorised unit trusts and Consultation on combating sideways loss reliefs avoidance. Further consultations on these areas were announced as part of the 2012 Budget and we are tracking the progress of the proposals in Tax legislation tracker, Combating sideways loss reliefs avoidance and Tax legislation tracker, Preventing avoidance involving unauthorised unit trusts.)
Considering the need for a general anti-avoidance rule. (The government has broadly accepted the recommendation of the GAAR study group for a targeted anti-abuse rule: see Legal update, Aaronson recommends targeted GAAR (detailed update). The government is consulting on the draft legislation to implement it: see Legal update, General anti-abuse rule (GAAR): HMRC consultation. We are tracking the progress of the proposals in Tax legislation tracker, General anti-avoidance rule.)
Implementing targeted tax measures to address specific schemes. (In the 2012 Budget, the Chancellor announced or confirmed a number of tax measures to address specific schemes or avoidance generally: see Legal update, 2012 Budget: key business tax announcements: Anti-avoidance and Property.)

As the next step in its anti-avoidance strategy, the government wants to increase and improve the information available to taxpayers about tax avoidance arrangements.

Disclosure of tax avoidance schemes (DOTAS)

The disclosure of tax avoidance schemes (DOTAS) regime is designed to provide HMRC with information about potential tax avoidance arrangements at an earlier stage than otherwise would be the case, and to enable swifter and more effective investigation and, where appropriate, counteraction. The disclosure legislation applies to "notifiable arrangements" (and "notifiable proposals") that have as a main expected benefit the obtaining of a UK tax advantage and that fall within any one of certain widely drawn "hallmarks". For a full discussion of the DOTAS rules, see Practice note, Disclosure of tax avoidance schemes under DOTAS: direct tax.

As part of the March 2010 Budget, the previous government confirmed that it intended to extend the DOTAS hallmarks to employment income schemes, and so-called "income to capital" schemes and that HMRC would consult on draft legislation that would describe the types of schemes that must be disclosed (see Legal update, March 2010 Budget: key business tax announcements: Disclosure of tax avoidance schemes (DOTAS): extension of scheme). As part of the June 2010 Budget, the coalition government confirmed that substantive changes to the descriptions of schemes that must be disclosed would be developed in 2011-12. This was again confirmed in the 2011 Budget. See Legal update, 2011 Budget: key business tax announcements: DOTAS regime: further changes to hallmarks for further detail.

In June 2011, HMRC launched an informal consultation on new and revised hallmarks in the following areas:

Employment income.
Offshore tax planning.
Losses (individuals).

The government also proposed to repeal hallmark 8 (pensions and the special annual allowance charge), which became redundant when the special annual allowance charge ceased to apply. For further details about the informal consultation, see Legal update, Informal HMRC consultation on DOTAS hallmarks.

As part of the 2012 Budget the government confirmed that it would consult formally on extending the hallmarks. For further detail, see Legal update, 2012 Budget: key business tax announcements: Disclosure of tax avoidance schemes (DOTAS): new hallmarks.

The hallmarks

There current hallmarks are:

Hallmark 1: Confidentiality from other promoters (applies from 1 August 2006).
This hallmark applies if any element of arrangements (including the way in which the arrangements are structured) gives rise to the expected tax advantage and either:
- it might reasonably be expected that a promoter would wish to keep the way in which that element secures a tax advantage confidential from any other promoter at any time following the "material date" (test 1); or
- the promoter would, but for the disclosure rules, wish to keep the way in which that element secures the tax advantage confidential from HMRC at any time following the "material date", and a reason for doing so is to facilitate repeated or continued use of the same element or substantially the same element in the future (test 2). This test, therefore, depends on the subjective state of mind of the promoter rather than objective characteristics of the arrangements themselves.
Hallmark 2: Confidentiality from HMRC (in-house schemes) (applies from 1 August 2006).
This hallmark applies if all of the following apply:
- Any element of the arrangements (including the way in which the arrangements are structured) gives rise to the expected tax advantage.
- The user wishes to keep the way in which that element is expected to secure a tax advantage confidential from HMRC at any time following the material date.
- A reason for the user wishing to keep that element confidential from HMRC is to facilitate repeated or continued use of that element in the future.
Hallmark 4: Premium fee (applies from 1 August 2006).
Hallmark 5: Standardised tax products (applies from 1 August 2006).
Hallmark 6: Loss schemes for individuals (applies from 1 August 2006).
This hallmark applies where both of the following apply:
- The promoter expects more than one individual to implement the same (or substantially the same) arrangements.
- The arrangements are such that an informed observer (having studied them) could reasonably conclude that the main expected benefit of those arrangements is the provision of losses to some or all of the individuals participating and those individuals would be expected to use those losses to reduce their CGT or income tax liability.
Hallmark 7: Certain leasing arrangements (applies from 1 August 2006).
Hallmark 8: Certain pensions anti-avoidance arrangements (applies from 1 September 2009).

For a detailed explanation of the hallmarks, see Practice note, Disclosure of tax avoidance schemes under DOTAS: direct tax, Hallmarks.

Consultation

HMRC published its consultation paper on 23 July 2012. The paper outlines proposals for improving the provision of information to taxpayers and for extending the DOTAS rules. Comments are invited by 15 October 2012.

Improving information to taxpayers

The proposals are at a very early stage but include:

Publishing information about schemes that are proved not to work.
Publishing details about the promoters of schemes.
Communicating directly with taxpayers.
Sharing non-confidential information with professional bodies.
Providing a statutory defence for an action for breach of confidentiality for persons who share information about tax avoidance schemes with HMRC.

