Tax avoidance scheme disclosure rules to be broadened so that accelerated payment rules apply to more schemes

The proposals include removing the 'grandfathering' rule, which means some established planning does not need to be disclosed, widening the test for mass marketed schemes, introducing a new financial product 'hallmark', extending the regime to more inheritance tax avoidance and tightening the penalties for scheme users. At the same time the government is considering aligning the VAT disclosure regime more closely with the direct tax regime.

The DOTAS rules require the promoter of certain tax schemes to disclose details of the scheme to HMRC and for 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 scheme falls within one of a number of descriptions (called 'hallmarks'). There are 7 hallmarks aimed at new and innovative schemes, marketed schemes and targeting specific schemes.

Rules which came into force last month give HMRC the power to issue accelerated payment notices (APNs) to users of DOTAS schemes requiring them to pay the disputed tax within 90 days, with the tax being refunded if they are ultimately successful in their dispute. The provisions are controversial because they apply to schemes which were disclosed under DOTAS before the APN rules became law last month. HMRC has published a list of around 1200 past DOTAS schemes where it will be issuing APNs.

One of the hallmarks, designed for mass marketed schemes is for 'standardised tax products'. The government proposes several measures to "refocus" this hallmark. Exchequer secretary David Gauke said "In order to support the new Accelerated Payments measure consistently, it is important that DOTAS detects avoidance that is being designed or marketed now and that promoters cannot rely on features of the regime originally intended to target what was new or novel to get round disclosing what are really new schemes or old schemes that they continue to market that may not have been disclosed previously."

The government therefore proposes to remove the 'grandfathering' rule which means that schemes which are the same, or substantially the same, as arrangements made available before 1st August 2006, do not currently need to be disclosed. This would affect schemes which are promoted after the proposed DOTAS changes become law.

The proposals also include widening the 'hallmark' for mass marketed schemes. The consultation document said that HMRC has learned that some promoters intend arguing that nothing they offer will in future fall under this hallmark because they intend to restructure their operating model so that each client selects from a menu of options to achieve what they contend will be bespoke offerings rather than 'off-the-shelf' products, "even though an informed observer would be likely to conclude that most clients end up with very similar solutions".

To clamp down on avoidance schemes involving loans, derivatives and other financial products, the government has published a draft new 'financial products' hallmark. The draft hallmark proposes that where arrangements include at least one of a list of financial products, the arrangements must be disclosed where the main benefit, or one of the main benefits, of including the financial product is to give rise to a tax advantage and, either the financial product contains at least one term which is unlikely to have been entered into by the persons concerned were it not for the tax advantage, or, the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained. The financial products listed include loans, shares and derivative contracts.

If the proposals go ahead, Inheritance tax (IHT) schemes will be brought within the DOTAS regime. The rules currently only apply to a specific type of IHT avoidance involving the use of trusts and do not apply more widely to inheritance tax schemes. However, the government said that a key element of any change would be 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 the straightforward use of reliefs and exemptions".

According to the consultation document, HMRC has received information which suggests that "some promoters may seek to frustrate the introduction of Accelerated Payments by ceasing to disclose schemes so as to delay, or prevent, HMRC issuing Accelerated Payment notices to their clients". It said that some offshore promoters have suggested they will no longer comply with DOTAS and it is concerned that some UK resident promoters might seek to move their business out of the United Kingdom to avoid the rules.

The government therefore proposes to introduce a special rule to ensure that if an offshore promoter does not disclose a scheme, the requirement to disclose attaches to any person resident in the United Kingdom who is working with the offshore promoter. This would include a business partner.

The consultation document also contains proposals to increase the penalties for scheme users who do not notify a DOTAS scheme reference number in the correct box on the tax return and to require employers who use a scheme intended to provide a tax or national insurance advantage to employees, to pass the scheme reference number to employees to go on their tax returns, as well as that of the employer.

There is currently a separate disclosure regime for VAT schemes (VADR). This requires disclosure by the scheme user after implementation rather than by a promoter prior to implementation, and it includes a list of known schemes which require disclosure rather than relying solely on hallmarks. HMRC said that the number of new disclosures under VADR "has reduced dramatically to only a handful each year". It said that "it is unclear whether this reflects a genuine reduction in the incidence of VAT avoidance, a lack of compliance as a result of the obligations being placed onto the user, not a promoter, or whether the targeting of the regime has not kept pace with developments in the VAT avoidance landscape."

It asks for views on proposals to either update or refine the types of scheme requiring disclosure under VADR while retaining its current structure or re-designing the regime to operate on a similar basis to DOTAS by requiring disclosure by the scheme promoter. This could be achieved by merging VADR with DOTAS or keeping the two regimes separate.

The deadline for responses to the consultation is 23 October.