Tax Avoidance – Measures to strengthen scheme disclosure rulesFriday, December 18th, 2009
Five amendments are proposed to the existing rules for disclosing tax avoidance schemes, namely:
- A change to the trigger point for disclosure of marketed schemes to ensure early disclosure of schemes.
- An information power to require persons who introduce scheme promoters to clients to identify who the promoter is.
- Enhanced penalties for failure to comply with a disclosure obligation.
- A requirement for a promoter to provide HMRC with a periodic list of clients to whom they have issued SRNs.
- Revised and extended hallmarks, including a specific hallmark relating to schemes to avoid the payment of tax on “employment schemes”.
The regime for disclosing the existence and operation of tax avoidance scheme now has its own acronym – “Disclosure of Tax Avoidance Scheme” or DOTAS.
In a new consultation document, issued at the time of the 2009 Pre-Budget Report, HMRC seeks views on a number of proposed changes to the DOTAS regime. The disclosure rules were originally introduced by means of the Finance Act 2004 but they have been developed extensively since then and now apply to income tax and NICs, corporation tax, capital gains tax and stamp duty land tax.
In basic terms the DOTAS regime requires scheme promoters to disclose information about a tax avoidance scheme that meet certain definitions within 5 days of it being made available to clients. The definitions of schemes are called “hallmarks”. Some hallmarks are generic and target new and innovative schemes; others are more specific and target high risk areas, for example avoidance of the pension contributions anti-forestalling measures introduced in the Finance Act 2009.
On disclosure, promoters are issued with a scheme reference number (SRN) which must be passed on to clients so that they can identify themselves to HMRC. HMRC has powers to investigate non-compliance and impose penalties for failing to disclose a scheme and for failing to pass on or report an SRN.
The consultation document describes five amendments that HMRC wishes to make to the disclosure rules, in particular to prevent scheme promoters from avoiding or delaying disclosure. If scheme promoters can find ways of circumventing tax legislation, they can also find ways around the disclosure rules!
The proposed amendments are as follows:
- A change to the trigger point for disclosure of marketed schemes to ensure early disclosure of schemes. The rules currently require disclosure when a scheme is made “available for implementation” by clients. Some promoters use this rule to delay disclosure by getting a scheme ready to launch with the exception of some vital component, obtaining a list of potential clients and then implementing the scheme widely at very short notice before the Government can legislate to close down the scheme. The proposal is to require disclosure at the point where (1) the scheme is developed in sufficient detail to allow the promoter to provide prescribed information, and (2) the promoter makes the existence of the scheme known to third parties who can make potential clients aware of the scheme.
- An information power to require persons who introduce scheme promoters to clients to identify who the promoter is. Some third parties, who appear to be promoting an avoidance scheme, deny any obligation to disclose on the basis that their role is to introduce potential clients to the promoter. HMRC’s investigations into whether such refusal to disclose is valid can take months, during which time the scheme is heavily promoted without being disclosed. The proposal is to require a third-party introducer to identify the promoter, with appropriate time limits and penalties.
- Enhanced penalties for failure to comply with a disclosure obligation. In five of the six cases where HMRC has sought to impose an initial penalty on a promoter for failure to disclose, the promoter has prolonged the investigation before admitting the default, disclosed the scheme, and paid the maximum £5,000 initial penalty without a formal hearing before the Tax Tribunal. The £5,000 penalty is a minor cost when compared with the potential profits from the scheme. The proposal is to replace the maximum fixed penalty with an initial daily penalty of up to £600 per day and allow the First-tier Tribunal to take into consideration the fees received by the promoter in setting the total penalty. For example, where a promoter is identified and a penalty imposed 12 months after disclosure should have been made, the maximum aggregate daily penalty would be £219,000. After 18 months the penalty would be £317,000.
- A requirement for a promoter to provide HMRC with a periodic list of clients to whom they have issued SRNs. HMRC has a problem (1) identifying clients who fail to report an SRN, and (2) obtaining information about clients in time to properly assess the amount of tax at risk from the scheme. The proposal is to require promoters to supply HMRC with the names and addresses of clients to whom an SRN has, or should have been, issued.
- Revised and extended hallmarks. Various amendments to the existing hallmarks are proposed. Of particular interest is one that would target schemes that seek to avoid tax in relation to employment income. It contains a generic description of an employment scheme and a list of excepted arrangements.
The draft legislation for this fifth measure defines an “employment scheme” as arrangements whereby
“a tax advantage is obtained or might be expected to be obtained by virtue of the arrangements by way of a reduction in, or deferment of, liability by the employer or the employee or by any other person by reason of the employee’s employment—
- where the advantage relates to employment income, in any year of assessment; or
- in any other case, in any period of account.”
A number of exceptions are listed, mainly approved share schemes and registered pension schemes. It is notable that there is no exception provided for salary sacrifice schemes and, for example, it is clear that HMRC has treated the salary sacrifice scheme involving canteen meals as an avoidance scheme that needed to be closed down.
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