Extending DOTAS rules

The consultation paper records that the government has identified certain objectives that it wishes the DOTAS rules to achieve. Proposals for achieving those objectives are, therefore, set out and views are sought on their feasibility and on alternative proposals. If the proposals are feasible, they will be developed into detailed proposals.

The government's objectives and the related proposals are:

To ensure that HMRC is supplied with, or can call for, information and documents that both:
- enable HMRC to understand fully how the scheme works (on a detailed, rather than high-level, basis); and
- identify all of the parties in the marketing and implementation of the scheme, including the end-users.
The proposals are for more detailed reporting obligations on promoters (including the provision of additional client lists), to provide HMRC with greater information gathering powers or a mixture of the two.
To ensure that promoters comply with their disclosure obligations and do so at the right time.
HMRC is keen to avoid protracted arguments about whether a promoter has a reasonable excuse for non-disclosure and proposes three measures to achieve the objective:
- raising the reasonable excuse hurdle, for example, so that applies only if the promoter relies on a reasonable excuse of both fact and law;
- if the promoter is subject to a penalty for failing to comply with the DOTAS rules, requiring the promoter to provide information on all of the promoter's marketed schemes (and not just the scheme that was the subject of the penalty); and
- imposing personal obligations on promoters (rather than obligations on the promoter's firm as a whole).

Enhancing DOTAS hallmarks

The consultation on the proposed changes to the DOTAS hallmarks are at stage 2 of the consultation process. This means that views are not being sought on alternative proposals but on the detailed policy design and framework for implementation.

Confidentiality from other promoters (hallmark 1). The government proposes to amend the second test of hallmark 1 (see Background, DOTAS rules, The hallmarks) to ensure that promoters understand that the test is met if HMRC would be likely to take action to counter the scheme (legislatively or operationally) if it knew about it. HMRC considers that this could be achieved by amending the second test of hallmark 1 so that it is an objective, rather than subjective, test (in other words, the test would bite if any promoter would wish to keep any element of the scheme confidential from HMRC to facilitate repeated or continued use). Further, it is proposed that schemes will automatically fall within the second test of hallmark 1 if they contain certain features such as:

Specific conditions of confidentiality.
A fighting fund to fund litigation.
Success fees (if HMRC challenges the scheme but is not successful).
An indemnity in favour of the client if the scheme fails to achieve the tax advantage.

Confidentiality from HMRC (in-house schemes) (hallmark 2). The proposed amendment to hallmark 2 (Background, DOTAS rules, The hallmarks) is to make the test objective so that it applies if it might reasonably be expected that any promoter would wish to keep any element of the scheme confidential from HMRC to facilitate repeated or continued use. However, the objective test would apply only if the person developing the scheme were a "relevant business", which is, broadly, a bank or other business that provides tax services to entities outside the business.

Loss schemes for individuals (hallmark 6). The proposal is to extend hallmark 6 so that it applies to corporate entities and to change the main, expected benefit test (see Background, DOTAS rules, The hallmarks) from a sole to a main benefit test if the scheme is an unregulated collective investment scheme. While HMRC accepts the concerns that a corporate loss hallmark might catch benign tax planning or arrangements entered into for commercial reasons, it is aware of arrangements that it considers to go beyond benign tax planning, for example, the creation of consortiums for the sole purpose of sharing losses. Extending the hallmark to corporates will mean that corporation tax will be included within the list of taxes and it is proposed that CT losses will include trading losses, unrelieved non-trading loan relationship deficits and unused capital allowances.

New hallmarks. Two new hallmarks are proposed. The first of these is for schemes that attempt to circumvent the disguised remuneration rules in Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (as to which, see Practice note, Disguised remuneration: an overview). The proposal is for the hallmark to be restricted to schemes that seek to circumvent Part 7A by ensuring that the intermediary does not take a "relevant step", or where the arrangements trigger a nil charge, or modest charge in comparison with the value actually received, under Part 7A. An arrangement that does not fall within Part 7A because of the permitted exclusions will not fall within the hallmark unless the arrangement is contrived to fall within an exclusion, or the exclusion is conditional and the arrangements would be expected to result in a fallback charge. The second new hallmark is for schemes involving financial products (which would include loans, shares, derivative contracts and so on) where the expected tax advantage would not arise but for the financial product. HMRC seeks views on appropriate filters to restrict the application of the hallmark so that it does not catch benign tax planning.

Pensions hallmark. As previously proposed, the pensions hallmark will be removed but HMRC will keep the need for a pensions hallmark under review.

Offshore hallmark. Previous consultations raised the possibility of an offshore hallmark. This is not currently being considered but is being kept under review.

Comment

It is clear from the consultation paper that the government is seeking to capitalise on the current, anti-tax avoidance environment to make some radical proposals. The proposals for increasing information to taxpayers is light (in part to be expected at the first stage of consultation) and, therefore, give rise to many questions. In particular:

At what point are schemes proved not to work? How will differences between schemes be dealt with?
What details of promoters will be published (will it be the firm or the individual, and what will happen if the relevant individual has ceased to work at the relevant firm)?

A key concern for many tax practitioners will be the extension of the losses hallmark to corporate entities. It will be vital to provide to HMRC as part of the consultation examples of benign tax planning that will potentially fall within the extended hallmark to persuade HMRC to apply appropriate filters to reduce the scope of the hallmark.

Source

HMRC: Lifting the lid on tax avoidance schemes.

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Tax avoidance consultation launched (detailed update) | Practical Law