Finance Act 2015 Sch 17

Disclosure of Tax Avoidance Schemes Commentary from Finance Act Handbook

GENERAL NOTE
The disclosure of tax avoidance schemes (DOTAS) regime has been in place for over ten years. The regime has developed considerably during that period and is in many ways much more rigorous than it was when it was first introduced. But there are still some areas where HMRC believe that the rules are not being complied with, or where there is genuine doubt about how the regime should operate. Schedule 17, which follows extensive consultation, is therefore the latest attempt to modernise the regime.

Schedule 17 has eight main elements:

–       a duty for promoters to provide updated information to HMRC;

–       an extension of the time limit within which HMRC may issue a reference number;

–       a duty on employers to provide information to employees who may receive a tax advantage under the arrangements;

–       a duty on employers to notify HMRC of details of employees who may expect to receive a tax advantage;

–       a widening of the notification requirements for introducers;

–       a whistleblowing protection for persons notifying HMRC of suspected breaches of the DOTAS rules;

–       a mechanism for HMRC to publish information about DOTAS arrangements; and

–       further increases in certain penalties.

Paragraphs 1–3
Paragraph 1 introduces new FA 2004 s 310C:

–       New s 310C(1) provides that the section applies where HMRC have allocated a reference number under FA 2004 s 311 for notifiable arrangements and there is a change in relation to the arrangements of a type specified in s 310C(2) below.

–       New s 310C(2) provides that the change is either a change in the name by which the arrangements are known or a change in the name or address of a person who is a promoter in relation to the arrangements.

–       New s 310C(3) provides that notification of the change must be given to HMRC within 30 days of its being made.

–       New s 310C(4) introduces s 310C(5) and (6)  which deal with the situation where there is more than one promoter.

–       New s 310C(5) provides that where the change is a change of address of the promoter, it is the duty of that person to notify HMRC.

–       New s 310C(6) provides that if that person notifies the change to HMRC, the duty of any other person to notify the same change is discharged. This is a practical measure to deal with the situations where there are multiple promoters. Otherwise every promoter in relation to the arrangements would have to notify a change of address of any one of those promoters.

Paragraphs 2 and 3 are consequential drafting amendments.

Paragraph 4
Currently HMRC have 30 days from receipt of a DOTAS notification to issue a scheme reference number. In practice HMRC have usually issued a reference number almost immediately on receipt. This has led to some cases where a reference number has been issued for arrangements which, on full consideration, may not actually need to be registered. In the past this has been little more than a minor inconvenience, but it takes on much greater significance with the advent of the accelerated payment notice regime.

Under that regime a DOTAS number is one of the triggers for the issue of a notice, and there are therefore very significant consequences for scheme users where a reference number has been allocated to a scheme which does not actually require one. Cautious promoters may well have had a policy of notifying HMRC in marginal cases simply in order not to risk a penalty for failure to notify. They may, however, for the reasons discussed above, not be prepared to adopt that same cautious approach given the added significance of a DOTAS reference. Clearly HMRC do not want to do anything to cause previously compliant promoters to take a different approach to DOTAS notifications going forward.

As a result of these concerns, para 4 extends the time limit for HMRC to issue a scheme reference number to 90 days. It is thought that HMRC will use this extended time to discuss with promoters in these marginal cases whether or not registration is actually required, so that only schemes which definitely meet the requirements will be allocated a reference number. Such an approach would not be practical under the previous 30 days limit.

Paragraphs 5–8
HMRC have been concerned for some time that in schemes which offer a tax benefit to employees (whether or not they also offer a tax benefit to the employer) there is no mechanism within DOTAS for capturing the information about the employee’s use of the scheme. There are also concerns that in some cases employees are participating in arrangements implemented by their employers without understanding that those arrangements may constitute tax avoidance.

Paragraph 5 deals with this issue by imposing further reporting requirements on certain employers.

Subparagraph (1) introduces amendments to FA 2004 s 312A:

–       New s 312A(2A) provides that where the scheme user is an employer and receives (or might reasonably be expected to receive) a tax advantage in relation to the employment of one or more employees, the employer must provide prescribed information relating to the reference number to relevant employees. Note that sub-s (2A) is concerned with advantages received by the employer in relation to employees, not with benefits which may be received by employees.

–       New s 312A(3) defines terms used. A “relevant tax” is one prescribed in FA 2004 s 306 (in practice this is virtually all UK taxes) and a “relevant employee” is one in relation to whom the employer receives (or might reasonably be expected to receive) the tax advantage. For this purpose employee includes former employee; and employee includes office holders.

Subparagraphs (4) and (5) are minor drafting amendments.

Paragraph 6 allows for prescribed circumstances under which the duty to provide information does not apply. These will be defined in regulations to be issued shortly.

Paragraph 7 allows for HMRC to include information requirements for the purpose of this new provision to be included in the relevant statutory instruments.

Paragraph 8 is a minor drafting amendment.

