We welcome the opportunity to comment on the consultation document published on 20 April 2016 by HM Revenue & Customs (HMRC) entitled 'Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax'.
We confirm that we are happy for this response, including any personal information, to be published or disclosed in accordance with the access to information regimes.
1.1 Overarching objectives
The overarching objectives set out in the consultation document are:
- To request feedback on proposals to change the VAT disclosure
of avoidance scheme rules (VADR) to:
- Require promoters to disclose VAT avoidance schemes to HMRC
- Extend the obligation for disclosure of schemes to other indirect taxes in particular gambling duties and insurance premium tax
- To request feedback on the updated draft inheritance tax (IHT) hallmark
Our response has been drafted with these objectives in mind.
2. Executive summary
In summary our view is that little change from the existing VADR regime is required, while the proposals for DOTAS for IHT need to be reconsidered.
Our more detailed comments on the particular consultation questions are set out below.
Our overall view on the proposals for the VAT disclosure regime is that the existing disclosure regime appears to be working very well, and does not merit any change. That said, we acknowledge there may be some advantages in closer alignment with the DOTAS rules, although we note there are different DOTAS filters applied for different taxes. While we are not aware of any avoidance on other indirect taxes, we can appreciate the need for extension of the disclosure regime to these areas, particularly in a climate where they may well assume greater revenue raising importance for the Government.
2.2 DOTAS for IHT
Our view of the IHT hallmark is that it is still far too widely drafted and needs radical reform if it is to be effective for the Government and taxpayers. We include a form of words that might be adapted into a reformed IHT hallmark. As inheritance tax arrangements are very different from commercial and investment arrangements, we feel some further consideration should be given to the timing of any disclosure obligation and on whom that obligation falls.
3. Responses to consultation questions
3.1 Question 1 Do you agree that reforming VADR in this way would provide a clearer and more timely picture of the nature and extent of avoidance?
The proposal seeks to move the obligation for making a disclosure from the person using a scheme to a person who promotes the scheme, resulting in on-going obligations for such promoters to provide information on clients using the schemes.
We note that published statistics for the use of disclosable VAT avoidance schemes reveals that fewer than five listed schemes and fewer than five hallmarked schemes have been disclosed each year from April 2011 to September 2014 (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/379821/HMRC_-_Tax_avoidance_disclosure_statistics_1_Aug_2004_to_30_Sept_2014.pdf)
In addition VAT schemes that meet the Halifax test, being those:
- that result in the accrual of a tax advantage, the grant of which would be contrary to the purpose of the VAT provisions when considering the circumstances viewed as a whole and
- where it is apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage
have the consequence that the abusive transactions will be redefined to exclude the 'abusive practice'.
We note that under the current disclosure regime the obligation to disclose arises within 30 days of the last day for submitting the VAT return, or within 30 days of the claim being made.
We understand the estimated loss of VAT from VAT avoidance in calculating the tax gap for 2013-14 was £0.2bn which represents less than 0.2% of total net VAT receipts of £104.8bn, and only 7% of the total estimated tax lost from avoidance for that year. These percentages and absolute amounts of VAT avoidance are significantly lower than for other taxes, which perhaps warrant a greater focus.
In our experience businesses have little appetite for using what are currently identified in the regulations as VAT avoidance practices. Changing the persons who are obliged to disclose 'disclosable schemes' for the existing regime will achieve little more than adding extra administration into the disclosure regime by requiring promoters to monitor the use of their schemes by clients.
The difference in time limit for disclosure, from 30 days of the deadline for submitting a VAT return to potentially within five days of a scheme being made available, may give a timing advantage were HMRC able to act quickly to eliminate unacceptable tax advantages arising from such avoidance. It is not necessary, however, to change the identification of the person required to report a disclosure to access this potential timing advantage.
It is our view, however, from a review of Tribunal and Court decisions on VAT avoidance, that the boundary between acceptable and unacceptable VAT avoidance, is often unclear. We therefore query whether HMRC has the capability to capitalise on any potential cashflow advantage from a change in timing of disclosure.
3.2 Question 2: If you disagree, what suggestions do you have for reforming VADR so that it provides HMRC with a clear and timely picture of the nature and extent of avoidance?
It may be possible to take advantage of advance disclosure times, by requiring earlier disclosure in the existing VADR, thus achieving closer alignment with the other DOTAS rules.
