Disclosure of Tax Avoidance Schemes (DOTAS) and the new IHT hallmark

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1 Disclosure of Tax Avoidance Schemes (DOTAS) and the new IHT hallmark Gary Coombs, Gareth Morgan Counter-Avoidance Directorate Danka Wigley, Sanjeev Virk Assets and Residence Policy May/June 2018

2 Background Avoidance bending rules to gain tax outcome Parliament never intended Small minority of taxpayers and about 6% of UK s tax gap Early detection key to developing response to: Change the law to close loopholes Tackle through taxpayer audit In 2004 Government introduced two mandatory disclosure regimes: DOTAS to deal with Income Tax, Corporation Tax and Capital Gains Tax avoidance VAT Disclosure Regime to deal with VAT avoidance (replaced in 2018) In addition to disclosure, avoidance detected through: working in real time with our largest and most complex taxpayers risk assessment and other intelligence-gathering methods Protective marking Protect 05/06/2018 2

3 What is DOTAS? An information tool designed to provide early intelligence about: proposals (schemes) and arrangements displaying tax avoidance features how they are intended to work those who use them Applies to schemes seeking to avoid: Income Tax Corporate Tax Capital Gains Tax Stamp Duty Land Tax Inheritance Tax Annual Tax on Enveloped Dwellings Apprenticeship Levy National Insurance contributions Similar regime for VAT & Other Indirect Taxes (DASVOIT) from January 2018 Protective marking Protect 05/06/2018 3

4 DOTAS Policy Original policy objectives were to: Provide early information about new and innovative avoidance Inform policy and legislative change to close loopholes Identify scheme users to inform HMRC s tax audits Alter economics of avoidance and act as a deterrent Not originally intended to capture all avoidance Strengthened and refined regularly as avoidance landscape has changed and in particular in 2015/16 to ensure it detects avoidance being sold and used now and supports other, new, counter-avoidance legislation like Accelerated Payment Notices This included adding IHT into the confidentiality and premium fee hallmarks from February 2016 and replacing the existing IHT hallmark from 1 April 2018 Protective marking Protect 05/06/2018 4

5 Structure of the DOTAS regime 4 elements: Disclosure certain persons, usually a promoter, required to provide information to HMRC about tax avoidance schemes describing how scheme works. Ongoing obligations scheme users are identified by a Scheme Reference Number (SRN) which they must report to HMRC. Since January 2011 promoters must provide information to HMRC about clients to whom they have given a SRN. Since 2015 a similar obligation on employers who implement schemes relating to employees remuneration Information powers enable HMRC to investigate suspected failure to comply with DOTAS rules and to decide whether a SRN is required Penalties applicable to various failures to comply with aspects of DOTAS Protective marking Protect 05/06/2018 5

6 How DOTAS works A scheme must be disclosed if it: falls within certain descriptions referred to as hallmarks; enables or might be expected to enable any person to obtain a tax advantage; and a main benefit (outcome) that might be expected is obtaining that tax advantage Duty to disclose arises in relation to both proposals (the idea or scheme) and arrangement that implement that proposal (important to note in context of IHT grandfathering provision) Hallmarks generally test proposals or arrangements in the hypothetical: how it might reasonably be expected that a (hypothetical) promoter would act; whether a (hypothetical) promoter could charge a premium fee what an informed observer could reasonably be expected to conclude Very much the approach taken for the new IHT hallmark Protective marking Protect 05/06/2018 6

7 How DOTAS works The hallmarks capture arrangements with features indicative of avoidance Confidentiality promoter wants to keep scheme confidential from another promoter or HMRC Premium fee promoter able to charge a premium based on anticipated tax saving Inheritance Tax schemes designed to avoid Inheritance Tax Standardised tax products off-the-shelf schemes able to be marketed widely Loss schemes designed to create artificial losses to set against general income Leasing schemes involving leasing arrangements Employment Income schemes designed to get round anti-avoidance legislation Financial products using financial products with contrived or abnormal steps Land and property transactions designed to avoid Stamp Duty Land Tax Only first 3 bullets apply for arrangements involving IHT No grandfathering in confidentiality or premium fee hallmarks Protective marking Protect 05/06/2018 7

8 How DOTAS works Disclosure is required: within 5 days of a scheme becoming marketable or first used by a client by the promoter who designed or markets the scheme, or by users where devised in-house, promoter not UK-resident, or legal privilege applies HMRC has 90 days to consider whether scheme notifiable and to issue SRN Promoter must pass SRN to users who must also pass it to other participants, e.g. employer must pass to relevant employees of employment schemes Promoter reports details of users to HMRC on quarterly Client Lists Users must report SRN to HMRC on every affected tax return (or special form). This does not apply for IHT arising on death HMRC uses this information to inform policy development and taxpayer audits Protective marking Protect 05/06/2018 8

