Clampdown on tax avoidance

“We are clear. We will not stand for a minority of taxpayers continuing to seek out unacceptable ways to reduce the amount of tax they pay, and we will ensure HMRC has the tools to robustly tackle such activity.” So said David Gauke, Exchequer Secretary to the Treasury.

A clampdown on tax avoidance has been a consistent theme for this Government as HMRC seeks to show its teeth to those it considers are seeking to use schemes deemed to improperly avoid tax. Disclosure and exchange of information is a hot topic. Inter-country exchange of information is standard practice, and many high-profile celebrity cases where tax-avoidance schemes have been used have hit the mainstream press.

In the media recently, HMRC has been describing its Accelerated Payment Notices regime as a ‘game changer’, saying it has collected more than £2bn in disputed tax since the new rules were introduced in 2014 and is on course to raise its target of £5bn by 2020.

These apply where avoidance schemes are subject to the Disclosure of Tax Avoidance Schemes (Dotas) rules, which were originally introduced in 2004 for income tax, corporation tax and capital gains tax.

The Dotas regime requires specified persons to provide information to HMRC about tax schemes falling within certain descriptions. The person required to make the disclosure is normally the promoter of the scheme, such as a financial institution, bank, accountancy or law firm, and applies to UK and non-UK based promoters.

The purpose of Dotas was to provide early information about tax-avoidance schemes to HMRC, identify the users of such schemes and reduce the supply of them by altering the balance of financial advantage gained from avoidance. Dotas requires the promoter of certain types of avoidance schemes to disclose information about the scheme to HMRC within five days of making it available for use. Taxpayers who use these schemes are required to report the scheme reference number on their tax return.

There have been 93 changes to tax law as a result of information from Dotas since its introduction. In July 2015, the Government published draft changes to the hallmark legislation which potentially brought a number of insurance-based trust solutions into the regime. However, reassuringly, the latest draft regulations issued on 2 February 2016 confirm that the Government recognises the concerns over a widely drafted inheritance tax (IHT) hallmark and provides reassurance that the use of legitimate, mainstream tax-planning tools such as loan trusts and discounted gift trusts should not be caught within Dotas.

This is a sensible approach from the Government as there is a clear difference between these instruments and the avoidance schemes which are under pressure from HMRC’s efforts to strengthen the tax-avoidance disclosure regime.

The IHT hallmark will be revised and further consultation will be issued in 2016. However, there are still changes due to the Dotas legislation. The changes will apply to the Standardised Tax Products, Loss Schemes, Confidentiality and Premium Fee hallmarks and the Government is pushing ahead with the introduction of a new hallmark describing arrangements around certain financial products. The following is a summary of each of the changes to the hallmarks.

Confidentiality and Premium Fee hallmarks

These hallmarks currently apply only to schemes involving Income Tax, Capital Gains Tax and Corporation Tax and National Insurance Contributions. The changes expand these to include schemes involving IHT.

Financial Products

This is a new hallmark aimed at schemes using financial products that include terms unlikely to have been entered into were it not for the tax advantage and schemes using financial products which include contrived or abnormal steps without which the tax advantage could not be obtained.

Loss schemes

This hallmark is aimed at schemes which generate tax losses for individuals to offset against their other taxable income or gains. The changes seek to ensure that promoters cannot argue that the projection of a theoretical profit under the arrangements at some point in the distant future exempts them from disclosing the scheme

Standardised Tax Products

This hallmark is aimed at schemes which can be sold to and implemented by a wide population of clients with little variation. The changes to the rules seek to ensure that promoters cannot argue that small changes to documentation, to a sequence of transactions or the way in which a product is described make the product non-standardised and remove the requirement to disclose.

In addition, the changes remove an existing ‘grandfathering’ provision, which exempts schemes from disclosure under this hallmark if the same or a substantially similar scheme were made available by any person before the hallmark was introduced

The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations (SI2011/170) came into effect from 6 April 2011 to detect a specific type of IHT avoidance involving the use of trusts. There had been very few disclosures under this hallmark and HMRC believed the reason for this was, in part, the narrow scope of the existing hallmark, and also because promoters are relying on the fact that their schemes are ‘substantially the same’ as pre-April 2011 schemes and as such are outside the scope of Dotas.

A key element is to ensure that any new disclosure requirements applicable to IHT remain tightly targeted, describe the avoidance which HMRC is interested in, and do not catch IHT planning that involves straightforward use of reliefs and exemptions. The Government plans to redevelop the IHT hallmark for further consultation in 2016 in line with this objective.

There is clearly a link between a scheme being disclosed under Dotas and HMRC giving an accelerated payment notice. These notices can be given where there is an open enquiry or appeal in respect of the tax advantage purported to arise through implementation of a scheme disclosed under Dotas.

For lifetime IHT charges, an accelerated payment notice could be given during the scheme user’s lifetime where a chargeable event has occurred in relation to a scheme disclosed under Dotas and an IHT return has been delivered to HMRC, bringing the tax within the rules for giving an accelerated payment notice.

For IHT chargeable following death, no accelerated payment notice can be issued until after the person has died and an IHT account has been delivered.

The clarity we now have about the Dotas rules offer an opportunity for advisers to confidentially manage clients’ tax liabilities using mainstream solutions that will not be questioned in terms of their legitimacy, while alerting clients who should disclose arrangements they may already have in place.

Rachael Griffin is Head of Trusts & Technical Solutions at Old Mutual Wealth

Key points

A clampdown on tax avoidance has been a consistent theme for this Government.

The Dotas regime requires specified persons to provide information to HMRC about tax schemes falling within certain descriptions.

There have been 93 changes to tax law as a result of information from Dotas since its introduction.

What is the process for scheme disclosure?

• Under Dotas, a scheme promoter is required to disclose the main elements of the scheme to HMRC.

• Special rules apply where disclosure is not made by a promoter – in those cases a scheme user must make disclosure.

• HMRC will then issue the scheme with a Dotas number.

• A scheme user will have to notify HMRC that it is using the scheme by inserting the number in its tax return.

• HMRC will monitor the scheme’s use and if necessary legislate to terminate it.

• Financial penalties are levied on those who fail to comply with the regime.