Disclosure of Tax Avoidance Schemes (DOTAS): Extension to Stamp Duty Land Tax (SDLT) on residential property

At Budget 2008 the Government announced that it would extend the SDLT avoidance schemes disclosure regime to cover residential property worth £1 million or more.

HM Revenue & Customs (HMRC) wish to discuss how such a scheme might work in advance of drafting regulations for consultation with key stakeholders later this summer.

All comments on this paper should be sent to Michael Lyttle by 6 June 2008.

This short discussion paper describes the options for extending DOTAS to SDLT on residential property and suggests points for discussion.

On this page:

1. Background

1.1 The object of DOTAS is to:

  • provide early information to HMRC about the detail of tax avoidance schemes allowing for those schemes to be risk assessed and, where appropriate, to inform loophole closing anti-avoidance legislation
  • identify users of those tax avoidance schemes in order for HMRC to prioritise schemes for legislative change and/or operational challenge

1.2 DOTAS requires promoters (and in some cases users) of tax schemes falling within certain descriptions to provide information about ('disclose') the scheme to HMRC within prescribed time limits.

1.3 The initial coverage was income tax, Capital Gains Tax (CGT) and Corporation Tax (CT) ('the main regime'), limited to schemes that concerned employment and certain financial products. The main regime was extended to the whole of income tax, CT and CGT with effect from 1 August 2006 and the descriptions of schemes to be disclosed revised into a series of 'hallmarks' targeting new and innovative schemes ('the generic hallmarks') or certain known high risk areas.

1.4 Users of disclosed main regime schemes are identified by a scheme reference number (SRN) issued by HMRC.

1.5 DOTAS was extended to SDLT with effect from 1 August 2005, limited to schemes that concern non-residential property with a value of at least £5 million. Schemes falling within certain listed descriptions (and certain combinations of those descriptions) are excepted from disclosure. The descriptions cover schemes that were already known to HMRC at 1 August 2005.

1.6 The SDLT descriptions were deliberately drawn more widely than the main regime descriptions. DOTAS is intended to close information gaps that inhibit HMRC taking effective and timely action against avoidance. For the main regime taxes the information gap was largely a timing gap. But for SDLT the information gap was in many cases an absolute gap. This is because of the nature of the SDLT system (a transaction tax where each transaction is reported on a separate return). Successful avoidance has the effect that there may be no return to trigger HMRC enquiries. Relatively wide disclosure descriptions were needed for HMRC to establish the existing stock of avoidance schemes.

1.7 The SRN system was not applied to SDLT schemes. The time limits for filing SDLT returns make them unsuitable for reporting SRNs. A separate system for users to report SRNs would have imposed an undesirable burden on users of schemes that were not avoidance (bearing in mind the wide scope of the SDLT descriptions).

2. Legislation

2.1 The primary legislation for DOTAS is Part 7 of Finance Act 2004, as amended by Section 108 of FA 2007.

2.2 There are 4 main sets of regulations made under Part 7:

  • The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations – SI 2006/1543 prescribe descriptions of arrangements required to be disclosed in respect of income tax, CT and CGT
  • The Stamp Duty Land Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations –SI 2005/1868 prescribe descriptions of arrangements required to be disclosed in respect of SDLT
  • The Tax Avoidance Schemes (Information) Regulations –SI 2004/1864 prescribe the information to be provided to HMRC by scheme promoters and users and the time limits for providing that information
  • The Tax Avoidance Schemes (Promoters and Prescribed Circumstances) Regulations – SI 2004/1865 prescribe circumstances in which a person is not to be treated as a promoter

In this instance we are mainly concerned with the second set of regulations above, SI 2005/1868.

2.3 A summary of and commentary on the DOTAS legislation as it applies to SDLT is at Appendix A. It is suggested that readers also refer to the HMRC guidance on disclosure.

3. Residential property

3.1 The initial extension of DOTAS to SDLT was limited to non-residential property on the assumption that any tax avoidance schemes that concerned high value residential property would also concern high value commercial property and so would be disclosed to HMRC.

3.2 Subsequently HMRC became aware of SDLT avoidance schemes being marketed that concerned high value residential property only. HM Treasury (HMT) published a consultation document 'Stamp duty land tax – ensuring fairness for all' in December 2007. It included a proposal to extend DOTAS to SDLT on residential property worth £1 million or more.

3.3 The Government announced at Budget 2008 that it would legislate later in 2008 to extend the SDLT disclosure regime to residential property worth £1 million or more.

3.4 HMT published its response to the consultation on 30 April 2008.

4. Options for extending DOTAS to residential property

Broadly there are 3 options:

Option 1 – retain the descriptions for commercial property. Extend them (but with a value threshold of £1 million) to residential property.