Paragraphs 9–11
Paragraph 9 introduces new FA 2004 s 313ZC:

–       New s 313ZC(1) states that the section applies if Conditions A to C are satisfied.

–       New s 313ZC(2) sets out Condition A: that a promoter in relation to arrangements is providing (or has provided) services in connection with those arrangements to a person “the client”.

–       New s 313ZC(3) sets out Condition B: that the client received information under FA 2004 s 312(2) or (5) (i.e. a scheme reference number).

–       New s 313ZC(4) sets out Condition C: that the client is an employer and one or more of the client’s employees receive (or might reasonably be expected to receive) a tax advantage from the arrangements, or the employer might receive (or might reasonably be expected to receive) a tax advantage in relation to the employment of one or more employees.

–       New s 313ZC(5) provides that the client is required to provide prescribed information relating to the employee to HMRC in either of the circumstances envisaged in s 313ZC(4) at the prescribed time.

–       New s 313ZC(6) provides that the obligation above does not apply where HMRC have given notice under FA 2004 s 312(6) or s 313(5) (i.e. that they no longer require promoters to notify clients of the scheme reference number). A list of such schemes can be found at www.gov.uk/government/publications/tax-avoidance-withdrawn-scheme-reference-numbers ]

–       New s 313ZC(7) provides that the duty to provide HMRC with information does not apply in prescribed circumstances.

–       New s 313ZC(8) incorporates the definition of relevant tax in FA 2004 s 312A(3) into new s 313ZC?

Paragraphs 10 and 11 are minor drafting amendments.

Paragraphs 12 and 13
One of the problems with the operation of DOTAS in the past has been in dealing with chains of intermediaries. Conceptually DOTAS works best where there is a single promoter who designs, markets and implements the scheme; it has struggled to deal with the situation where there a number of people in the chain – particularly where there are introducers and sub-introducers who have no part to play in the design or implementation of the scheme but whose function is simply to make contact with potential clients and refer them further up the chain.

Paragraph 12 is the latest attempt to deal with this problem.

Subparagraph (1) introduces amendments to FA 2004 s 313C:

–       New s 313C(1) provides that s 313C applies where HMRC suspect that a person is an introducer in relation to a proposal which HMRC suspect may be notifiable.

–       New s 313C(1A) gives HMRC the power to require, by written notice, the person to provide prescribed information about each person who has provided him with information about the proposal, and also about each person with whom he has made marketing contact about the proposal. In other words, this requirement looks both up and down the chain: up the chain to the person/people who provided the introducer with information about the scheme, and down the chain to those people to whom the introducer himself has provided information.

Subparagraphs (3) and (4) are minor drafting amendments.

Paragraph 13 is a minor drafting amendment.

Paragraphs 14 and 15
Paragraph 14 introduces new FA 2004 s 316A:

–       New s 316A(1) provides that s 316A applies where a person is required to provide information under FA 2004 s 312(2) or s 312A(2) or (2A). These are the sections which require the promoter to provide information to scheme users and certain other parties.

–       New s 316A(2) gives HMRC the power to specify additional information which must be provided to recipients of information under new s 316A(1) above.

–       New s 316A(3) provides that HMRC may specify the form and manner in which such additional information is to be provided.

–       New s 316A(4) defines “additional information” for the purposes of s 316A as information supplied by HMRC which relates to notifiable proposals/arrangements in general. In other words this gives HMRC a power to require promoters to give HMRC-sanctioned information to scheme users etc about the implications of taking part in tax avoidance arrangements.

Paragraph 15 is a minor drafting amendment.

Paragraph 16
Paragraph 16 inserts new FA 2004 s 316B. It is intended to offer protection to whistleblowers who draw HMRC’s attention to potential breaches of the DOTAS regime.

While the intention of this change is laudable it is difficult to see quite how it can operate in practice. What protection will it really give, say, to an employee of a company participating in a scheme which the employee believes should have been notified under DOTAS but was not? Does it offer him protection if his employer attempts to dismiss him for breaching the company’s confidentiality rules? Protection may be available under other legislation (for exampleEmployment Rights Act 1996 s 43B?but viewed in isolation para 16 does not appear to achieve very much.

Paragraph 17
Paragraph 17 introduces new FA 2004 ss 316C and 316D:

–       New s 316C(1) provides that HMRC may publish information about arrangements to which a reference number is allocated, or about a promoter of such arrangements.

–       New s 316C(2) specifies which information may be published.

–       New s 316C(3) provides that HMRC may publish the information in any manner they consider appropriate.

–       New s 316C(4) is an important safeguard. No information can be published which identifies the user of the arrangements.

–       New s 316C(5) provides that where a promoter also enters in to the arrangements himself, new s 316C(4) does not prevent the publication of the promoter’s name or other information in relation to his capacity as a promoter.

–       New s 316C(6) provides that before publishing information which identifies a person as a promoter HMRC must inform that person that they are considering doing so and give the person a reasonable opportunity to make representations about whether the information should be published.

