VAT (DISCLOSURE OF AVOIDANCE SCHEMES) ORDER 2004 VAT (DISCLOSURE OF AVOIDANCE SCHEMES) REGULATIONS 2004

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1 VAT (DISCLOSURE OF AVOIDANCE SCHEMES) ORDER 2004 VAT (DISCLOSURE OF AVOIDANCE SCHEMES) REGULATIONS 2004 Response by The Chartered Institute of Taxation to the draft statutory instruments published by HM Customs and Excise in May 2004 Introduction 1 Schedule 2 para 2 of the Finance Bill inserts a new VATA 1994 Sch 11A making provision for the disclosure of VAT avoidance schemes. The new Sch 11A authorises HM Treasury to made orders setting out the schemes, or criteria for schemes, which have to be disclosed and authorises HM Customs and Excise to make regulations regulating the manner in which disclosures are made. A draft Order and draft Regulations have been published on the Customs and Excise website and comments have been invited. 2 The Chartered Institute of Taxation welcomes publication of the draft legislation. It was very difficult to make constructive comments in our Finance Bill representations (see Appendix) on the basis of the documents published on Budget Day. Our comments are set out below. General comments 3 The disclosure provisions can place an obligation on taxpayers to make a disclosure even in circumstances where they have fully complied with the law in a manner that produces an outcome at variance with what Customs and Excise would like it to be or with what it might have been if the arrangements at issue had been foreseen so that the legislation would have been drafted differently. For the most recent example of many cases, see The Board of Governors of Robert Gordon University v Customs and Excise Comrs (2004) VAT decision We note that in Lea Jorion, née Jeunehomme, and Société Anonyme d'etude et de Gestion Immobilière 'EGI' v Belgian State (joined cases 123/87 and 330/87) [1988] ECR 4517, Advocate-General Slynn, in commenting on art 22(8) of the Sixth Directive, noted that The requirements laid down must not, however, go beyond what is reasonably necessary for the purposes of verification and fiscal control. If a Member State

2 wishes in particular areas to go further then it must have recourse to Article 27 of the Sixth Directive. 5 While that case related to deductions, the same principle relates to all requirements imposed on taxpayers by art 22(8) and it appears that Customs and Excise regard art 22(8) as the vires for the new provisions. To the extent that the new disclosure requirements go beyond those necessary to collect the tax and prevent tax evasion, we believe that they are disproportionate to the objects intended by the Sixth Directive and are therefore ultra vires. By way of example, we note, in particular, the requirement to disclose transactions that are in accordance with VAT law but are considered to be tax avoidance by Customs and Excise. 6 The disproportionate nature of the requirements is emphasised when it is considered that non-disclosure of arrangements (apparently even if they work in law) will be punished by penalties equal to those for misdeclarations. This is discussed in greater detail below. Designated schemes General 7 We have some difficulty in following the logic of art 3(4) of the draft Order. If a feature of the scheme is one of the matters listed in art 4(4)(a), it is unclear how the feature can be absent as a matter of law. We would appreciate some explanation of the sort of situation this provision is intended to meet. 8 Our comments on the schemes described in Sch 1 of the draft Order are set out below. Schemes 1 and 2 9 Scheme 1 expressly excludes schemes where the grantee is a registered social landlord. We consider that the greater part of the VAT lost in this area arises in connection with the large-scale voluntary transfers of dilapidated housing stock. No disclosure requirement arises in respect of transfers by a local authority to a housing association or by one housing association to another. However, a disclosure requirement arises if a private landlord makes a similar transfer (eg in relation to a university hall of residence which he constructed) or if a housing association transfers housing stock to a subsidiary. This discriminates between transactions having a similar economic effect. 10 A similar situation arises in relation to Scheme 2. Scheme 3 11 This seems to be an invitation for retailers to make a slightly different charge for cash and credit transactions. P/bc/disclosure

