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Tony Wickenden: Tightening the rules on tax avoidance disclosure

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Over the years, successive governments have employed various measures to tackle tax avoidance, such as the Disclosure of Tax Avoidance Scheme rules, the General Anti-Abuse Rule and, most recently, the accelerated payments legislation.

The latest consultation from HM Revenue & Customs, entitled Strengthening the Tax Avoidance Disclosure Regimes, proposes to tighten the Dotas rules. It has received recent press publicity, especially the proposals relating to inheritance tax avoidance arrangements. 

I will examine the IHT proposals next week but it is important first to consider the broader context of these proposed rules.

Under the current rules, a scheme must be disclosed under Dotas if it falls within any of the descriptions or hallmarks prescribed in the regulations and where the scheme may be expected to enable someone to obtain a tax advantage.

This consultation considers options to improve the information available to HMRC through Dotas. In particular, it:

  • Proposes changes to the descriptions of schemes required to be disclosed
  • Proposes changes to continued compliance with the rules by promoters not resident in the UK
  • Proposes changes to the penalties applicable to users of schemes who fail to notify their use of a scheme
  • Considers the introduction of protection for those who wish to provide information about potential avoidance to HMRC but who are prevented from doing so by governance or confidentiality requirements
  • Considers a number of other changes to improve the regime’s operation generally, including processes around the issue of scheme reference numbers to provide greater certainty regarding how HMRC may respond to the notification, and
  • Seeks views on how the VAT avoidance disclosure regime could be improved to ensure HMRC gets appropriate information about schemes designed to avoid VAT.

Grandfathering provisions

Of particular interest is the proposal to abolish the existing grandfathering provisions. Broadly speaking, these provisions exempt tax planning schemes from disclosure if a largely similar scheme is already available before the time when the hallmarks in relation to schemes aimed at avoiding the tax under consideration were brought into effect.

The Government says grandfathering could be misused by promoters. As a result, it is proposed that disclosure will be required for any arrangements that might previously have been grandfathered if they are made available or newly implemented after any change takes effect.

The consultation also makes clear that to support the new accelerated payments measures, it is important Dotas detects avoidance that is being designed or marketed now and that promoters cannot rely on features of the regime which were originally intended to target what was new or novel to get around disclosing what are in fact new schemes or old schemes they continue to market which may not have been disclosed previously. 

The linkage of the new accelerated payments regime to the Dotas review is very strong and said to be one of the main drivers for the proposed toughening-up.

The consultation runs until 23 October and it will be interesting to see both the outcome and the effect it could have on certain schemes currently being marketed.

It is important to recognise the consultation relates to tax avoidance, not just IHT.  There is, however, a large chunk of the document dedicated to the expansion of the Dotas provisions in relation to IHT schemes.

Press attention

The press has recently highlighted the sections of the consultation document that focus exclusively on IHT avoidance. 

It seems HMRC is particularly keen to toughen things up in this space, especially by removing grandfathering and expanding the hallmarks to cover a much wider range of avoidance strategies than currently affected. 

At one level, these proposed changes to the application of Dotas to IHT planning look like they could have quite an extensive impact. 

But it is encouraging that HMRC has stressed the importance of the consultation period. This is so it can, with interested parties, ensure the new hallmarks will be appropriately targeted. 

I will look at the Dotas proposals in relation to IHT in greater detail next week. 

Tony Wickenden is joint managing director at Techincal Connection

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