In the wake of the publication of the Finance Bill, I would like to look at the background to the new disclosure rules for tax avoidance. When new disclosure provisions for promoters of tax-avoidance schemes were announced on Budget day, tax planners had already been alerted to the possibility by rumours that gathered pace in the days before the speech. Apparently, both the US and Australian models had been considered, with what emerged being closer to the former than the more Draconian latter.
For many years, the Government has been determined to match the increase in avoidance with appropriate resistance. Famous court cases such as Ramsay and Furniss versus Dawson heralded a new era with the introduction and then limitation of the so-called substance over form doctrine, under which the courts could ignore or coalesce steps in a series of transactions that were found to have been inserted for no commercial purpose and which had the avoidance of tax as their sole or main aim.
But attacks through the courts were not enough to halt what was seen by the authorities as a burgeoning industry. As a result, a trend emerged under which legislation was regularly introduced aimed at putting a stop to tax and National Insurance avoidance schemes that were seen as offensive. In most cases, legislation was targeted at particular schemes, which caused the planners to find and then exploit other means of achieving the same end.
The history of legislation and regulation to prevent NI avoidance schemes is a good example of this approach, with a seemingly endless stream of variations on the non-cash benefit theme being introduced and then closed down by very specifically targeted legislation until more general provisions were introduced.
Many of you will remember schemes involving the remuneration of employees and directors in the form of life insurance policies, unit trusts, gilts, gold, wine, carpets and platinum sponges (presumably for those really high-flying executives who valued posh bath times – well, it beats the loofah and rubber duck, doesn't it?) The latest provisions, incorporated into part seven of this year's Finance Bill, concentrate on gathering information. The authorities clearly believe that the more information they have, the better equipped they will be to counter what they consider to be unacceptable tax planning. They clearly aim to be on the front foot in the war against avoidance.
Of late, there have been a number of examples of growing Government antagonism towards avoidance and this has no doubt been exacerbated by the need to gather much tax as possible to fund what many consider to be quite expansive Government spending.
Those in the financial services sector will be aware of the new attack on estate planning though the pre-owned assets rules imposing an income tax charge in cases where the taxpayer (or, in this case, non-taxpayer) avoided inheritance tax but continued to enjoy a benefit from the assets (tangible or intangible) given away. Legislation has also been introduced to prevent avoidance through the use of gilt strips.
It is important to realise that this new legislation does not represent a form of clearance. It is aimed at giving the Inland Revenue the means of determining whether any scheme is offensive and should be acted against. Many will be aware that legislation already contains various clearance procedures. An example is where vendors of, say, private company shares can, on providing full information, secure clearance that the transaction in securities legislation (sections 703-709 ICTA 1988) resulting in an income tax charge will not apply.
Other examples of clearance procedures exist and some of you may recall the proposal for a system of pre-transaction rulings which was not proceeded with. A system of post-transaction rulings, to be given after a transaction has occurred but before a taxpayer submits a tax return, was introduced in 1997. There are, however, particular procedures to follow in order to obtain such rulings.
This year's provisions add to the body of provisions in this field and represent a significant step in the war against avoidance. They also represent additional cost and inconvenience to promoters of schemes, with little obvious benefit.
Part seven of this year's Finance Bill moves us into a new era in regard to the promotion of avoidance schemes. The Bill puts new obligations on promoters of certain tax schemes and arrangements to give details of those schemes to the Revenue. Taxpayers will be required to provide details of schemes and arrangements where they have been bought from an offshore promoter, and that promoter has made no disclosure, or where they have entered into notifiable arrangements not involving a promoter.
The disclosure rules apply to arrangements that have the obtaining of a tax advantage as a main benefit. More detail has not been forthcoming and further detailed tests describing the schemes and arrangements within the disclosure rules will be set out in regulations.
The Revenue may allocate a reference number to schemes and arrangements and promoters will be required to notify clients of that number so they can enter it on their tax return. This will enable the Revenue to reference a particular scheme to a particular taxpayer.
The disclosure rules come into effect on August 1, 2004. Transitional provisions include a requirement, from that date, for promoters to disclose schemes or arrangements that they have promoted or sold from March 18, 2004. Taxpayers who have bought schemes from an offshore promoter, or who have entered into notifiable arrangements not involving a promoter, will be required to disclose such schemes where they have been implemented on or after April 23, 2004.