Option 2 – retain the existing descriptions for commercial property. Apply a different set of descriptions for residential property schemes.

Option 3 – apply a new set of descriptions to both non-residential and residential property.

Option 1: Extend the existing descriptions to residential property

Advantages

Promoters will be familiar with the rules.

Disadvantages

This option could lead to a number of unwanted disclosures of ordinary tax planning. It could also place unnecessary burdens on promoters/users.

HMRC’s initial thoughts

We are not attracted to this option because of the risk for unwanted disclosures/unnecessary burdens. But we would like to do more work to establish just how great that risk is.

Points for discussion:

  • What main types of scheme are being used?
  • What is the extent of schemes that:

(a) fall within the current SDLT descriptions

(b) concern residential property with a value of at least £1million which

(c) promoters have not disclosed already as a non-residential property scheme?

• Would a grandfathering rule overcome the problem of unnecessary disclosures (ie no scheme would be notifiable if it had already been made available by any promoter before a certain date). Such a rule was used successfully to limit disclosures under the 'standardised tax product' hallmark in the main regime (SI 2006/1543 regulation 11(1)(b)).

Option 2: Retain the existing descriptions for commercial property. Apply different descriptions for residential property

Advantages

No disturbance of the existing regime with which promoters are familiar.

Targeting the residential property descriptions more narrowly at avoidance would minimise the number of unwanted disclosures of residential property schemes (and associated unnecessary admin burdens).

Disadvantages

Risk that the residential property descriptions would fail to capture some or all types of avoidance.

HMRC’s initial thoughts

The object for HMRC would be to learn about schemes that it does not already know about. So we believe the descriptions for residential property would have to be proxies for new and innovative schemes (akin to the generic hallmarks used for the main regime, which are discussed more fully under Option 3) rather than objective descriptions of known schemes or types of scheme.

There would seem to be little advantage in applying such hallmarks to residential property without applying them to commercial property.

Points for discussion

Option 3: Devise new description(s) covering residential and non-residential property

Advantages

Reduces risk of significant numbers of unwanted disclosures of residential property schemes with associated unnecessary admin burdens.

Reduces risk of unintentional failure to disclose commercial property schemes descriptions because of the wide scope of the descriptions.

Disadvantages

Risk that the revised descriptions would fail to capture avoidance schemes.

Promoters and others would have to familiarise themselves with new descriptions.

HMRC’s initial thoughts

This looks the preferred option, provided suitable hallmarks can be worked up. HMRC has established the opening stock of schemes and is now mainly interested in learning about new and innovative schemes. Over the last 12 months we have received 66 disclosures, which is equivalent to some 5 or 6 a month, and these are generally of new and innovative schemes. We would want to be certain that we continue to capture such schemes and do not throw the baby out with the bath water.

We believe the descriptions would have to be proxies for new and innovative schemes (akin to the generic hallmarks used for the main regime). The generic hallmarks for confidentiality and premium fee are set out in Appendix B. Guidance on these hallmarks.

Points for discussion

Is there a significant degree of unintentional failure to disclose commercial property schemes?

Could a confidentiality hallmark work for SDLT? If so, what features of the main regime hallmark would need amendment for SDLT purposes?

Could a premium fee hallmark work for SDLT? If so, what features of the main regime hallmark would need amendment for SDLT schemes?

Are there any other hallmarks that might work for SDLT?

Appendix A: Outline of the current disclosure legislation

The legislative background

The law for the disclosure regime is contained in a combination of primary and secondary legislation as follows:

1. Part 7 of the Finance Act ('FA') 2004, consisting of sections 306-319

2. Section 98C of the Taxes Management Act 1970 ('TMA')(inserted by s.315 FA 2004)

3. Section 108 of FA 2007, which amended Part 7 and section 98C

4. The Tax Avoidance Schemes (Information) Regulations 2004, SI 2004/1864 (as amended) ('the 2004 Information Regulations')

5. The Tax Avoidance Schemes (Promoters and Prescribed Circumstances) Regulations 2004, SI 2004/1865 ('the Promoters Regulations')

6. The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006, SI 2006/1543 ('the Description Regulations')

7. The Stamp Duty Land Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2005, SI 2005/1868 ('the SDLT Description Regulations')

8. The Tax Avoidance Scheme (Penalty) Regulations 2007, SI 2007/3104

Commentary on Part 7 FA 2004 and associated regulations relevant to SDLT

The primary legislation for the disclosure regime is contained in Part 7 FA 2004, which consists of sections 306-319. Unless otherwise stated, the statutory references that follow here are to those sections.