9 DOTAS Enforcement Range of information powers to investigate non-disclosure Penalty for non-disclosure up to 1m, with further penalties if failure continues Penalties for failure to provide Client List up to 5,000 per client omitted Penalties for employers who fail to pass SRN to employees or fail to provide employee details to HMRC up to 5,000 per failure per employee Other failures to comply with DOTAS up to 5,000 per failure Penalties for user failing to report SRN to HMRC up to 5,000 for first failure, 7,500 for second failure and 10,000 for subsequent failures Most penalties imposed by Tribunal, not HMRC Protective marking Protect 05/06/2018 9

10 DOTAS and IHT background 2011 IHT hallmark Very narrow scope applied only to avoidance of relevant property entry charge Grandfathering arrangements substantially the same as those made available before 6 April 2011 did not have to be disclosed Not effective few disclosures & no information about other types of IHT avoidance 2014 consultation proposed Extending scope to all areas of IHT avoidance (on death & other lifetime transfers) Removing grandfathering disclose new schemes, new variants, existing schemes implemented or sold after new hallmark takes effect Targeted approach to ensure planning & straightforward use of reliefs etc. not caught Including IHT within Confidentiality and Premium Fee hallmarks Response to proposals & draft regulations in 2015 & 2016 broadly supportive. Concerns that regulations too broad reflected in final drafting. Protective marking Protect 05/06/

11 The new IHT hallmark SI 1172/2017 Takes effect from 1 April 2018 regulation 1 Replaces the 2011 IHT hallmark (SI 170/2011) regulation 6 Describes which IHT arrangements are notifiable regulations 3 and 4 Excepts certain pre-existing proposals from disclosure regulation 5 The informed observer test: Independent, knowledgeable, but not necessarily an expert Studies the arrangements e.g. terms of documentation Takes all relevant circumstances into account effect, substance, non-tax benefits, HMRC guidance Could reasonably be expected to conclude that conditions 1 and 2 are met Protective marking Protect 05/06/

12 The new IHT hallmark conditions Condition 1 Main purpose, or one of main purposes, is to obtain an inheritance tax advantage Specific areas of avoidance or reduction greatest risk and concern to HMRC a) Charge when property becomes relevant property (entry charge) b) Ten year anniversary charge (s.64) or RP charge at other times (s.65); charge on property leaving employee or newspaper trusts (s.72); charge on close company transfers (s.94) c) Charges on gifts with reservation of benefit if no POAT income tax charge d) Reduction in the value of a person s estate without being a chargeable transfer or a PET Condition 2 The arrangements involve one or more contrived or abnormal steps Those steps are necessary to obtain the tax advantage Arrangement are notifiable if: it s reasonable to expect an informed observer to conclude that both conditions are met, they might be expected to enable any person to obtain an IHT advantage, and the expected main benefit of them is to get that tax advantage Protective marking Protect 05/06/

13 The new IHT hallmark exceptions Established, well understood IHT planning is excepted from disclosure if: it implements a proposal that was made available and implemented at least once before 1 April 2018; HMRC accepted that the proposal accorded with established practice at the time it was first implemented; and the arrangements that implement that proposal on or after 1 April 2018 are substantially the same as arrangements that implemented it before that date Established practice means as shown in published material or other written evidence of a common practice accepted by HMRC in its guidance, statements, bulletins, correspondence etc. HMRC has appropriate resource in place to consider issues of notifiability and exceptions in the 90 days following disclosure Protective marking Protect 05/06/

14 Further information & questions For further details of the DOTAS regime see For details of how the new IHT DOTAS hallmark applies and examples see the IHT guidance at New 2017 IHT hallmark see Questions? Protective marking Protect 05/06/

15 Contacts Gary Coombs Danka Wigley Gareth Morgan Sanjeev Virk Protective marking Protect 05/06/

Disclosure of Tax Avoidance Schemes (DOTAS) Regime and the Annual Tax on Enveloped Dwellings (ATED)

Disclosure of Tax Avoidance Schemes (DOTAS) Regime and the Annual Tax on Enveloped Dwellings (ATED) Draft regulations and Taxes Information and Impact Note 15 July 2013 1 Contents 1 Introduction 3 2 Draft