Disclosure of NICs schemes

The Tax Avoidance Disclosure (TAD) regime is extended to NICs with effect from 1 May 2007.

What is TAD?

The purpose is to give HMRC early warning of new avoidance schemes and inform anti-avoidance legislation and compliance work. TAD is designed to capture new and innovative schemes. It is targeted squarely at avoidance, but that does not mean that every scheme disclosed is an avoidance scheme.

Equally, the fact that a scheme has been disclosed and has been given a reference number by HMRC does not imply that HMRC has approved the scheme or accepts that it works. TAD is not a clearance system.

How does TAD work?

TAD applies only to schemes which fall within certain descriptions (more below).

The obligation to disclose normally falls upon the promoter, that is to say someone who either makes the scheme available for implementation or is to any extent involved in the design of the scheme. In practice promoters are often accountants, lawyers or banks, but may include payroll consultants and service providers

In some circumstances scheme users have to disclose rather than the promoter. The main circumstance is where the scheme is designed “in-house” and there is no promoter.

Disclosures must be made within short time limits – for a promoter as short as within 5 days of making the scheme available for implementation. Disclosure is made by sending a form to Anti-Avoidance Group in HMRC describing the scheme and how it works.

A promoter has to disclose a scheme once only. No further disclosure of that scheme is required unless it is changed to the point where it becomes a different scheme.

A promoter disclosure does not identify clients. HMRC issues a Scheme Reference Number (SRN) which a promoter must pass on to clients. Clients who use a scheme for which they have a SRN must notify HMRC. For NICs schemes, the client will normally be the employer, who, if they use the scheme, must notifiy HMRC on form AAG4 by the filing date of the PAYE return affected.

A promoter who fails to disclose a scheme may be liable to a penalty of up to £5,000, to be determined by the Special Commissioners, and £600 a day for each day that the failure continues thereafter.

A scheme user who fails to notify a SRN may be liable to an initial penalty of £100, rising to a maximum of £1,000 for subsequent failures.

Extending TAD to NICs

A person who has to disclose a scheme for both tax and NICs can make a single disclosure. The only change after 1 May 2007 is that they must now explicitly explain how the scheme works for NICs. HMRC will issue a single SRN.

So the main impact of the extension will be upon schemes that are notifiable for NICs only.

What NICs only schemes may be notifiable?

The starting point is that there must be a scheme. That scheme must be expected to provide someone with a NICs advantage – a reduction or deferral of payment of an NI liability . And that advantage must be one of the main benefits of using the scheme.

A scheme that passes through the above tests is notifiable only if it falls within one of several descriptions – “hallmarks”.

The hallmarks most likely to trigger a NICs disclosure are:

• Confidentiality from other promoters. Applies to promoters only. The test focuses on any element within the scheme that delivers the expected NICs advantage. It is a hypothetical test – would any promoter want to keep that element confidential from other promoters in order to facilitate continued or repeated use of that element.
• Confidentiality from HMRC. Again focuses on any element within the scheme that delivers the expected NICs advantage. The test is would the promoter want to keep the element confidential from HMRC in order to facilitate continued or repeated use of that element.
• Premium fee. Another hypothetical test. The test is whether it is likely that any promoter would expect to receive a premium fee for the element (or similar) that delivers the NICs advantage
• Standardised NICs Products. This hallmark is aimed at so-called “plug and play” schemes that use standardised documentation and transactions and whose main purpose is to obtain a NICs advantage. There are exceptions for schemes that consist of certain statutory reliefs and for schemes made available (by any promoter) before 1 August 2006

Implications for payroll professionals

Numerous payroll professionals have contacted HMRC asking whether they have to disclose schemes involving salary sacrifice arrangements, childcare voucher schemes, holiday pay schemes etc.

Nothing specifically excludes salary sacrifice arrangements, or schemes that use salary sacrifice to provide other tangible benefits, from disclosure. However, in practice, HMRC expects very few such schemes to be notifiable because they will fall out at some stage of the tests described above.

Let us assume that such a scheme gets as far as the hallmarks. HMRC would not expect an existing standard scheme to fall within either of the confidentiality hallmarks or the premium fee hallmark, all of which are proxies for “new and innovative”.

Nor would HMRC expect an existing standard scheme to fall within the standardised NICs product hallmark because most, if not all, those schemes will have been on the market before 1 August 2006.

Childcare voucher schemes are an example of an existing standard scheme that we would not expect to fall within the hallmarks.
Ultimately it is for promoters and payroll managers to decide whether they have to disclose a particular scheme. But we would suggest that the approach should be to ask themselves is there something new, innovative or unusual about this scheme? Is it seeking to use salary sacrifice to provide tangible benefits of a type, or in a way, that schemes on the market before 1 August 2006 did not?

If the answer is “yes” or even “possibly” we would recommend that person to read the Disclosure guidance. In particular read the guidance about the hallmarks. We would also recommend that person to seek appropriate professional advice, not only as to whether the scheme is notifiable, but also as to whether it achieves the tax and NICs advantages anticipated.