3 Scheme 5 12 This description is phenomenally wide. It catches a huge range of business promotion schemes, eg free CDs with magazines, free CD-ROMs with computer magazines, tins of biscuits, etc. Scheme 6 13 This appears to overlook regulations, such as those applicable to distance selling via the internet imposed by the DTI, which require an extended coolingoff period for purchases. Scheme 9 14 We refer you to the recent tribunal decision in The Board of Governors of Robert Gordon University v Customs and Excise Comrs (2004) VAT decision Given that the learned Tribunal chairman found in favour of the taxpayer, one has to ask: why is scheme 9 in the legislation? Secondly, given that the College could not have entered into the arrangements that scheme 9 regards as avoidance without the consent of a government body, the Scottish body would not have consented if the Government behaved in a consistent manner. As it is, one part of Government has entered into an arrangement that another part regards as a sham. How are taxpayers to contract with the Government with any certainty in these cases? Provisions associated with schemes 15 Sch 2 para 2 of the draft Order stigmatises an agreement whereby, inter alia, the tax advantage will be shared to any extent by the promoter. This gives rise to three questions. 16 First, we consider that the definition in Sch 2 para 2(2) may leave some doubt in a taxpayer s mind whether or not there is a promoter in relation to a scheme he has used. The definition appears to apply as follows: Anyone who devises and sells tax avoidance schemes appears to carry on an activity in the course of a trade, profession or business which involves the provision to other persons of services relating to taxation and is therefore a promoter. Anyone who sells tax avoidance schemes devised by someone else appears to be a promoter only if he does so in the course of a trade, profession or business which involves the provision to other persons of services relating to taxation. A person who assists a taxpayer devise an avoidance scheme for use by the taxpayer appears to be a promoter only if the assistance is given in the course of a trade, profession or business which involves the provision to other persons of services relating to taxation. 17 We consider that taxpayers require guidance on which business or professional activities are considered to involve the provision of services P/bc/disclosure

4 relating to taxation for the foregoing purposes and which services are considered to relate to taxation for those purposes. 18 Secondly, a promoter clearly shares in the tax advantage if his fee is determined wholly or partly by reference to the quantum of the saving. However, we note that professional fees are often quantified by reference to savings in circumstances where tax avoidance plays no part. By way of example, we understand that some professional advisers provide a service of checking assessments for default interest and that the fee charged is a percentage of the amount by which the assessment is reduced. 19 Thirdly, it is debatable, as a matter of English usage, whether a person shares in the saving merely by charging a flat fee, particularly if the fee is payable whether or not any saving arises. 20 We consider that these matters should be put beyond doubt by a different choice of words. Provisions included in schemes 21 The new VATA 1994 Sch 11A para 5(1)(b), when read in conjunction with paras 1 and 5(2), (3), provides that any arrangement, transaction or series of transactions listed in Sch 2 paras 4 7 of the draft Order is notifiable if its main purpose, or one of its main purposes, is to enable anyone to achieve a tax saving or deferral. 22 We see a need for compliance officers within every organisation of any size whose job is to ensure that no reportable event goes unreported. One approach is to draw up a checklist of events within paras 4 or 5 of Sch 2 which could occur within the normal operations of the business. It seems clear that in some circumstances and whether or not intended a tax saving could result from those events. 23 The voluntary disclosure provisions appear to be of assistance. As the scheme has not been implemented (ie the event has not yet happened), the taxpayer is able to provide all the information prescribed by reg 6 of the draft Regulations. In consequence, we foresee compliance officers dreaming up ever more fanciful scenarios where a notification requirement may arise and making a voluntary disclosure merely to protect the business from a disclosure penalty. Three problems arise. 24 First, VATA 1994 Sch 11A para 9(2) provides that Customs and Excise may allocate a reference number and notify it to the taxpayer. They are not required to do so. The exemption from making a subsequent statutory notification in VATA 1994 Sch 11A para 6(4) requires the receipt of a reference number by the taxpayer. The taxpayer clearly obtains no protection if Customs and Excise decline to issue one. What criteria will be used in deciding whether or not to issue a reference number? 25 Secondly, the exemption in VATA 1994 Sch 11A para 6(4) is drawn in terms that any person has previously provided the taxable person with a reference number. In the case of voluntary notifications by taxable persons, are we correct in assuming that any person for purposes of the exemption includes Customs and Excise? P/bc/disclosure