–       New s 316C(7) defines “APN relevant” arrangements. These are arrangements in respect of which HMRC have indicated in a publication that they may exercise (or have exercised) their power under the accelerated payment notice regime in respect of the arrangements.

New FA 2004 s 316D imposes a requirement on HMRC to publish information about final judicial rulings which show that the tax advantage which the arrangements sought to achieve was in fact achieved. This is presumably because it would be wrong, in cases where HMRC have published information previously which suggested that the arrangements would be open to challenge and might not work, not to publicly acknowledge that in fact the arrangements were successful.

–       New 316D(1) provides that this section applies where HMRC have published information about arrangements under new s 316C; after the information has been published a ruling is made by a court or tribunal about tax arrangements; and HMRC are of the opinion that the ruling is relevant to arrangements about which they have published information. Note that the ruling does not have to be in respect of the arrangements themselves: it could be about different arrangements. The key point is that the ruling must be relevant to the arrangements about which HMRC have published information. So, for example, a court might have given a ruling in a loss scheme promoted by promoter A. It has many similar features (though is not identical) to a loss scheme promoted by promoter B. If HMRC have published information about promoter B’s scheme, the ruling on promoter A’s scheme would fall within new s 316D.

–       New s 316D(2) provides that a ruling is relevant to the arrangement if the principles laid down or given in that ruling would, if applied to the arrangement, allow the purported tax advantage to be achieved. In addition the ruling must be a final ruling. In other words, this provision does not apply while there is still the possibility of appeal. This is a concept taken over from the follower notice regime introduced in FA 2014.

–       New s 316D(3) places a requirement on HMRC to publish information about the ruling. HMRC have discretion as to whether to publish information under new s 316C, but once they have done so they have no discretion in relation to relevant rulings.

–       New s 316D(4) provides that HMRC must publish the information about the ruling in the same matter as they published the information under new s 316C. This does not prevent HMRC from also publishing information about the ruling elsewhere. The intention here is to ensure that HMRC give the ruling the same prominence as the original information and cannot hide it away somewhere on an obscure page of a website that nobody would ever find.

–       New s 316D(5) and (6) define a final ruling. Essentially this is a ruling of the Supreme Court or a ruling of a lower court or tribunal against which all appeal rights have been exhausted. The test is in all material respects the same as the one in the follower notice regime.

–       New s 316D(7) defines “tax arrangements” for the purposes of new s 316D. These are arrangements in respect of which (having regard to all of the circumstances) the obtaining of an advantage in relation to tax was the main purpose or one of the main purposes.

Paragraph 18
At the moment there are comparatively low fixed penalties for failure by a user to report the use of a scheme on his return or other relevant form. The penalty for a first failure is £100, rising to £500 for a second failure within three years, and £1,000 for each failure after that.

Paragraph 18 amends TMA 1970 s 98C to abolish the fixed penalties and substitute penalties of up to £5,000, £7,500 and £10,000 for the three categories listed above.

Paragraphs 19–21
The commencement provisions for this Schedule are quite complex because the Schedule contains a number of quite separate provisions.

Paragraph 19 provides that new FA 2004 s 310C (the duty of a promoter to provide updated information) applies only where a reference number is allocated to the arrangements on or after 26 March 2015 (the date of Royal Assent to FA 2015). But it does not apply where information about the arrangements was originally supplied to HMRC by the promoter in accordance with FA 2004 s 308 before Royal Assent. In other words, there is no obligation on promoters to revisit old schemes to determine whether or not updated information is required to be provided to HMRC.

Paragraph 20 provides that where a notice was given by HMRC under FA 2004 s 312A(4) (i.e. that the obligation to pass on the scheme reference number to scheme users has been removed) before Royal Assent, that notice is automatically deemed to include the removal of the new obligation under s 312A(2A) (information to be provided to employees).

Paragraph 21 provides that new FA 2004 s 316C (publication of information) only applies to information in respect of arrangements to which a reference number is allocated on or after the date of Royal Assent. In other words HMRC cannot use the new information powers to publish information about historic schemes. In addition, new s 316C does not apply where prescribed information was given to HMRC in compliance with FA 2004ss 308–310 before Royal Assent. This means that notifications received by HMRC before Royal Assent that are allocated a reference number after Royal Assent, are not within the publication regime.

New s 316C(2)(b) (publication of information about final rulings) applies only in the case of final rulings given on or after the date of Royal Assent. There is no obligation on HMRC to revisit all past disclosed schemes to ascertain whether in fact a final ruling of the court has shown them to be effective.

Final note
DOTAS continues to evolve. The link between DOTAS and accelerated payment notices created a fundamental shift in the role of DOTAS within the tax compliance regime. No longer is it merely concerned with the provision of information: it has become a de facto charging provision. As the accelerated payment notices regime continues to develop and practical experience is gained of how the link with DOTAS actually works, it is likely that there will be yet further changes to DOTAS. The key issue, and one which is not yet fully resolved, is how HMRC will deal with deliberate non-compliance with the regime. HMRC have considerable powers to force disclosure: there is limited evidence that that those powers have actually been widely used.