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Keeping a watch on Big Brother

I may have stumbled upon a plot and I feel it is my duty as a citizen of the financial services world to make you aware of it.

Anybody operating in the sector who even glanced at this year&#39s Budget proposals would be aware of the Treasury&#39s plans to require the registration of tax-avoidance schemes by (usually) the promotors of those schemes, however they are defined. The clear official intent is to be on the front foot with regard to having information on the schemes available in the market.

The trend of information gathering has been maintained by the FSA, which has announced that it is to launch an “alarm system” in an attempt to identify future misselling problems before they arise.

So, two important official bodies are seeking more information to enable them to police matters more effectively. The plot thickens. Have the FSA and Inland Revenue been exchanging notes? Who knows?

Regardless of whether the proposed measures are effective, they will certainly mean more administrative costs for financial services businesses, especially promotors of tax-avoidance schemes and financial products generally. In these days of ever-narrowing margins, this cannot be a good thing commercially. In the long run, of course, both initiatives may serve to improve effectiveness, reduce disputes and give greater confidence to consumers.

In the Budget, it was made clear that life is set to get much tougher for tax-avoidance schemes and there are to be a number of measures aimed at specific schemes. As I said above, the proposed disclosure rules are designed to provide the Revenue with information about potential tax-avoidance schemes and arrangements much earlier than at present to enable swifter and more effective investigation and, where appropriate, counteraction. It is expected that the date when the rules will come into effect will be included in the Finance Bill, which will have been published by the time you read this.

The new rules will require promoters to provide details of certain defined schemes and arrangements to the Revenue shortly after the scheme is sold. Promoters will be required to provide a description of the scheme, including details of the types of transactions planned, the tax consequences of the arrangements and statutory provisions on which they rely. The Revenue will register these schemes and allocate a reference number to each. This will be given to each buyer of the scheme.

In most cases, taxpayers using schemes and arrangements within the new rules will be required only to include the registration number on their tax return. But where they have bought a scheme from an offshore promoter which affects their UK tax liability, or where the scheme has been devised in house rather than bought from a promoter, taxpayers themselves will be required to provide details of the scheme to the Revenue. They will be required to disclose these details shortly after the scheme is bought or first implemented.

The new rules will require disclosure of schemes and arrangements where a main benefit is the obtaining of a tax advantage and where they meet further conditions. These conditions are designed to target schemes and arrangements based on financial products and employment-based products. Details of these conditions will be published in the Finance Bill. The tax treatment of particular transactions will not be affected by the new rules.

There will be penalties for failing to comply with the requirements. Details will again be published in the Finance Bill.

It remains to be seen what types of scheme will fall within these disclosure provisions. The meaning of terms such as “certain defined schemes” and “the main benefit is the obtaining of a tax advantage” are of great importance, especially in light of the Government&#39s stated aim to “target schemes and arrangements based on financial products and employment-based products”. We will have to wait and see the Finance Bill for further amplification of how wide these provisions will be.

My conspiracy theory came to life on March 31 when the FSA published its reporting requirements for firms involved in mortgage, general insurance or retail investment activities. The FSA will use information it collects about firms&#39 financial health and business activities to monitor compliance and identify trends and anomalies. This will help it determine what sector-wide or firm-specific work needs to be done to protect consumers and maintain market confidence.

The FSA is reforming its reporting requirements for firms. In particular, it believes that improved reporting requirements are essential for the cost-effective monitoring of the many thousands of smaller firms in retail financial markets, including those that will fall within its scope when it starts regulating mortgages and general insurance. If the FSA did not collect this information, it would not be able to target its resources as effectively.

FSA director of high-street firms Sarah Wilson said: “We need to have a clear picture of what is happening in the marketplace to help us to spot potential problems early on and determine whether action needs to be taken. That is why we are asking firms to provide us with information on a regular basis. This will help us to be cost-effective by allowing us to be present on the ground where it matters most.”

It has been reported that an important part of what has to be reported will be details of how salespeople will be incentivised to sell particular products.

Big Brother appears to be getting bigger and this growth spurt will have a very definite impact on the financial services sector. Just how much? “Who knows – you decide.” Cue music. Cue Davina.


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