3.3 Question 3: To what extent do you think the DOTAS rules on who is a promoter and circumstances when a scheme user has to disclose an avoidance scheme would be effective in a revised indirect tax disclosure regime?
As noted above there may be a cashflow advantage to the Government from earlier disclosure, though this does not need to be achieved by a change in the person required to disclose.
3.4 Question 4: To what extent would the DOTAS 'benefit' test be a clearer and more objective test for disclosure of indirect tax avoidance schemes?
A refinement of the conditions for non-hallmarked schemes to refer to 'main benefit' instead of 'main purpose' could result in a different set of actual disclosures. To the extent there is subjective difficulty in determining whether there is a main purpose of obtaining a tax advantage, we think there will be difficulties in identifying whether there is a main benefit of obtaining a tax advantage which should be disclosed and whether there is one which should not, leading to potential distortion of data.
3.5 Question 5: To what extent would removal of turnover thresholds ensure HMRC is more fully sighted on VAT avoidance?
We agree that it may be appropriate to have more consistency between rules for VAT and for direct tax. However, in the context of simplification and reducing the VAT administrative burdens for small businesses and non-VAT registered businesses, we wonder whether a removal of the thresholds so that any business could be caught would be justified or actually achieve any benefit for the exchequer.
3.6 Question 6: To what extent should a revised indirect tax disclosure regime place reporting obligations on VAT non-taxable persons?
We are of the view that requiring non-VAT registered businesses to disclose could only be effective where those businesses have a taxable presence in the UK. However, in view of the potentially large number of businesses involved, and the low proportion of VAT lost from avoidance, we are sceptical of the value of imposing such obligations on this sector of the business community.
3.7 Question 7: How should users of VAT avoidance schemes who are not registered for VAT, and who receive a scheme reference number from the promoter, be required to notify HMRC when they use such schemes?
If this was to be introduced, and on the assumption the obligation would only attach to a business that had some other taxable presence in the UK, the obligation to disclose could be included on their tax return concerning the other taxes for which they are liable.
3.8 Question 8: Should the indirect tax disclosure regime adopt the DOTAS definition of tax advantage for VAT or should it retain the current definition, suitably adapted to cover non-taxable persons?
It is our view that the existing VADR is understood. In view of the relatively low level of VAT avoidance, if there were to be any reform of the definition of tax advantage for VAT, it should concentrate on seeking to identify significant VAT avoidance.
3.9 Question 9: Do you believe that penalties for failure to comply with obligations under the indirect tax disclosure scheme should be the same as those applied under DOTAS? If not, please explain your reasons and explain what penalty structure would be more appropriate.
In our view makes sense to align the VADR and DOTAS penalty regimes for non-disclosure.
3.10 Question 10: Which DOTAS hallmarks do you believe are suitable for an indirect tax disclosure regime? Would these hallmarks require any modification to work effectively for VAT arrangements, and if so how should they be modified?
The suggestions of aligning as afar as possible the DOTAS and VADR hallmarks for confidentiality and premium fee are sensible in our view. We are not convinced a hall mark designed around 'standardised tax products' or 'financial products' would work very well for VAT. We support a review of the schemes identified by VAT hallmarks to take account of modern business practices and case-law developments since the original schemes listed in Annex A were identified.
3.11 Question 11: Which of the current VADR hallmarks should be retained in a reformed regime? What further hallmarks or features of schemes should be added?
See response to question 10.
3.12 Question 12: Do you see any reason why gambling duties and IPT should not be brought within the scope of VADR, revised as proposed in this consultation?
3.13 Question 13: Do you agree that indirect taxes should be included within the scope of the proposed revised VADR? What further changes would be required to include these regimes?
3.14 Question 14: Which hallmarks do you believe are suitable for VAT and for IPT and gambling duties? Would these hallmarks require any modification to work effectively for arrangements in these taxes, and if so how should they be modified?
The hallmarks concerning value shifting, groups – third party suppliers, confidentiality, premium fee, and offshore loops would seem to be suitable for IPT and gambling duties.
3.15 Question 15: Would these 'generic' hallmarks also be suitable for other indirect taxes? If not, what changes do you believe would be needed to make them effective?
On an initial view these 'generic hallmarks would seem to be useable for a number of other indirect taxes.
