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Consultation on strengthening DOTAS and VADR

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HMRC consults on tougher DOTAS and VADR rules

HMRC is consulting until 23 October 2014 on proposals to strengthen the disclosure of tax avoidance schemes (DOTAS) regime, including draft regulations to introduce a new financial products hallmark. The consultation also considers how the VAT disclosure regime might be updated to align more closely with DOTAS.

Financial secretary to the Treasury, David Gauke said: ‘In order to support the new accelerated payments measure consistently, it is important that DOTAS detects avoidance that is being designed or marketed now and that promoters cannot rely on features of the regime originally intended to target what was new or novel to get round disclosing what are really new schemes or old schemes that they continue to market that may not have been disclosed previously.’

The DOTAS rules require the promoter of certain tax schemes to disclose details of the scheme to HMRC and for those using such schemes to put a DOTAS reference number issued by HMRC on their tax return. The rules apply where ‘arrangements’ are expected to provide a tax advantage, getting a tax advantage is expected to be one of the main benefits and the scheme falls within one of a number of descriptions (called ‘hallmarks’).

The key proposals for change 

One of the hallmarks of a DOTAS scheme is ‘standardised tax products’. The consultation document contains several measures to improve the way this hallmark works in practice in order to counter the very narrow interpretation of the hallmark adopted by some promoters.

Currently, under the ‘grandfathering’ rule, schemes, which are the same, or substantially the same, as arrangements made available before 1st August 2006, do not need to be disclosed. The consultation proposes to remove this rule.

The consultation also proposes to focus on the promoter’s offering. The idea is to ensure that arrangements described as ‘bespoke’ , but in reality aimed at more than one client, are caught.

Similarly the document suggests widening the loss hallmark – which applies to schemes aimed at generating tax losses – whilst adding a safeguard which compares the tax losses to the actual economic cost of implementation of the scheme.

The document also includes a draft new ‘financial products’ hallmark. Under the hallmark, where arrangements include at least one of a list of financial products, the arrangements must be disclosed where the main benefit, or one of the main benefits, of including the financial product is to give rise to a tax advantage and, either the financial product contains at least one term which is unlikely to have been entered into by the persons 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. The financial products listed include loans, shares and derivative contracts.

The consultation suggests bringing IHT schemes within the DOTAS regime. At the moment DOTAS only applies to IHT avoidance involving the use of trusts. This has generated only few disclosures whilst HMRC is aware of several IHT avoidance schemes. The document points out that there is no reason to keep IHT out of DOTAS as it is within the GAAR in any event.

The document also includes measures to protect whistleblowers. The proposed rules would confirm that no duty of confidentiality prevents voluntary disclosure of information to HMRC.

Additionally, the consultation document proposes to introduce a special rule to ensure that if an offshore promoter does not disclose a scheme, the requirement to disclose attaches to any person resident in the United Kingdom who is working with the offshore promoter. This would include a business partner. The purpose of this rule is to alleviate concerns that, following the introduction of accelerated payments, non-UK promoters might decide not to comply with DOTAS and that UK promoters might decide to move offshore.

The consultation document also suggests increasing the penalties for scheme users who do not notify a DOTAS scheme reference number in the correct box on the tax return.

New rules may also require employers who use a scheme intended to provide a tax or national insurance advantage to employees, to pass the scheme reference number to employees who will have to include it on their tax returns, in addition to that of the employer.

Finally, the disclosure regime for VAT schemes (VADR) is currently different from DOTAS. In particular, it requires disclosure by the scheme user after implementation rather than by a promoter prior to implementation, and it includes a list of known schemes which require disclosure rather than relying solely on hallmarks. The document notes that the number of new disclosures under VADR ‘has reduced dramatically to only a handful each year’. The document therefore contains proposals to update or refine the types of scheme requiring disclosure under VADR while retaining its current structure, or re-designing the regime to operate on a similar basis to DOTAS. This could be achieved by merging VADR with DOTAS or keeping the two regimes separate.

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