The new VAT and indirect taxes avoidance disclosure regime

The Government has released a summary of responses to its consultation on “Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax”, setting out its intention to fundamentally overhaul the existing VAT disclosure regime and extend the new replacement regime to all indirect taxes.

Legislation has been included in the draft Finance Bill to more closely align the regime with the existing disclosure regime for direct taxes and is intended to come into effect from 01 September 2017. However, further detail of the all important hallmarks to be included are still awaited at this stage.

Background

The original disclosure of tax avoidance scheme rules were first introduced in 2004. When introduced, an entirely separate regime, VAT avoidance disclosure regime (VADR), was implemented for the disclosure of VAT avoidance which contained significant differences to the direct tax disclosure regime (DOTAS). In particular, the burden of disclosure was placed on the taxpayer undertaking the scheme (rather than the promoter of the scheme). The reasons for this fundamental difference were never entirely made clear but related to the fact that VAT, as a European based tax, had certain structural differences to the main taxes on income and gains and, as such, a taxpayer based disclosure obligation was more in keeping with the general administrative requirement of the Sixth VAT Directive (as it was then).

In addition to requiring disclosure by the scheme user, rather than promoter, the existing VADR has other significant differences to DOTAS. In particular, disclosure obligation depend on the turnover of the relevant taxpayer. Businesses with supplies of £600,000 or more are required to disclose the use of specific avoidance schemes listed by HM Treasury. In addition to disclosure of listed schemes, businesses with a turnover of £10m or more are also required to provide details of arrangements which contain certain designated features, termed "hallmarks".

A consultation on the future of the VADR took place in 2014 but was inconclusive. More recently, a further April 2016 consultation sought views on whether to bring the existing regime up to date to reflect changes and developments in the VAT landscape, or whether it would be better to more closely align the regime to DOTAS or indeed to incorporate VAT into DOTAS itself. Following that consultation, the Government announced in the Autumn Statement that, despite no clear majority response in favour of doing so, it would make changes to the VADR to bring it more into line with DOTAS. This has now been confirmed in the consultation response document and draft legislation released alongside it.

Obligation to report

The principal obligation to report VAT avoidance schemes will be moved from the scheme user to the scheme promoter. In doing so, the Government will essentially adopt the DOTAS rules on who is a promoter and when a scheme user has to disclose an avoidance scheme to the new VADR regime. As with DOTAS notifications, HMRC will issue a scheme reference number to the promoter who in turn will be required to pass this number on to everyone to whom it supplied the scheme. Scheme users will then be required to report that number to HMRC on every occasion they use the scheme.

The new VADR

In addition to moving the primary obligation to disclose to the promoter, the new VADR will also be fundamentally amended to work in a similar way to DOTAS. As such, the requirement to disclose will depend on:

• the existence of arrangements which fall within any of the descriptions (hallmarks) prescribed by Treasury regulations
• enabling, or the possible expectation to enable, any person to obtain a tax advantage in relation to indirect taxes, and
• whether the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that tax advantage.

The new scheme involves a number of fundamental changes to the existing VADR.

VAT advantage

The Government has accepted that the way VAT is structured means that the definition of “tax advantage” contained in DOTAS would not, however be suitable for the new VADR. Therefore, the new regime will retain the existing definition of VAT advantage, which focusses specifically on amounts of output tax, input tax and VAT credits.

VAT hallmarks

The hallmarks to be adopted for the new VADR will be the subject of further consideration and will be included in regulations in due course. However, the response document indicates that the Government intends to apply the generic hallmarks from DOTAS which cover confidentiality, premium fee arrangements and standardised tax products to the new VADR.

Adopting a benefit based test

Where a scheme is not listed but falls within one of the hallmarks, the existing VADR requires the disclosure of the scheme only where the main purpose or one of the main purposes of the scheme is to obtain a tax advantage. The April Consultation expressed the concern that it can be difficult to demonstrate the subjective purpose of a particular scheme.

The tax advantage condition in the new VADR rules will be aligned with that in DOTAS in that it will consider the ‘benefit’ expected to arise from a scheme. A promoter has to disclose a scheme if obtaining a tax advantage is expected to be a main benefit of the arrangements. This is an objective test which looks only at the expected result of the arrangements rather than their aim.

Removal of turnover limits

The Government has also decided to remove the existing turnover limits from the new scheme. Therefore, the new VADR will apply to all VAT avoidance schemes, including, in principle, schemes carried out by VAT non-taxable persons. The Government’s response points out that retaining the existing turnover limits makes little sense in the context of a primary obligation on a scheme promoter and might actually increase the administrative burden on scheme promoters by requiring them to ascertain turnover figures.

However, the Government will consider how to ensure that the regime does not place undue burdens on small businesses having to disclose in the absence of a promoter and whether using similar criteria to the small-business threshold contained in the DOTAS rules would be appropriate. This is an issue that will be dealt with in regulations. In addition, the Government will also give further thought as to how unregistered businesses might disclose arrangements where there is no promoter. Again, details will be included in regulations.

Other indirect taxes

The Government has also decided to extend the new VADR to other indirect taxes, including Insurance Premium Tax (IPT), landfill tax, aggregates levy and customs duties. In particular, the Government has indicated that it is currently difficult to form a view of the avoidance risks in relation to these other indirect taxes and that bringing them within the VADR is important.

The response document indicates that the Government again considers that the generic hallmarks (confidentiality, premium fee arrangements and standardised tax products) will be appropriate to include, but will be given consideration to what other specific hallmarks may be appropriate.

Comment

Draft legislation has been released in the draft Finance Bill in section 93 and Schedule 21 to implement the new wider VADR. However, detail of the hallmarks to be included is still awaited and it is important that the Government provide time for proper consultation on this key aspect of the new regime.