For example, DOTAS is of key significance in the accelerated payments regime and the new serial avoiders regime, announced at the Autumn Statement. It is not, then, surprising that the Government has pressed ahead with its proposals to further strengthen the regime, set out in a new technical consultation, Disclosure of Tax Avoidance Schemes: hallmark regulations - summary of responses and next steps.
The Government’s clear intention remains to strengthen existing hallmarks and introducing a new financial products hallmark (which has many similarities with the original financial products ‘filter’ which was included within the regime on inception), although a few concessions have been made. However, one notable compromise is in respect of inheritance tax (IHT). In light of representations made that the draft IHT hallmark was so wide that it would catch non-abusive planning, the Government has decided to develop a revised draft IHT hallmark for further consultation in 2016. Nevertheless, the planned inclusion of IHT within the scope of the Confidentiality and Premium Fee hallmarks is still going ahead.
The changes will be implemented by SI 2016/99 The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) (Amendment) Regulations 2016, laid before the House of Commons on 2 February 2016 and which come into force on 23 February 2016.
Standardised Tax Products
This hallmark is intended to catch what are often referred to as marketed avoidance schemes. One driver for the changes has been promoters being able to argue schemes were not disclosable because minor changes were made for individual clients to otherwise standardised products.
The revised hallmark requires that in order for a standardised tax product to be disclosable under the draft it must be reasonable to expect an informed observer (having regard to all relevant circumstances) to conclude that certain conditions are met – in particular that the main purpose of the standardised arrangements is to enable a person to obtain a tax advantage or that the arrangements would be unlikely to be entered into but for the expectation of obtaining a tax advantage. This gets at the substance of the arrangements, as well as their strict legal form.
Another significant change is that the previous grandfathering of any standardised tax products if they are substantially the same as anything made available before the hallmark was introduced has been removed. This potentially widens the scope significantly, where the same documentation is used to undertake substantially the same planning for a number of different clients, where this is ‘old’ planning – and the question will now need to asked whether this planning is manly aimed at securing a tax advantage and it would not be undertaken if it were not for that tax advantage. Bespoke planning should be used for all such planning, as opposed to standard documents. Normal commercial arrangements should not be caught - so the choice to finance a company with debt as opposed to equity will not be notifiable, unless this is part of wider arrangements.
Concern was also expressed in the consultation process that the scope is so wide it could catch arrangements involving Social Investment Tax Relief, Seed Enterprise Investment Schemes, Quoted Eurobonds and Excluded Securities. HMRC has confirmed these will not be notifiable unless they are part of wider and more complex arrangements structured to obtain more tax relief than would otherwise be the case.
Finally, banks have won a small concession here – any products that are excluded from the Financial Products hallmark through the exemption relating to the Code of Practice on Taxation for Banks will also be excluded from this hallmark.
This hallmark targets schemes for individuals aimed at generating losses which can be relieved against other income and gains and where the loss relief obtained is greater than the economic loss. The change here is a widening of the main benefit test, looking at the arrangements as a whole and having regard to all the relevant circumstances to determine if the arrangements, and the way they have been structured, would be unlikely to have been entered into absent the losses. In particular the amended hallmark will not be disapplied where a scheme that provides immediate losses but purports to provide long-term overall profits will not get around the hallmark.
Losses which are a genuine commercial reality, such as genuine business start-up losses, will remain outside the scope of the hallmark.
Financial Products Hallmark
As a result of previous disclosures, the Government has decided that a new financial products hallmark must be introduced to counter structured financial products used in corporate tax planning. The mere inclusion of a financial product is not sufficient – there must be a direct link between the inclusion of a financial product and the tax advantage, and that advantage must not be merely incidental.
In order for a financial product to be disclosable it must be reasonable to expect an informed observer (having regard to all relevant circumstances, i.e. beyond the mere legal analysis) to first conclude that the following two conditions are met:
- Condition 1: the arrangements include at least one of the specified financial products from the list; and
- Condition 2: that the main benefit, or one of the main benefits, of including a specified financial product in the arrangements is to give rise to a tax advantage.