Section 306 defines notifiable arrangements and notifiable proposal, which is a proposal for arrangements that would be notifiable if they were entered into. Part of the definition of notifiable arrangements entails the prescription by the Treasury, by regulation, of descriptions of arrangements. These descriptions are contained in relation to the SDLT regime in the SDLT Description Regulations.

The arrangements prescribed in the SDLT Description Regulations are those:

  • Whose subject matter does not consist wholly of residential property.
  • Whose value is at least £5 million.
  • are not contained in the Schedule of excepted arrangements. The Schedule provides that arrangements are excepted from disclosure if they comprise one or more of six steps, A to F. (subject to 2 rules which describe how those steps can be used in combination) and do not include any other step necessary for the purpose of securing a tax advantage.

Section 307 defines promoter. Essentially a promoter is a person who either makes a proposal available for implementation or is to any extent involved in the design of arrangements. Subsection (5) provides that a person is not to be treated as a promoter by reason of anything done in 'prescribed circumstances'. 'Prescribed' here means prescribed by regulations (section 318).

The Promoters Regulations provide for five instances where a person who would otherwise be a promoter is not to be treated as such. One instance is where legal professional privilege has the effect that the promoter is not required to provide all of the information otherwise required to be disclosed.

Section 308 sets out the first duties of a promoter:

  • Subsection (1) obliges him to provide 'prescribed information' about a notifiable proposal to HMRC within a 'prescribed period' after the relevant date, which is defined in subsection (2).
  • He is also obliged under subsection (3) to provide 'prescribed information' about notifiable arrangements within a 'prescribed period', unless they implement a proposal already notified under s308(1). The information to be provided, and the time limits for doing so, are prescribed in the 2004 Information Regulations. Regulation 3 prescribes the information to be provided and regulation 4 prescribes the time limits.
  • Subsection (4) is commonly known as the co-promoter rule although that term is not used in the sub-section. It provides that where two or more persons are promoters in relation to the same proposal or arrangements, a notification by one of those persons discharges the obligations of the other(s) to notify.
  • Subsection (5) provides that a promoter does not have to notify the same, or substantially the same, proposal or arrangements more than once.

Section 309 concerns the situation where the promoter is outside the UK, in which case if the promoter fails to comply with section 308 the obligation to provide prescribed information passes to the client.

Under Section 310 the obligation also passes to the client where neither the promoter nor any other person in the UK is obliged to notify under section 308 (as a promoter) or section 309 (as the client of an offshore promoter). In practice section 310 applies where there is no promoter because:

  • the arrangements are designed by an 'in-house' tax department
  • the promoter is a lawyer who cannot make a full disclosure without revealing legally privileged information – in such a case he is not treated as a promoter for the purposes of the regime by virtue of regulation 6 of the Promoters Regulations (see also section 314)

Section 311 provides that HMRC may allocate a reference number, the SRN, in relation to a notifiable proposal or notifiable arrangement where a person has complied with sections 308, 309 or 310.

HMRC does not allocate reference numbers to SDLT schemes under section 311. It issues numbers outside s311 solely to assist promoters to keep track of disclosed schemes.

Section 312 requires a promoter, within 30 days of the relevant date (which is defined in subsection (2)), to provide a person to whom he supplies services in connection with notifiable arrangements (a 'client') with 'prescribed information' relating to any reference number issued by HMRC. Regulation 7 of the 2004 Information Regulations prescribes the information - it consists of the SRN only. Since HMRC does not issue SRNs for SDLT schemes, a promoter has no s312 obligation in relation to such.

Section 313(1) requires any person who is a party to notifiable arrangements to provide HMRC with 'prescribed information' relating to:

1. a reference number notified to him by HMRC under section 311 or by the promoter under section 312

2. the time when he expects to obtain, by virtue of the arrangements, an advantage in relation to any 'relevant tax', which is defined in section 313(2) by reference to the arrangements described in regulations under section 306

Section 313(3) provides that regulations under section 313(1) may, in 'prescribed cases', require:

1. the reference number and other information to be included on any return or account that the person is required to make to HMRC

2. the same information to be provided separately to HMRC at the 'prescribed time(s)'

Regulation 8 of the 2004 Information Regulations prescribes the information that a person who is a party to notifiable arrangements must notify to HMRC under section 313. It also prescribes the cases in which the information is to be provided on returns, and the times at which it is otherwise to be provided:

Paragraph (11) exempts users of SDLT schemes from providing information to HMRC.

Section 314 provides that nothing in Part 7 requires any person to disclose legally privileged information. The effect of this, combined with regulation 6 of the Promoters Regulations and with section 310, is that the obligation to make a disclosure passes to the client.