3.16 Question 16: What further hallmarks are required to ensure avoidance risks specific to these taxes are properly addressed?
3.17 Question 17: Do you agree that the DOTAS definition of tax advantage is appropriate for indirect taxes other than VAT? If so, does it need to be modified for any of the taxes?
3.18 Question 18: Do the revised Conditions 1 (tax advantage a main purpose) and 2 (contrived or abnormal arrangements) target the hallmark appropriately and ensure that ordinary tax planning arrangements are not caught, whilst ensuring that IHT avoidance is disclosed?
Our view is that the hallmark as currently drafted will not work properly with conditions one and two either together or on their own. Our further comments on the conditions follow.
As many arrangements for transferring assets to beneficiaries can involve contrived or abnormal circumstances without any tax avoidance purpose or benefit, it is our view that the inclusion of condition two without the requirement of a main purpose of obtaining an IHT advantage is a redundant condition. We also note that 'contrived' and 'abnormal' can have different meanings depending on the context for which they are used.
It is our view that the current draft conditions and schedule would still catch a wide range of situations that could be within what is currently understood to be accepted IHT planning. For example if a trust is set up and funded with property qualifying for business property relief, to the extent one regards a gift and the setting up of a trust as 'abnormal or contrived' and the use of property qualifying for business property relief as having a main purpose of obtaining an IHT advantage, such an arrangement would be disclosable.
We are also uncertain as to the point at which a disclosure would be triggered if within the requirement for a promoter to disclose under FA 2004 s.308(2)(c). A 'transaction' may only arise on death, and a will providing for assets to be dealt with on death may be revoked or varied after it is initially made and before any 'transaction' has occurred. Requiring disclosure on making a will may mean that many redundant disclosures will be made. An alternative might be that the obligation for disclosure is transferred to executors, who may have little understanding or background for the reasons why an individual signed a will drafted in a particular way.
3.19 Question 19: Does the Schedule now cover the types of arrangements which could meet Conditions 1 and 2 but which should not be disclosed? Should other types of arrangements be included?
As discussed above it is our view that the IHT DOTAS hallmark in its proposed form is still far too widely drafted. We are certain there are more appropriate ways of drafting the hallmark. A possible example might be along the following lines:
An arrangement is not disclosable under the IHT hallmark unless, when considered in the circumstances in which it is used, it is undertaken with a view to giving rise to an IHT outcome that is contrary to the purpose of the IHT legislation, purposively interpreted.
We are also of the view that some further consideration needs to be given to the timing of obligation to disclose, and on whom the obligation should fall.
3.20 Question 20: Do you agree that the revised approach of describing the type of excepted arrangements is preferable to one where the circumstances are more precisely defined? Are the descriptions sufficiently precise to ensure that the appropriate arrangements are included?
It is helpful to have a white list of arrangements excepted from disclosure, but as noted above, we are of the view the statutory instrument needs to be radically changed.
4. The firm
Smith & Williamson is an independently owned professional service group with around 1,600 people across 13 offices in the UK, Ireland and Jersey.
Smith & Williamson is ranked amongst the UK's top ten accountancy firms1 and also ranks in the top ten independently owned private client wealth managers2 in the UK. The group has around £16bn of funds under management and advice (as at 31 March 2016).
This combination of a full service accountancy and tax practice alongside an investment management business, which offers private banking, differentiates us from other firms and makes us unique.
On the international front, Smith & Williamson is part of Nexia International, a top ten global network of independent accounting and consulting firms, which gives us access to local knowledge and expertise in over 500 offices across over 100 countries worldwide.
Our corporate finance practice is part of M&A International Inc., an independent alliance of specialist merger and acquisition firms. The alliance offers the resources of over 500 professionals operating in every major financial centre in the world.
Clients are wide-ranging, but can be grouped as follows:
- High Net Worth Individuals, families, business interests and trusts
- Entrepreneurs and management teams
- Mid to large Corporates
- Professional practices
- Non-profit organisations
1 According to the latest league tables from Accountancy magazine and Accountancy Age.
2 FT Money Guide: private client wealth management AUM rankings, Fenchurch: Side-by Side Analysis of Key Players – AUM, PAM: Top 40 Managers by Assets Under Management.
Smith & Williamson LLP: Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. The word partner is used to refer to a member of Smith & Williamson LLP The Financial Conduct Authority does not regulate all of the services or products discussed in this publication.