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HM Revenue and Customs Brief 57/07

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Issued 14 August 2007

Disclosure of avoidance schemes: New information powers

What this Brief is about

This Brief explains section 108 of the Finance Act 2007 and impending associated regulations.

Summary

Part 7 of the Finance Act 2004 requires certain persons, usually promoters, to provide HMRC with information about (“disclose”) certain tax avoidance schemes.

Section 108 inserts new powers into Part 7 such that will enable HMRC to:

  • enquire into the reasons why a promoter has failed to disclose a scheme (new sections 313A and B to the Finance Act 2004)
  • enforce disclosure in appropriate cases (new sections 306A and 314A to the Finance Act 2004) and
  • call for more information where a disclosure is incomplete (new section 308A to the Finance Act 2004).

By being mostly exercisable through the Special Commissioners (see “Application hearings” below) these provisions provide a mechanism for resolving disagreements as to whether a scheme is required to be disclosed.

Section 108 also amends section 98C of the Taxes Management Act 1970, providing a power for the Treasury to make regulations that increase the level of daily penalty for failure to disclose a scheme where that failure continues after the Special Commissioners have made an order that it is disclosable.

Regulations and introduction of the changes

As well as section 108 of the Finance Act 2007, secondary legislation is also required to fully implement the changes described in this Revenue & Customs Brief –

  • The Tax Avoidance Schemes (Information)(Amendment) Regulations 2007 (“the Information Regulations”), which contain the time limits for complying with obligations arising from exercise of the new powers were laid on 24 July. Subject to the annulment procedure, they come into force on 1 September, from when the new powers will be exercisable.
  • The Tax Avoidance Schemes (Penalty) Regulations 2007 (“the draft Penalty Regulations”), provide for increasing the daily penalty to a maximum of £5,000 in cases where the Special Commissioners have made an order under s.306A or s.314A of the Finance Act 2004, were “presented” to the House of Commons in draft on 24 July. It is anticipated that the regulations will be debated late October or early November. Subject to them being approved, they will come into effect 21 days later.
  • It is anticipated that further Information Regulations will be made and laid on the day the Penalty Regulations are approved by Parliament, to come into effect at the same time as them. These further regulations will prescribe, in the case of an order under section 314A, the period after the issue of the order at which the higher maximum daily penalty applies if disclosure has still not been made. It is proposed to set the period at 10 days following the issue of the order.

Enquiries into non-disclosure of a scheme

The new s.313A allows HMRC to require a promoter to explain why a scheme has not been disclosed. The new s.313B allows HMRC to apply to the Special Commissioners for an order requiring a promoter to provide supplementary information or documents to support the reasons given for non-disclosure.

Explaining why a scheme has not been disclosed (FA 2004, s.313A)

HMRC can, by written notice, require a person suspected of being the promoter of a scheme to state whether, in his opinion, he is required to disclose the scheme. The notice will specify the scheme in relation to which the promoter’s opinion and reasons are sought.

If the person does not consider there to be a disclosure obligation he must provide a full explanation as to why this is the case. In doing so it is insufficient for the reply to simply refer to the fact that a lawyer or other professional has given an opinion to that effect. Instead it must engage with the relevant legal tests, for example:

  • where it is asserted that the obtaining of a tax advantage is not a ‘main benefit’ of a scheme, the response must include an identification of the various benefits and how they had been measured relative to the advantage
  • where it is asserted that the scheme does not fall within any of the hallmarks, sufficient information must be provided to enable HMRC to confirm the assertion or
  • where it is asserted that the person is not the promoter of the scheme in question, sufficient information must be given to enable HMRC to confirm the assertion.

The Information Regulations prescribe that opinion and reasons must be provided by the 10th day after the date of the notice or any longer period directed by HMRC. Failure to do so may result in a penalty of up to £5,000. If the failure continues after the initial penalty has been imposed an additional penalty of up to £600 per day may be imposed.

Orders for supplementary information or documents (FA 2004, s.313B)

HMRC may apply to the Special Commissioners for an order that a person provide specified information or documents in support of his stated reasons as to why a scheme is not disclosable. It is irrelevant whether or not the reasons were given in response to a notice under s.313A (see above).