Then, the informed observer would also have to be reasonably expected to conclude that either of the following conditions are met:
- Condition 3: a specified financial product included in the arrangements contains at least one term unlikely to have been entered into but for the tax advantage; or
- Condition 4: arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.
The list of financial products provided by the Regulations is extensive, including loans and shares, derivative contracts as well as less common financial products. Again, anything exempted under the Code of Practice on Taxation for Banks is exempted, as are ISAs.
The Government has promised further guidance will be provided, but in the meantime the Technical Paper does provide useful examples of specific products which should not be caught by the hallmark (provided the arrangements are not abusive):
- entering into a loan of less than 12 months which is ‘short’ for income tax purposes where there is no requirement to deduct tax from interest distributions;
- investing under the EIS (or SEIS);
- choosing debt rather than equity to fund a particular activity/transaction;
- investing in a Self-Invested Pension Plan;
- investing in Excluded Indexed Securities;
- setting up and operating a tax-advantaged employee share scheme;
- listing securities which benefit from the Quoted Eurobond exemption ;
- using discounted bonds;
- using/entering/agreeing to earn-out rights (i.e. disposal of shares in a company in pursuance of relief at section 138A TCGA 1992);
- carrying out a partition demerger (involving creating new classes of shares with rights to specific assets;
- setting up an Employee Ownership Trust;
- implementing an Employee Ownership Schemes;
- structuring a joint venture arrangement so a particular group is created under the CGT groups legislation (section 170 TCGA 1992), consistent with investing companies receiving a fair stake in the joint venture in the form of conventional shares as a result of the arrangements and given the respective values of their contributions; and
- joining the Real Estate Investment Trust regime.
The Government also agrees that a number of specific exclusions are justified to prevent the ordinary use of financial products or arrangements being caught (and these will also be included in the promised guidance):
- The sale of a business in exchange for financial products which allow deferral (roll-over) of a gain until later disposal.
- Setting the term over which a long-dated debt matures to below 50 years, so that it is not subject to the equity note legislation.
- Arrangements comprising the hiving down of a trading division to obtain the benefit of the substantial shareholding exemption which would otherwise meet condition 4, so long as condition 3 is not met.
- Arrangements consisting only of the issuing of shares to hedge the currency risk from a loan relationship or a derivative contract, where the shares are accounted for as a liability. This would not however apply where condition 3 is met (e.g. where the shares contain terms unlikely to have been entered into but for the tax advantage).
Financial Products including a term providing for conversion into, or redemption in, a foreign currency which would otherwise meet conditions 3 and 4 (this would apply in particular to a term included to ensure that a security or loan agreement is not treated as a Qualifying Corporate Bond (QCB) for chargeable gains purposes).
Inheritance Tax Hallmark to undergo further consultation
The Government’s proposals to widen the current IHT hallmark from its current narrow focus were the most controversial of all, with the worry being that it would catch ordinary planning. As a result, further 12 week consultation will take place during early 2016, including publication of a revised draft hallmark.
The Technical Paper does say that it would have regarded the draft hallmark previously published as not catching:
- lifetime gifts;
- the ordinary settlement of property into trust;
- use of the normal out of income exemption;
- non-abusive use of BPR and APR;
- gifting of a house to a relative allied with the payment of market rents;
- non-abusive arrangements involving ‘loan trusts’, or bare trust variations of loan trusts; or
- non-insurance based schemes, such as discounted gift trusts and bare trust versions of these (although HMRC may wish to review valuations).
However, there was widespread concern that the original proposals did not contain adequate safeguards to ensure that such ‘plain vanilla’ planning, often not tax-motivated, would be protected from the DOTAS régime.
Neither does the Government wish to discourage charitable bequests; and the use of Deeds of Variation are accepted provided they are not used as part of wider abnormal or contrived arrangements.
Confidentiality and Premium Fee Hallmarks
Whilst changes to the IHT hallmark may have a stay of execution, this is not the case when it comes to the inclusion of IHT within the scope of the above general hallmarks.
It is important that the extended hallmarks, effective from 23 February 2016, are considered when any tax planning is undertaken. A key here is the smell test: if it is unlikely the user would have undertaken the planning absent the tax advantage, then DOTAS may well be in point, bringing with it the potential ramifications of APNs and the serial avoiders regime.