5 26 Thirdly, taxpayers will rightly assume (unless, or until, the courts decide otherwise) that voluntary disclosure is a means of protecting themselves from penalties for failure to disclose. On this basis, we foresee that Customs and Excise will receive more voluntary disclosures than they expect or, more importantly, want. Information to be disclosed Form and manner of notification 27 VATA 1994 Sch 11A para 6(2) and (3) provide that taxpayers must notify the reference number of a designated scheme (in the case of designated schemes) and prescribed information relating to the scheme (in the case of other schemes). This information must be notified in such form and manner as may be required by or under regulations. 28 Reg 3 of the draft Regulations merely states that a scheme must be made in such form and manner as the Commissioners require. This begs the question to which the draft Regulations should be providing an answer. We assume that Customs and Excise intend to set out their requirements in a notice. If this is the intention, we consider that reg 3 should specifically say so because the notice must be made under regulations. However, we see no reason why such information should be relegated to tertiary legislation. We consider that the relevant requirements should be included in the Regulations. 29 Reg 4 of the draft Regulations provides that the information to be notified in respect of schemes that are not designated schemes includes the amount of the tax advantage and the method by which that amount was calculated. This gives rise to a number of questions considered separately under the next subheadings. For present purposes, we make two points. 30 First, it is logical to suppose that the amount of the tax advantage is restricted to the amount arising for the period to which the VAT return or claim relates. This is the only tax advantage that has arisen. Any future tax advantage is hypothetical. Further, it appears that any future disadvantages arising from the particular arrangements are not taken into account in calculating the tax advantage. This cannot be correct. We note that the future advantage may not arise because, for example, the legislation is changed. We consider that this should be made clear in the regulations. 31 Secondly, tax advantage is defined in terms of VAT being something other than it otherwise would be or would otherwise be the case (Sch 11A para 2(1)(a) and (b)). It is quantified for the purpose of calculating tax geared penalties by reference to the amount by which the amount of VAT that would, but for the scheme, have been shown in [the relevant] returns (Sch 11A para 11(3)(a) and (b)). The difference in terminology gives no real guidance on how to calculate what is necessarily no more than a hypothetical sum. Nature of a tax advantage 32 Making a tax advantage is merely one of the conditions that trigger the requirement to disclose use of a scheme during the relevant prescribed P/bc/disclosure

6 accounting period. It is not a taxable event. If the scheme works, there is no understatement of tax and therefore no basis for either a voluntary disclosure by the taxpayer or an assessment by Customs and Excise. 33 Before looking at the detail, we note that whether a scheme works, or whether it is VAT motivated, is not a black and white issue. Indeed, the comments made by the Tribunal chairman in Capital One Developments Ltd v Customs and Excise Comrs (2004) VAT decision (another case chosen from the recent releases), demonstrates that Customs and Excise make unsubstantiated allegations. The views of Customs and Excise and the Tribunal in a given situation can be markedly different. Given that it is ultimately for the courts and tribunals not Customs and Excise to decide, it seems inevitable that Customs and Excise will apply a more severe standard of tax motivation than the courts. Given this, how is a taxpayer to comply other than by surrendering his right to be taxed by (EU) law? 34 A scheme can operate in one or other of the following ways: It can change an existing way of doing things. It can relate to something new, either in relation to a one-off event or a recurring series of events. Changing an existing way of doing things 35 A taxpayer ( X ) may change the way in which he carries on his existing business. For example, X may cease making supplies of a description YY to Y and start making supplies of a description ZZ to Z. The question relevant to disclosure is whether a tax saving or tax deferral results from the new way of doing things. As both the YY and ZZ supplies have taken place, the saving or deferral is a real one. 36 It is clearly necessary to recast the relevant VAT return disregarding the ZZ transactions (the ones that have actually taken place) and assuming that the taxpayer had continued to make the YY transactions (the one that he no longer makes). The tax advantage is the difference between tax declared on the return furnished and tax calculated on the revised basis. 37 So far so good, but what if: Commercial conditions have changed, eg no one now makes YY transactions so that the taxpayer, having decided to do likewise, has a range of options available to him? Inflation has affected the price previously charged for YY transactions and it is a matter of speculation what he would now charge? A different pattern of purchases results from the change from YY to ZZ transactions so that the input tax incurred in respect of the hypothetical YY transactions is a matter of speculation? 38 Calculating the tax advantage arising is clearly less than straightforward, even if it is possible to second-guess the Customs and Excise view of how an advantage should be calculated. P/bc/disclosure

