When the seeds of the disclosure of tax avoidance schemes (DOTAS) régime were first sown the Government may have thought they included the acorn from which a mighty oak would grow. But since then the result, variegated by the general anti-abuse rule (GAAR) and follower notices and accelerated payment notices (APNs), has come to resemble an impenetrable thicket whose thorns now include heavy penalties for non-observance. The Government has even felt the need to include harsher penalties for non-compliance with the GAAR in the draft Finance Bill 2016 clauses despite no compliance failures having been recorded yet.
As the game of cat and mouse developed, DOTAS was seen as lagging behind developments in tax planning schemes: a scheme reference number became a selling point for some promoters and schemes whose success was always dubious in terms of the tax saved came to be sold on their merits as tax deferral tools, taking advantage of the relatively low rates of interest charged on tax paid late.
Now the key significance of DOTAS is in the accelerated payments régime and the new serial avoiders regime, so it was hardly surprising that the Government pressed ahead with its proposals to further strengthen the regime by the Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2015. However, the reaction to the proposed IHT hallmarks, was overwhelmingly negative because they threatened to move DOTAS to a different level: away from fostering a cooperative approach between HMRC and advisers whereby unacceptable practices would be identified and stopped and towards casting a much wider net that would have trawled up a by-catch of conventional IHT planning methods that were regarded as normal, prudent planning within the spirit of the existing tax legislation.
There will be a new financial products hallmark bearing a strong resemblance to the original financial products ‘filter’, included within the regime on inception, and IHT will be brought within the premium fee and confidentiality hallmarks. Those steps are not objectionable: they already apply to planning in other areas of tax and so including IHT there brings consistency.
The focus of criticism of the July 2015 proposals was the Government’s proposed IHT hallmark which had three conditions:
- that arrangements would produce a tax advantage;
- one or more elements of the arrangements would be unlikely to have been entered into but for the tax advantage;
- contrived or abnormal steps without which the tax advantage could not be obtained.
Of those only Condition 3 was generally accepted as uncontroversial.
The word ‘advantage’ is common currency in tax planning but there is a world of difference between arranging a transaction in the way that attracts minimum taxation and creating a transaction or ‘arrangement’ with the sole or main objective of creating a tax advantage. The absence of any qualification that the transaction should only be reportable if it evinced the signs of having as its sole or a main purpose the obtaining of a tax advantage set alarm bells ringing both within the tax advisory professions and, probably, HMRC who would not have welcomed the administrative burden of a ‘plain vanilla deluge’ of disclosures of unexceptionable transactions.
In response. HMRC’s February 2016 Technical Paper now states that lifetime gifts, ordinary settlements into trust, normal expenditure out of income exemption, “non-abusive” use of BPR and APR, gifting a house to a relative but leasing back at a market rent, certain ‘loan trusts’ or non-insurance based discounted gift trusts on arm’s length terms were not the intended target.
At the time of the original consultation the CIOT proposed a test that an ‘informed observer’ would conclude that a person might reasonably be expected to obtain an IHT advantage and that obtaining that tax advantage was the purpose, or one of the main purposes of the arrangement. This would replace the Government’s Conditions 1 and 2.
This does not mean that the IHT hallmark has dropped off the radar. We now await the promised 12 week consultation which will result in an IHT hallmark which, it must be hoped, will make clear the sort of arrangements that are not caught by DOTAS. However it would be preferable for a prescriptive ‘quasi white list’ approach not to be adopted, in guidance or legislation, which would by implication cast doubts on any sort of arrangement not specifically included.
Chris Williams is a Senior Manager in Mazars’ National Tax team, specialising in private client matters and chairs the Chartered Institute of Taxation’s Succession Taxes Sub-committee.
(This first appeared on Accountancy magazine's website)