March 19th, 2014 / Insight posted in MKS Comments

Budget 2014: Anti-avoidance Measures

  • Disclosure of Tax Avoidance Schemes (DOTAS)

The Government has announced a consultation on extensions to the “Hallmarks” that determine whether the details of a tax avoidance scheme must be disclosed in advance to HMRC.

KS comment: The Government’s assault on the tax avoidance industry continues unabated. The DOTAS rules require promoters to disclose details of a scheme in advance of its implementation, and the clear intention is to extend the scope of the disclosure.

  • Venture Capital Trusts – Return of Capital

The measure is designed to prevent VCTs from returning capital to investors within 3 years of the issue of the shares. The arrangement was exploited by a number of VCTs to effectively return an investment to the subscriber without disturbing the income tax relief.

It applies to share issues on or after 6 April 2014.

  • Accelerated Payment of Tax associated with Tax Avoidance Schemes

The new rules will enable HMRC to issue a “Notice to Pay” to a taxpayer who has participated in a tax avoidance scheme notified under DOTAS or potentially counteracted by the GAAR, and where an enquiry notice has been issued. This effectively means that the tax in dispute must be lodged with HMRC pending closure of the enquiry. If the matter is ultimately determined in the taxpayer’s favour the tax is repaid with interest. It is important to note that the rules will apply to existing schemes currently in dispute.

KS Comment: HMRC’s perception is that taxpayers using marketed tax avoidance schemes often do so on the basis that one of the main benefits, even if the scheme ultimately fails, is the deferral of the eventual tax liability, in some cases for years. For the majority of taxpayers, who do not indulge in tax avoidance this is probably seen as fair and reasonable. Treasury estimates of the tax yield for existing schemes in dispute and so-called “follower schemes” (see below) are around £5bn.

  • Amendment of Return in “Follower Cases”

It is often the case that HMRC, when faced with a large number of similar schemes, will choose to litigate on a “test case” basis.

If they are successful the litigant is obliged to pay the tax due, but there is no incentive for users of similar schemes to accept the tribunal’s findings and settle their liability.

The measure enables HMRC to issue a notice to taxpayers using “follower” schemes to accept the finding of the court, amend their return accordingly and pay the tax. If they fail to do so they may become liable to a penalty.

KS Comment: Tax schemes that fail often do so because of defective implementation, rather than because of any failure in the basis structure. HMRC’s view, that if a particular scheme fails, then all similar schemes will also fail, is simplistic, but to most taxpayers, those who play with matches cannot complain if they are occasionally burned.

  • Avoidance schemes involving the transfer of corporate profits

This measure applies to transactions after 19 March. It blocks certain arrangements where profits are transferred between companies in the same group for tax avoidance purposes. At Autumn Statement 2013, the Government announced a measure, with effect from 5 December 2013, to block avoidance schemes where deductions are claimed for payments between companies in the same group under derivative contracts which are linked to company profits.

This new measure complements the Autumn Statement 2013 measure, as a broader response to arrangements that have the same economic characteristics as above, but using a different mechanism.