Negligence & tax abuse – what should you do about tax advice?
The Disclosure of Tax Avoidance Schemes (DOTAS) system was introduced for certain taxes in 2006, the statutory framework having been included in the FA 2004. Inheritance Tax (IHT) was not included at the start. The objectives of the disclosure rules are to obtain:
- Early information about tax arrangements and how they work; and
- Information about who has used them
which clearly gives HMRC the opportunity to consider their impact and where appropriate to put forward legislation to close a particular scheme down.
Background to DOTAS
With effect from 6 April 2011 schemes which seek to avoid IHT charges associated with the transfer of property into trust came within the disclosure rules. The application of DOTAS to IHT is in only one area – the mitigation of the charge to IHT which arises on a transfer of value made by an individual during lifetime as a result of which property becomes relevant property – i.e. a transfer into trust. There are a large number of examples of which HMRC are aware which are not disclosable
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Proposed changes to DOTAS
There have been very few IHT disclosures since it was included in DOTAS. HMRC believe this is because of the narrow scope of the existing ‘hallmark’ and also because promoters claim that their schemes are ‘substantially the same’ as pre April 2011 schemes and so outside DOTAS.
The Government now believes there is good reason for including IHT avoidance schemes in the disclosure system and so propose changes. Your clients may have read over the summer a number of scare stories in the press as a result of the publication of a consultation document by HMRC entitled ‘Strengthening the Tax Avoidance Disclosure Regimes’. The closing date for comments on the consultation is 23 October 2014.
Some commentators anticipate that the result would be to force clients to pay IHT while they are alive because of these changes and another new initiative – the Accelerated Payments Scheme.
IHT schemes sold to clients and implemented after the changes take effect would include:
- Schemes newly devised after the change
- New variants of pre-existing schemes
- Existing schemes identified by the revised hallmark which continue to be sold
- Where any person enters into the first transaction with a view to implementing the scheme after the change
Once again HMRC are saying they are not interested in IHT planning arrangements that involve the straightforward use of reliefs and exemptions such as use of the spouse exemption by giving an IPDI to a second spouse then exercising overriding powers to advance the funds to the deceased’s children from a former marriage; or buying BPR property and transferring it into trust.
However, they do want to catch any arrangement which avoids or reduces an immediate charge to IHT and they do want to introduce a requirement to disclose arrangements which reduce or avoid tax on death. The Government wants to make the hallmark appropriately targeted so that it does not pick up what would be regarded as acceptable tax planning.
Worryingly the consultation document says that “where an individual person used a standard Will to make use of the [spouse] exemption in a straightforward way, the Government would not want ‘sight’ of this transaction under DOTAS.” It is to be hoped that HMRC would never want sight of a Will before a testator has died!
The main fear seems to be schemes set up to avoid the Gifts with Reservation of Benefit rules and also schemes which seek to benefit twice from business loans and thereby undermine the changes in the FA 2013 to the treatment of liabilities for IHT.
However, in trying to re-assure when schemes might be caught the document again refers to Wills:
“An existing arrangement, such as the execution of a Will which is drafted in such a way so as to result in a potential reduction in IHT on or after death and which would otherwise come within the new hallmark would not have to be disclosed if the Will had been executed before the date of the change. A subsequent codicil to that Will would not change the DOTAS position provided it did not substantially alter or revoke the clauses that originally set up the tax saving arrangement”
Accelerated payments & follower notices
HMRC issued a consultation document back in January 2014 ‘Tackling marketed tax avoidance’ which proposed that users of marketed tax avoidance schemes should pay the tax purported to be saved up front in case the scheme is found to be abusive; if it eventually is found not to be abusive then HMRC would repay the tax paid with interest. This arrangement of payment in advance is called Accelerated Payment and has been heavily criticised. However, Part 4 FA 2014 contained the relevant statutory provisions permitting accelerated payments and Follower Notices. https://www.gov.uk/government/publications/tax-avoidance-schemes-on-which-accelerated-payments-may-be-charged-by-hmrc
Users of those schemes with a reference number on the linked list above are those who may receive a notice to make an accelerated payment. Starting in August 2014, HMRC will phase the issuing of notices to current users over approximately 20 months.
The list contains SRNs rather than scheme names as taxpayers will have used this to identify their use of an avoidance scheme when completing their Self-Assessment return.
HMRC say that when challenging marketed tax avoidance schemes they have to drag users to the tribunal before they will concede and pay up. This is regarded as unfair and a delaying tactic. As a result of the FA 2014 HMRC will be able to issue a follower notice in cases where there is a judicial ruling ‘relevant to the circumstances’.
This notice will explain why HMRC think that the judicial ruling applies and invite settlement. Payment can then be demanded by an accompanying payment notice – with the relevant penalty regime applying on failure to pay on time.
The Government’s objective is to encourage taxpayers to concede where there is a judicial decision in another case.
If the taxpayer refuses to pay the tax upfront as demanded by the notice there will be the risk of a 50% penalty of any tax ultimately found to be due as and when there is a court decision in the particular case.
Following Royal Assent of the FA 2014 on 17 July 2014 HMRC has published the list of the existing DOTAS arrangements for which it will issue payment notices. Clients will want to ensure that any accelerated payment demand is justified under the legislation. The power to demand accelerated payments is linked to the ‘tax advantage’ which is thought to exist.
The accelerated payment demands and follower notices for existing arrangements are likely to have been issued during August so clients may seek your help.
Taxpayers have 90 days to make representations to HMRC about the amount being demanded.
How might it impact on your IHT practice?
A scheme being disclosed under DOTAS may result in an enquiry or appeal where HMRC allege a tax advantage has arisen through the implementation of the disclosed scheme. HMRC can give an accelerated payment notice where there is an open enquiry or appeal.
For lifetime IHT charges an accelerated payment notice could be issued during the scheme user’s lifetime where the chargeable event has occurred for IHT.
Obviously, for IHT arising on death no accelerated payment notice could be issued until after the person has died & the IHT account has been delivered.
Both the Daily Telegraph & Daily Mail have run articles in August saying that savers could be forced to pay IHT while they are still alive under this new drive against tax avoidance.
This would be true if there was a chargeable lifetime event which was seen to be avoided by a marketed and disclosable scheme.
The main emphasis therefore is around the use of trusts to save tax and whether a scheme has been used.
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