7 Starting to do something new 39 A taxpayer ( X ) may do something new, eg occupy new business premises currently owned by a third party ( Y ). There are many way of structuring the transaction. At its simplest, X has a choice whether to purchase the property from Y or to lease it. The range of choices multiplies if, for example, the property requires refurbishment (so that X or Y could be responsible for carrying out the necessary works), or if X intends to occupy only part of the premises (so that he may acquire an interest in either the part of the property he intends to occupy, or acquire an interest in the whole property and sub-let the surplus accommodation). 40 Some ways of structuring the deal will clearly be more tax efficient than others. In reality, X strives to achieve the most tax-efficient structure consistent with his commercial requirements and any restrictions imposed by law. This is what we understand by the term tax planning. The problem in relation to disclosure is that no real saving or deferral arises. There is only a notional saving (or even a notional loss) by comparison with transactions that could have, but did not, take place. If the range of possible transactions is large which is often the case with property transactions selecting the proper comparator may be a matter of some difficulty. 41 There is no legal test for determining which of a number of possibilities should be selected as the comparator. The choice must clearly be restricted to ones that X could lawfully adopt (cf Capital One Developments Ltd v Customs and Excise Comrs (2004) VAT decision 18642). Logically, it should also exclude any structure that would amount to a designated scheme. 42 Ultimately, the choice depends partly on the facts of the case and partly upon whatever principles emerge from the courts and tribunals. Until these principles emerge, taxpayers must rely upon the guidance given by Customs and Excise of which there is currently none and their own judgment. At the risk of understatement, there is likely to be some tension between the views of Customs and Excise on one hand and taxpayers on the other. Quantifying the tax advantage 43 Quantification is the crux of the difficulty of the whole arrangements. If the taxpayer has complied with the law, as applied by the courts, by reference to what criteria does he measure the alleged tax advantage? 44 Quantifying the amount of the tax advantage gives rise to a compliance cost. It is reasonable that this cost should be kept as low as possible. Thus, taxpayers need to know what use will be made of the information they provide so that they can decide how much effort should be devoted to the necessary calculations. 45 The following factors appear to be relevant: Taxpayers necessarily render the relevant return or claim on the basis of an honest belief that the tax they declare is correct. As regards the tax effect of the scheme they use, their honest belief may or may not prove well founded. As things stand at the time of making the return or claim, however, they necessarily hold the view that no tax due has been understated or P/bc/disclosure

8 overclaimed. As the taxpayer denies that he has misstated tax liabilities or claims, he should not be required (as a matter of practical necessity) to put a lot of effort into making a definitive calculation of a sum that may never become due. Nor should he be effectively required to commit himself to an estimate or assumption before the need arises, ie the time (if any) when Customs and Excise consider that an understatement or overclaim has arisen. This is a matter of some importance because the proper estimates or assumptions may well become apparent only with the benefit of hindsight, eg in the light of principles developed by the courts and tribunals. It follows that the standards to be applied in calculating the quantum of the tax advantage should differ from those applied in relation to voluntary disclosures of past errors and claims for repayment of tax. In the absence of any prior information about the scheme used by the taxpayer, Customs and Excise have no means of knowing whether or not an understatement or overclaim has taken place. All that the disclosure provides is grounds for investigating the taxpayer s tax affairs in order to find out whether the scheme he has used has the intended legal consequences. It follows that the sum disclosed should not be regarded by Customs and Excise as an amount they can assess to best judgment without taking any further steps. They must first form a view whether or not the scheme is effective. This requires an investigation of the facts and the applicable law. A definitive calculation is necessary only if Customs and Excise take the view that an understatement or overclaim has arisen so that an assessment is necessary. 46 Looked at in this way, we see no reason why the taxpayer should be required to calculate the tax advantage with the degree of precision required for (say) a voluntary disclosure, repayment claim or tax-geared penalty for failure to notify. This seems to be a reasonable conclusion given the only possible use of the sum disclosed is to determine whether the potential loss of tax is sufficient to warrant early investigation. All that Customs and Excise appear to require for this purpose is a ballpark figure. Thus, the relevant factors appear to be: Is the tax advantage material? Is it a one-off advantage or a recurring one? Is the recurring advantage (if any) likely to increase materially in future periods? 47 On this basis, we consider that taxpayers should be required to notify an estimate of the tax advantage. For preference, we would like a form showing a number of value ranges so that it is merely necessary to tick the most appropriate box. 48 Taxpayers are required to notify the method by which [the amount of the tax advantage] was calculated. It is unclear what this entails. In our view, what seems to be required is a statement of the assumptions used when calculating the estimate. Penalties 49 In our representations on the Finance Bill, we expressed disquiet regarding the P/bc/disclosure

