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Tony Wickenden: Prepare for more disclosure

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Last week I looked at the growing importance to HMRC of improving “tax cash flow” and its drive to do so through direct recovery of tax and the issuing of accelerated payment notices. A key facet of an effective APN system is a strong disclosure of tax avoidance schemes regime, as the issue of an APN substantially depends on the scheme having a Dotas reference number.

To date, inheritance tax has been fairly lightly treated in relation to Dotas. It was brought into Dotas with effect from 6 April 2011 in relation to IHT avoidance involving the use of trusts.

Under the current Dotas provisions regarding IHT, arrangements must be disclosed if they involve property transferring into relevant property trusts where a main benefit of the arrangement is the avoidance or reduction of an IHT “entry charge”. However, under the current “grandfathering” rules, schemes that are the same, or substantially the same, as arrangements made available before 6 April 2011 do not need to be disclosed.

Changes are proposed to the current Dotas rules for IHT to ensure the following:

  • All IHT schemes (whether newly-devised or new variants of pre-existing schemes) that are sold to clients and implemented after the changes proposed in the consultation take effect will need to be disclosed.
  • Arrangements designed to avoid or reduce an immediate charge to IHT will be caught (contrast the existing narrower focus on the entry charge related to transfers into relevant property trusts).
  • Arrangements that, although not giving rise to an immediate charge to IHT, attempt to reduce or avoid IHT on death (such as arrangements that seek to circumvent the reservation of benefit rules or the rules for deducting liabilities introduced by Finance Act 2013 and now contained in section 162A IHT Act 1984) would need to be disclosed.
  • Some of the general Dotas hallmarks, such as the confidentiality and premium fee hallmarks, will be extended to include IHT.

The extension of the rules to include new variants of existing schemes reflects the Government’s concerns grandfathering could be misused by promoters.  However, it says it will use the suggestions made in consultation, and examples provided in response to the consultation, to help ensure ordinary tax planning arrangements and retail products are not caught.

Securing as clear an understanding of what constitutes such “ordinary tax planning arrangements” in the eyes of HMRC will be very important. It has also confirmed it will look to incorporate examples of disclosable and non-disclosable schemes and arrangements in guidance to help advisers recognise and comply with their Dotas obligations.

I am (hopefully not foolishly) optimistic (though not certain) that, despite the proposed removal of grandfathering, most of the current “tried and tested” schemes could fall outside of the scope of the new extended hallmarks. I am especially hopeful the proposed list of examples will help to make this clear.  We cannot be certain about this though until we see the new provisions.

On the other aspects of the changes to Dotas, legislation to protect whistleblowers and to introduce a power under which HMRC will be able to publish information about disclosed schemes and their promoters is available for consultation as part of the draft Finance Bill. 

Regulations to make changes to the hallmarks, including extension of the IHT hallmark and further changes to the draft financial products hallmark, will be published for consultation early this year too, with a view to bringing the revised hallmarks into effect later in the year.

Disclosure is stated to be required for “listed financial products” where:

–       The main benefit, or one of the main benefits, of including the financial product(s) is to give rise to a tax advantage. 

–       The financial product contains at least one term unlikely to have been entered into by the person 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.

Clarification is being sought that, as for IHT, “ordinary tax planning” with retail financial products, and especially of a type that has been carried out for many years (despite the removal of grandfathering), will be capable of continuing to be carried out without the need to disclose. HMRC has committed to taking these concerns into account and has already confirmed that where the only financial product involved is an Isa or the promoter is a bank (banks being subject to their own strict code of practice in relation to tax avoidance arrangements) disclosure will not be required.

Tony Wickenden is joint managing director at Technical Connection

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