Section 315 inserts section 98C into the TMA providing penalties for failure to comply with the provisions of Part 7. These penalties have been summarised at paragraph 20 of the Technical Note.

Section 316 provides that the information required under sections 308(1) or (3), 309(1), 310, 312 or 313(1) must be made in a form and manner specified by HMRC. HMRC has specified in guidance that users who are not required to notify a SRN on their tax return must do so on a form AAG4.

Section 317 concerns the procedure for making regulations.

Section 318 is interpretative and includes definitions of 'arrangements', 'tax', 'tax advantage' and 'prescribed'.

Section 108 FA 2007 inserted new sections 313A, 313B, 314A, 306A and 308A into Part 7. These provide, very broadly, that HMRC may investigate schemes where they have reasonable grounds to believe that a promoter has failed to disclose a notifiable proposal or notifiable arrangement, or that a promoter has failed to provide all prescribed information in connection with such a proposal or arrangement.

Appendix B: The confidentiality and premium fee hallmarks (extracts from SI 2006/1543)

Confidentiality involving a promoter (Regulation 6)

(1) Arrangements are prescribed if they satisfy—

(a) Conditions 1 and 2; or

(b) Conditions 1 and 3.

(2) The Conditions are as follows.

Condition 1

Any element of the arrangements (including the way in which the arrangements are structured) gives rise to the tax advantage expected to be obtained under the arrangements.

Condition 2

It might reasonably be expected that a promoter would wish the way in which that element of those arrangements secures a tax advantage to be kept confidential from any other promoter at any time in the period beginning with the opening date and ending with the appropriate date.

Condition 3

The promoter would, but for the requirements of these Regulations, wish to keep the way in which that element secures that advantage confidential from Her Majesty’s Revenue and Customs for some or all of the period beginning with the opening date and ending with the appropriate date, and a reason for doing so is to facilitate repeated or continued use of the same element, or substantially the same element, in the future.

(3) In a case where—

(a) by virtue of regulation 6 of the Promoters Regulations, no person is to be treated as the promoter in relation to the arrangements, or

(b) by virtue of section 309(1) of FA 2004 (duty of person dealing with promoter outside United Kingdom), a user of the arrangement has a duty to provide prescribed information,

paragraph (2) shall have effect as if for Condition 3 there were substituted

“Condition 3

The user of the arrangements wishes to keep confidential from Her Majesty’s Revenue and Customs the way that element secures that advantage for some or all of the period beginning with the opening date and ending with the appropriate date.”.

(4) In this regulation—

“the appropriate date” has the meaning given in regulation 8(1) of the Information Regulations, and the provisions of regulation 8 of those Regulations (prescribed information under section 313 of FA 2004: timing and manner of delivery) apply for the purposes of determining that date; and

“the opening date” means the date of the first transaction forming part of the arrangements.

Confidentiality where no promoter involved (Regulation 7)

Arrangements are prescribed if—

(a) no person is a promoter in relation to them;

(b) the intended user of the arrangements is a business which is not a small or medium-sized enterprise;

(c) any element of the arrangements (including the way in which the arrangements are structured) gives rise to the tax advantage expected to be obtained under the arrangements;

(d) the user of those arrangements wishes the way in which that element is expected to secure a tax advantage to be kept confidential from Her Majesty’s Revenue and Customs for some or all of the period—

(i) beginning with the day on which he enters into the first transaction forming part of the notifiable arrangements, and

(ii) ending with the latest time at which he would first have had to provide Her Majesty’s Revenue and Customs with information under section 313 of FA 2004 in accordance with regulation 8 of the Information Regulations or otherwise include information about the arrangements in a return; and

(e) a reason for the user’s wishing to keep that element confidential from Her Majesty’s Revenue and Customs is to facilitate repeated or continued use of the same element, or substantially the same element, in the future.

Premium fee (Regulation 8)

(1) Arrangements are prescribed if they are such that it might reasonably be expected that a promoter or a person connected with a promoter of arrangements that are the same as, or substantially similar to, the arrangements in question, would, but for the requirements to disclose information under these Regulations, be able to obtain a premium fee from a person experienced in receiving services of the type being provided.

But arrangements are not prescribed by this regulation if—

(a) no person is a promoter in relation to them; and

(b) the tax advantage which may be obtained under the arrangements is intended to be obtained by an individual or a business which is a small or medium-sized enterprise.

(2) For the purposes of paragraph (1), and in relation to any arrangements, a “premium fee” is a fee chargeable by virtue of any element of the arrangements (including the way in which they are structured) from which the tax advantage expected to be obtained arises; and which is—

(a) to a significant extent attributable to that tax advantage, or

(b) to any extent contingent upon the obtaining of that tax advantage.