9 tax-geared penalty for non-disclosure of designated schemes. Our concern centred on the fact that taxpayers may become liable for both a 15% penalty for non-disclosure and a 15% penalty for misdeclaration. By contrast, only one penalty in respect of non-disclosure arises if the misdeclaration arises from dishonesty. 50 We have reconsidered this view in the light of the draft Order and draft Regulation. It appears to us that the real mischief of non-disclosure in relation to designated schemes lies in the fact that some prescribed accounting periods may be out of time for assessment when Customs and Excise become aware that the scheme has been used. A 15% penalty is not much of a disincentive to non-disclosure if 100% of the tax saved escapes assessment. 51 We consider that the proper approach is to extend the time limits for assessment in the event of non-disclosure so that the all of the tax lost can be assessed. At present, the overriding three-year assessment period is increased to 20 years only in cases of dishonest conduct and non-registration (see VATA 1994 s 77(4)). However, failure to disclose does not necessarily involve dishonesty, and even dishonesty may be difficult to prove by reference to the standard applied by the tribunals. 52 If the time limits for assessment were to be extended, the penalty for failing to disclose designated schemes should be the same as the penalty for failing to disclose other schemes, ie 5,000. Given the difficulties inherent in the disclosure process, we consider that extension of time limits combined with a flat-rate penalty would achieve a fairer balance. The Chartered Institute of Taxation 29 June 2004 P/bc/disclosure

10 APPENDIX EXTRACT FROM THE CIOT S FINANCE BILL REPRESENTATIONS Clause 19 and Schedule 2 Disclosure of VAT avoidance schemes General 16. These provisions insert in VATA 1994 a new Sch 11A. The Explanatory Notes to the Finance Bill state that the purpose of Sch 11A is to increase transparency in the tax system (para 1). It is designed to provide greater information about the take-up of schemes Customs already know about, and early notice of some new, potentially damaging, schemes (para 63). 17. We have no objection to the principle of transparency. However, the disclosure requirements have the potential to require disclosure of many lawful and wholly unobjectionable arrangements, transactions and series of transactions merely because a tax saving results. 18. It is not possible to judge how onerous the disclosure requirements will be until such time as orders are made under Sch 11A paras 3 and 4 and regulations are made under Sch 11A para 6. The information given in Budget Notice CE1, 17 March 2004 is sparse, and the only consultation of which we are aware is a JVCC meeting held on 7 April (the day before the Finance Bill was published) to discuss the Budget proposals and a follow-up meeting scheduled for 12 May. We contrast this shortfall in consultation with the series of meetings arranged by the Inland Revenue with trade and professional bodies in connection with corresponding provisions relating to direct taxes. 19. The absence of concrete guidelines about the schemes to be designated under Sch 11A para 3 and the provisions to be designated under Sch 11A para 4 give rise to justifiable fears that the notification requirements as a whole will give rise to obligations that are wholly disproportionate to the stated aim of greater transparency. In this context, the tax-geared penalty for non-disclosure of schemes within Sch 11A para 3 and the fixed 5,000 penalty for nondisclosure of schemes within Sch 11A para 4 may amount to a barrier to the carrying out of lawful and innocent transactions (see para 10 below). Furthermore, Customs and Excise have made it clear that the intended effect of Sch 11A is to stop taxpayers entering into avoidance schemes. To the extent that a scheme complies with the law, we consider that the proposals contravene the Sixth Directive (see paras 11 and 12 below). 20. In our view, the nub of the problem lies in the concepts of scheme and tax advantage. The proposed Sch 11A para 1 provides that any arrangements, transaction or series of transactions amounts to a scheme. As VAT is concerned with arrangements (eg entering into contracts with customers or suppliers) and transactions (eg selling goods or providing services), almost anything done by a taxpayer will amount to a scheme for the purposes of the notification requirements. 21. The new Sch 11 para 2 can be summarised by stating that any scheme gives rise to a tax advantage if a taxpayer pays less tax (or recovers more tax) than would otherwise be the case. It is not entirely clear what the comparator should be in the context of this provision. P/bc/disclosure

