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HMRC proposes new disclosure requirements for 'promoters' of VAT avoidance schemes


Promoters of VAT avoidance schemes should be required to provide details of those schemes to HM Revenue and Customs (HMRC) in the same way as promoters of tax avoidance schemes more generally are required to do under the existing DOTAS rules, HMRC has said.

The existing VAT disclosure regime (VADR) rules place the disclosure burden on the users of VAT avoidance schemes, in contrast to the DOTAS rules which apply to scheme promoters "for the most part", according to an HMRC consultation on its proposed reforms. Aligning the VADR and DOTAS regimes in this way "would mean that HMRC would be given earlier and more comprehensive detail about schemes as they emerge", according to HMRC.

"It would also allow the rules to be more effective because they would be written for an audience well versed in tax technical language and the concepts of avoidance," HMRC said in the consultation paper. "This is often not the case when legislation is targeted at those who use such arrangements."

"A large number of disclosures were made in the early years of the regime but, unlike DOTAS, VADR has not been significantly updated since it was introduced. The number of disclosures has declined, the regime has not kept pace with changes in the VAT avoidance landscape and it is no longer fulfilling its policy intentions. It is important that it is reviewed to make sure it operates effectively to protect the Exchequer and to discourage the avoidance of VAT," HMRC said.

HMRC is consulting on its proposals for reform of the VADR rules, as well as reform of the avoidance rules in relation to inheritance tax (IHT), until 13 July 2016. The consultation builds on proposals first published for consultation in 2014, with a view to introducing new legislation in respect of IHT avoidance "later in the year", according to the paper.

The latest consultation does not propose to merge the DOTAS and VADR regimes as was suggested in the 2014 consultation paper, but rather to "reform VADR more closely to resemble DOTAS". HMRC is also seeking views on whether, and if so how, the reformed VADR regime could be extended to cover other indirect taxes, in particular gambling duty and Insurance Premium Tax (IPT) avoidance.

Both the DOTAS and VADR regimes were introduced in 2004, with the former applicable only to those taxes administered by the then Inland Revenue. The DOTAS rules require the promoter of certain tax schemes to disclose details of the scheme to HMRC, and those using such schemes to put a DOTAS reference number issued by HMRC on their tax return. The rules apply where there are 'arrangements' that are expected to provide a tax advantage, where getting a tax advantage is expected to be one of the main benefits and the features of the scheme incorporate one of seven descriptions or 'hallmarks'.

Although the VADR rules also refer to 'hallmarks', the current VADR regime is based on a list of known schemes which require disclosure by the scheme user after implementation. HMRC has now proposed that the existing DOTAS hallmarks be implemented "as far as possible" into its revised indirect tax disclosure regime, in particular confidentiality, premium fees and standardised tax products. Additional VADR-specific hallmarks could be "designed or retained where they are needed", for example hallmarks related to offshore transactions and connected persons, according to the consultation paper.

However, the biggest change proposed by HMRC would be transferring the obligation to disclose schemes from the users of those schemes to the scheme promoters. The disclosure obligation would continue to rest with the scheme user if there was no promoter, as is the case under the existing DOTAS rules. The consultation also proposes a definition of 'scheme promoter' based on the existing DOTAS rules, which would catch those responsible for the "design" of a scheme and those who "make a scheme available for implementation by others".

Separately, the consultation paper proposes bringing more IHT-related avoidance schemes within the scope of the DOTAS rules by introducing a wider IHT-related hallmark. HMRC has revised its proposal for this hallmark after feedback to the 2014 consultation suggested that its original proposal was "too wide" and would capture "some legitimate and non-abusive use of reliefs". Its updated proposal would instead require two conditions to be met: firstly, that the main purpose or one of the main purposes of the arrangement is to enable a person to obtain a tax advantage; and secondly, that the arrangement is contrived or abnormal or involves one or more contrived or abnormal steps without which a tax advantage would not be obtained.

"The government recognises that the purpose of obtaining a tax advantage has a wide meaning in the context of IHT," HMRC said in the consultation paper. "Therefore the approach taken in the redrafted hallmark is to link the tax advantage much more clearly to arrangements which are abnormal or contrived. Consequently ordinary tax planning arrangements which result in a tax advantage yet are not contrived or abnormal are not caught by the revised hallmark."

Specifically, HMRC said that "outright gifts where the donor gives up all benefit from the asset", as well as gifts into trust that use up the donor's nil rate band and so are not subject to the usual 20% entry charge and ordinary use of reliefs, would not be caught by its revised hallmark.

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