Disclosure of tax avoidance schemes

Summary of the disclosure rules - Income Tax, Corporation Tax and Capital Gains Tax

The disclosure regime was introduced with effect from 1 August 2004 and was limited in scope to tax arrangements concerning employment or certain financial products. This was widened with effect from 1 August 2006 to the whole of income tax, corporation tax and capital gains tax.

A tax arrangement must be disclosed when:

  • it will, or might be expected to, enable any person to obtain a tax advantage
  • that tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement, and
  • it is a tax arrangement that falls within any description ('hallmarks') prescribed in the relevant regulations.

In most situations where a disclosure is required it must be made by the scheme “promoter” within 5 days of it being made available. However, the scheme user may need to make the disclosure where:

  • the promoter is based outside the uk
  • the promoter is a lawyer and legal privilege applies, or
  • there is no promoter.

The hallmarks are:

  • Wishing to keep the arrangements confidential from a competitor.
  • Wishing to keep the arrangements confidential from HMRC.
  • Aarrangements for which a premium fee could reasonably be obtained.
  • Arrangements that include off market terms.
  • Arrangements that are standardised tax products.
  • Arrangements that are loss schemes, and
  • Arrangements that are certain leasing arrangements.

Upon disclosure, HMRC issue the promoter with an 8-digit scheme reference number for the disclosed scheme. By law the promoter must provide this number to each client that uses the scheme, who in turn must include the number on his or her return or form AAG4.

A person who designs and implements their own scheme must disclose it within 30 days of it being implemented.

National Insurance Contributions

The disclosure regime was extended from 1 May 2007 to include arrangements relating to National Insurance contributions. The rules broadly mirror those for IT, CT and CGT, except that the last two hallmarks do not apply.

Disclosures relating to Tax and NICs arrangements can be made on the same form but the respective advantages must be explained.

Stamp Duty Land Tax

The disclosure regime was extended in 2005 to include tax arrangements relating to stamp duty land tax where the subject matter of the arrangements is commercial property with a market value of at least £5 million.

The main differences compared to the disclosure regime for income tax, corporation tax and capital gains tax are:

  • the hallmarks are not applied to limit what is required to be disclosed, however there is a ‘white list’ of arrangements that are not required to be disclosed
  • promoters are not obliged to provide reference numbers to scheme users; and
  • some minor differences in the time limits for making disclosure.

Value Added Tax

A disclosure regime was also introduced on 1 August 2004 in relation to arrangements that are intended to give any person a VAT advantage. The main obligation for disclosure rests with those taxable persons who are party to the scheme. However, disclosure is limited to two broad categories:

  • Listed VAT avoidance schemes: These are schemes that are described in the relevant legislation. Currently, 10 schemes have been listed.
  • Hallmarked schemes: These are schemes that include or are associated with a ‘hallmark’ of avoidance prescribed in the relevant legislation. Currently, there are 8 hallmarks of avoidance.

The listed schemes are certain arrangements that involve:

  • the first grant of a major interest in a building
  • payment handling services
  • value shifting
  • leaseback agreements
  • extended approval periods
  • groups and third party suppliers
  • education and training by a non-profit making body
  • education and training by a non-eligible body
  • cross-border face-value vouchers, or
  • a surrender of a relevant lease.

The hallmarks are:

  • confidentiality agreements
  • agreements to share a tax advantage
  • contingent fee agreements
  • prepayments between connected parties
  • funding by loans, share subscriptions or subscriptions in securities
  • off-shore loops
  • property transactions between connected persons, and
  • issue of face-value vouchers.

The obligation to disclose is triggered by:

  • the submission of a VAT return that shows an amount that is different (higher or lower) from what would have been shown had the scheme not been entered into
  • the submission of a claim for VAT (e.g. by the making of a voluntary disclosure of an error) that is higher than what would have been claimed had the scheme not been entered into, or
  • incurring at any time less non-deductible VAT than what would have been incurred had the scheme not been entered into.

Disclosure is required to be made within 30 days of (as applicable) the due date of the affected VAT return; making the claim; or the due date of the VAT return covering the period in which less non-deductible VAT was incurred.

However, disclosure of listed schemes is not required where the total turnover (including exempt income) for the business plus any associated companies is less than £600,000 pa. Similarly, disclosure of hallmarked schemes is not required where the total turnover (including exempt income) for the business plus any associated companies is less than £10m pa.

In addition, for hallmarked schemes, disclosure is not required where a third party (such as the promoter of the scheme) has registered the scheme with Anti-Avoidance Group and provided the reference number HMRC allocated to it to the person who would otherwise be liable to make a disclosure.