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Dotas position

HMRC and the Treasury aim to fill ’the information gap’ by extending Dotas to trust-based IHT avoidance schemes

Last week, I looked in some detail at the proposed clampdown on tax avoidance by the Coalition. Inextricably linked to this initiative to raise an additional £7bn is the Disclosure of Tax Avoidance Schemes provisions and the recent proposal to extend these to trust-based inherit-ance tax avoidance schemes.

Recent (potentially sensationalist) press seems to have taken the view that the new initiative, coupled with the extension to Dotas, will mean that even relatively “tried and tested” arrangements could come under the microscope.

Of course, in the current volatile environment in which there is strong official pressure to gather in “as much as humanly possible from as many sources as possible”, little can be ruled out. And it is definitely a moving feast. Future developments in the economy, tax revenues, spend-ing cuts and consequent debt reduction will all play key roles in shaping the official attitude to avoidance. It’s safe to say now, though, that the prevailing official mood is not benign.

Despite this, though, it would seem that, in relation to the proposed extension of the Dotas provisions to trust-based IHT avoidance schemes, there is some comfort at hand – at consultation stage at least. A key driver behind Dotas is HMRC/Treasury concern that they are unaware of the full extent of IHT mitigation and avoidance that is going on in connection with trust-based schemes. In their words, there is an “information gap”. The objective, as is the case for the whole of Dotas, is for HMRC to be in a position to identify schemes and users at an early stage.

With this in mind, the referred to “comfort” at consultation stage comes in two parts:

1: Confirmation that it is not intended to apply Dotas to transfers into trust where business property relief, agricultural property relief, conditional exemption or exemption on a transfer into a heritage maintenance fund is available to remove or reduce the charge to tax.

2: Greater comfort comes from HMRC reassurance that they want to learn about schemes that are “new and innovative” not schemes of which they are already aware.

In order to restrict disclosures to “new and innovative” schemes, the draft amending regulations contain a “grandfathering” rule that would exempt from disclosure “any scheme of the same or substantially the same description as the scheme that was first made available for implementation before a given date (which has yet to be determined)”.

The apparent lack of need to disclose “existing” schemes will cause a collective sigh of relief from providers and advisers. The interesting part for designers of new schemes will be the extent to which the description of a scheme being “substantially the same” as one HMRC knew about can be stretched.

It is worth reminding you how the Dotas regime works. It is effectively an early warning system for HMRC. Given that knowledge is power, HMRC is very keen to have “the knowledge” of appropriate schemes so as to “have the power” to attack them.

The so-called “main regime” was initially applied to income tax, corporation tax and capital gains tax. It was extended to cover SDLT in 2005 and NICs in 2007.

A tax arrangement must be disclosed when:

  • It will, or might be expected to, enable any person to obtain a tax advantage.
  • That tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement.
  • It is a tax arrangement that falls within any description (“hallmarks”) prescribed in the relevant regulations. In most situations where a disclosure is required, it must be made by the scheme “promoter” within five days of it being made available.

However, the scheme user may need to make the disclosure where:

  • The promoter is based outside the UK
  • The promoter is a lawyer and legal privilege applies
  • There is no promoter

The hallmarks are:

  • Wishing to keep the arrangement confidential from a competitor
  • Wishing to keep the arrangement confidential from HM Revenue & Customs
  • Arrangements for which a premium fee could reasonably be obtained
  • Arrangements that include off market terms
  • Arrangements that are standardised tax products
  • Arrangements that are loss schemes
  • Arrangements that are certain leasing arrangements
  • Arrangements for certain pension benefits

Upon disclosure, HMRC issues the promoter with an eight-digit scheme reference number for the disclosed scheme. By law, the promoter must provide this number to each client that uses the scheme, who in turn must include the number on his or her tax return or form AAG4.

A person who designs and implements their own scheme must disclose it within 30 days of it being implemented.

It’s important to ensure that clients recognise that having a scheme reference number does not mean that the scheme has some kind of “approval or clearance”. There has been some evidence that this is sometimes the perception – and so is viewed (and possibly even sold) as a “positive”.

In closing, it is thought that the latest well publicised “clampdown” on avoidance will have the effect of at least dampening the appetite for more “innovative” tax planning strategies.

This should be taken as a strong “positive” by financial advisers looking to promote less “offensive” but nevertheless extremely effective planning centred on “officially acceptable” financial services products.

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