Detox for the tax avoidance industry

Part 7 of the finance bill has put some flesh on the bones of this concept but the regulations need to be published separately in statutory instruments to see the fully-clothed version.

The urgency for introducing disclosure of tax avoidance schemes (DOTAS) legislation in this finance bill followed recognition of the level of tax being avoided through the gilt strips scheme. When this was stopped last January, the paymaster general said: ‘This is a highly abusive tax avoidance scheme, which we have identified quickly and acted against immediately.’ Effectively, the government has run out of patience with aggressive tax avoidance schemes and insisted action be taken immediately.

In future, the promoters of tax avoidance schemes will be obliged to register them when they are first available for implementation.

The Revenue will then have two choices. It can ignore the information or issue a registration number, which will need to be notified to taxpayers implementing the scheme and disclosed on their tax returns. Notifications that are ignored will be those which are not considered abusive.

Promoters are defined in the finance bill as anyone whose trade, profession or business involves ‘the provision to other persons of services relating to taxation’. The definition appears wide enough to encompass accountants, solicitors, tax advisers, IFAs and tax barristers – which should lead to some interesting debate.

Where offshore promoters introduce tax-avoidance schemes, the UK taxpayer entering into the transaction will be liable to notify the arrangements to the Revenue unless, for example, their accountant does so on their behalf. Taxpayers, such as banks, that dream up avoidance schemes ‘in house’ will also have to notify such arrangements directly to the Revenue.

Four types of schemes are likely to be notified to the Revenue:

  • avoidance schemes that, on investigation by the Revenue, appear to be within the law; amending legislation is likely to follow shortly thereafter;
  • avoidance schemes, that, on investigation by the Revenue, do not require a change in the law; all taxpayers adopting such schemes are likely to suffer an inquiry into their returns;
  • acceptable tax planning and mitigation that cautious tax advisers choose to notify, despite efforts by the Revenue to discourage this; and
  • half-baked ideas unlikely to be promoted to any one but will, the promoters hope, distract the Revenue from early investigation of the avoidance schemes they are really interested in.

We can expect the regulations to identify certain ‘white-list tendencies’ of acceptable tax planning and mitigation schemes that will not require notification or registration.

I hope the end result will be the ‘elephant’ test. If an animal is big and grey, has a trunk and large ears we would all recognise it as an elephant.

When a client asks what he can do to avoid paying 40% on his profit of £1m, the chances are that any solution will be a notifiable avoidance scheme.

On the other hand, if there are alternative ways of undertaking transactions, such as a group reorganisation, then advising on and choosing the most tax-efficient option will probably not be a notifiable avoidance scheme.

It’s not an elephant, just one of the other beasts in the jungle.

I hope that the regulations will adequately distinguish which ‘schemes’ need to be reported. If my optimism is misplaced, however, the DOTAS rules could end up like a detox regime and encourage all of us to cleanse ourselves through regular disclosure of our tax-planning ideas to the Revenue.

Related reading