11 22. The problem, of course, is that everyday business decisions often result in a saving of tax. A partly exempt taxpayer saves tax by buying goods or services from an unregistered business rather than from a registered one. A partly exempt company saves tax by becoming a member of a VAT group so that no charge to tax arises on services outsourced to a fellow group company. These activities are not unacceptable tax avoidance, however widely that concept may be defined. Similarly, we question whether this description can properly be applied to such matters as a buyer requesting his supplier to invoice a day early (so that the buyer can claim input tax in his current VAT return rather than in the next one) or delaying sales or deliveries until the first day of the following month (so that the seller accounts for tax in his next VAT return rather than in his current one). 23. As almost anything amounts to a scheme for the purposes of Sch 11A para 3 or a provision for the purposes of Sch 11A para 4, and that almost anything can result in a saving of tax, we see a number of practical problems arising: The Treasury has a very broad discretion to designate schemes or provisions by order. As Parliament rarely votes down statutory instruments and the Courts must give effect to them unless they are ultra vires, there is no real check on whether the Treasury is acting reasonably when making designation orders. We would prefer any change to be made in primary law. We question whether a provision as far reaching as this should be the subject of a procedure that is unlikely to obtain full Parliamentary scrutiny. Taxpayers may find it necessary to incur the expense of notifying almost anything done in order to avoid the possibility of incurring a penalty. Customs and Excise will be swamped with notifications that convey no useful information. We draw attention to similar problems arising from the widely drawn notification requirements in relation to money laundering. Customs and Excise will have to devote precious resources to sifting notifications in order to locate information having practical value. 24. In our view, there is a need for transitional provisions. Taxpayers may have entered into a notifiable scheme (or rather a scheme that is notifiable in the view of Customs and Excise) many years ago so that ongoing transactions are now a matter of routine, eg a contract structured so as to be exempted from VAT rather than being charged to tax at the standard rate. Given that the personnel having first-hand knowledge of the history of these transactions may no longer be in place, there may well be practical difficulties in finding out whether or not a notifiable scheme has actually been entered into. We consider that the requirement to notify in Sch 11A para 6(1) should be confined to first use of a scheme affecting a prescribed accounting period ending, or repayment claimed, after the appointed day. 25. It is arguable that misdeclaration penalties, when properly applied, already deal with tax avoidance. If the scheme works, there is no misdeclaration penalty and it seems unfair that a substantial penalty should arise from failing to disclose the scheme or merely disclosing it late. If the scheme does not work, the taxpayer is liable for both a misdeclaration penalty (if the requisite tests are met and there is no reasonable excuse for the misdeclaration) and a penalty for failing to disclose the scheme. As regards designated schemes, the misdeclaration penalty is effectively doubled because a 15% penalty arises in respect of both defaults. A 5,000 penalty is particularly harsh in the case of P/bc/disclosure

12 schemes related to a designated provision. From the scanty information available, it appears that taxpayers are required to make a judgment as to whether or not disclosure is necessary. This in itself may be the reason for a fixed rather than tax-geared penalty. However, even a fixed penalty acts harshly if the taxpayer has taken professional advice as to whether or not he has a duty to disclose. 26. We note that art 22 of the Sixth Directive sets out the obligations of taxpayers under the common system of VAT. Although art 22(8) allows member states to impose additional obligations for the prevention of evasion, it does not permit the imposition of additional obligations such as those introduced by Sch 11A in respect of tax avoidance. Moreover, the power to introduce obligations is subject to a proviso that they do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers. We note that many transactions involve cross-border movements of goods or some international aspect to the performance of services. We consequently find some difficulty in reconciling Sch 11A with the powers and restrictions set out in art 22(8). 27. We also note that art 27(1) of the Sixth Directive (as recently amended by Directive 2004/7/EC) permits the Council to authorise member states to introduce special measures in order, inter alia, to prevent certain types of tax evasion or avoidance. Has the UK sought a derogation under art 27(1)? Further, given the aim of the proposals to deter taxpayers from exercising their lawful rights we doubt whether any derogation would be lawful (see Ampafrance SA v Directeur des Services Fiscaux de Maine-et-Loire (joined cases C-177/99 and C-181/00) [2000] ECR I 7013). Designated schemes 28. Broadly stated, Sch 11A requires taxpayers to notify the registered number of any designated scheme they have used. In practice, all taxpayers with turnover in excess of 600,000 per annum would need to scrutinise every designation order with care in order to find out whether anything they have done falls within the designated description and make the required notification if they have done so. Failure to do so would result in liability to a penalty of 15% of the tax saving (as determined in accordance with Sch 11A para 11(3)). 29. If small businesses are to be defined by reference to a turnover limit, it is desirable that the same limit should, as far as possible, apply for all VAT purposes. The turnover limits for cash accounting and annual accounting were increased from 600,000 to 660,000 by VAT (Amendment) Regulations, SI 2004/767. We consider that the increased limit should also be used for the purposes of Sch 11A in order to achieve uniformity. 30. Taxpayers must be able to ascertain whether any scheme used falls within the description set out in the designation order. Thus, the designation order must be sufficiently detailed to enable this to be done. 31. If a penalty is introduced (see above), we have reservations whether a taxgeared penalty is appropriate for failing to notify use of a scheme. It needs to be borne in mind that liability to a notification penalty would arise even if the Courts uphold (or have already upheld) the legal efficiency of the scheme so that no tax has been lost. A penalty of 15% of the tax legitimately saved is disproportionate. A fixed penalty seems more appropriate given that the only mischief is possibly depriving Customs and Excise of an early opportunity to P/bc/disclosure

13 test the legal validity of the scheme. A different situation arises if the scheme does not work. The mischief here would be that the delay in notification may result in all or part of an underpayment of tax falling out of time for assessment with a consequent loss of tax revenue. A tax-geared daily penalty seems more appropriate in these circumstances as both the tax lost and the period of delay are material factors. Other schemes 32. Broadly stated, the proposal requires taxpayers to notify Customs and Excise if they have used a scheme that includes, or is associated with, a provision of a description designated by Treasury order. In practice, all taxpayers with turnover in excess of 10 million per annum will need to scrutinise every designation order with care in order to find out whether anything they have done includes, or is associated with, a provision and, if so, whether the main reason, or one of the main reasons, for doing it was to enable anyone to save tax. Failure to make the required notification would result in a penalty of 5, The nature of a provision is left undefined, save to say that it includes any agreement, transaction, act or course of conduct. Budget Notice CE 1, 17 March 2004 states that the measure requires taxpayers to disclose the use of schemes that have certain of the hallmarks of avoidance. If the purpose of a designation order is to set out the hallmarks of avoidance, we consider that this should be more clearly stated in Sch 11A para A provision designated by order should be described in sufficient detail to enable taxpayers to ascertain whether any scheme is affected by it. 35. The information to be notified is to be prescribed in regulations. It is unclear what this will entail. It could be a brief explanation of the relevant facts or a detailed report that will take a long time to prepare. The requirements imposed must be reasonable. The proper test is whether the detail to be provided will secure transparency without imposing onerous obligations on taxpayers. We consider that the power to make regulations under Sch 11A para 6(3) should be limited accordingly. 36. Whether or not a scheme has been entered into for the purposes of obtaining a tax advantage is a matter of fact on which differing views can legitimately be held. In practice, it appears that taxpayers will normally make a judgment based on current events. If taxpayers decide that the tax saving purpose test is not met, they will presumably decide not to notify and some time may well elapse before Customs and Excise become aware of the scheme. The problem arising is that Customs and Excise would then have the benefit of hindsight in taking a view on the facts. What seemed innocuous to the taxpayer at the time may look rather different in the light of subsequent events. Moreover, the absence (or minor element) of any tax saving purpose may be difficult to establish, as no need for a meticulous record of the decision-taking process may be perceived in these circumstances. 37. If a penalty is introduced (see above), we agree that a fixed-sum penalty is appropriate for a failure to notify. P/bc/disclosure