The Information Regulations prescribe that information must be provided by the 14th day after the date of the order or any longer period directed by HMRC. Failure to do so may result in a penalty of up to £5,000. If the failure continues after the initial penalty has been imposed an additional penalty of up to £600 per day may be imposed.

Enforcing disclosure

Orders stating a scheme is disclosable (FA 2004, s.314A)

HMRC may, in relation to a specified promoter, apply to the Special Commissioners for an order stating that a scheme is disclosable.

The Special Commissioners can only make an order if they are satisfied on the evidence that the scheme is indeed disclosable.

As an order has the effect of confirming that a scheme is, and was always, disclosable under s.308, HMRC may, and subject to ‘reasonable excuse’ considerations, seek a late notification penalty of up to £5,000 under the existing penalty regime in section 98C of the Taxes Management Act 1970.

It is proposed that once a late disclosure penalty is awarded and non-disclosure continues after the tenth day from when the s.314A order is made, the maximum daily penalty rate will increase. The draft Penalty Regulations provide (see “Regulations and introduction of the changes” above), that the increased daily maximum will be £5,000.

Orders deeming a scheme to be disclosable (FA 2004, s.306A)

HMRC may, in relation to a specified promoter, apply to the Special Commissioners for an order that a scheme is to be treated as disclosable.

The Special Commissioners can only make an order if they are satisfied that HMRC have reasonable grounds for suspecting that the scheme is disclosable and have taken all reasonable steps to establish whether it is.

Grounds for suspicion may include:

  • the fact that the arrangements fall with any ‘hallmark’ prescribed in the relevant regulations
  • an attempt to avoid or delay complying with s.313A or s.313B or
  • a failure to comply with s.313A or s.313B in relation to another scheme.

The effect of an order is that a scheme is deemed to be disclosable under s.308 and must be disclosed. The Information Regulations prescribe that disclosure must be made by the 10th day after the date of the order. Failure to do so may result in HMRC applying to the Special Commissioners for a late notification penalty under the existing penalty regime in section 98C of the Taxes Management Act 1970.

If the failure continues after the initial penalty has been imposed, the draft Penalty Regulations provide (see “Regulations and introduction of the changes” above), that an additional penalty of up to £5,000 per day may be imposed.

However, even if disclosure is made within the time period described above, if HMRC can nevertheless demonstrate the information was always disclosable and has been provided later than the normal disclosure due date, an application to the Special Commissioners for a late notification penalty may still be made.

Incomplete disclosures (FA 2004, s.308A)

If HMRC believe that a promoter has not provided all the prescribed information in relation to a disclosure, they may apply to the Special Commissioners for an order that the promoter provides specified information and/or related documents.

The Special Commissioners can make an order only if they are satisfied that HMRC have reasonable grounds for suspecting that the specified information or documents form part of, or will support or explain, the prescribed information.

The effect of an order is that the specified information and/or documents must be provided to HMRC in the same way as if it were prescribed information. The Information Regulations prescribe that this must be done by the 10th day after the date of the order. Failure to do so may result in HMRC applying to the Special Commissioners for a late notification penalty under the existing penalty regime in section 98C of the Taxes Management Act 1970. If the failure continues after the initial penalty has been imposed an additional penalty of up to £600 per day may be imposed.

If the information or documentation is provided within the time period described above but HMRC nevertheless believe the information was always disclosable as prescribed information, and has been provided later than the normal disclosure due date, an application to the Special Commissioners for a late notification penalty may still be made.

Invoking the powers

In order to use the powers described above, HMRC must have reasonable grounds to suspect that the promoter has been non-compliant in relation to a particular scheme. In the majority of cases, HMRC expect to be able to resolve the issue in an informal way, with use of the powers limited to those occasions where a promoter is uncooperative or judged to be using deliberate delaying tactics; or for resolving genuine disputes as to notifiability.

The powers will be exercised only by officers within HMRC’s Anti-Avoidance Group.

Application hearings

The majority of the powers described above are dependant upon the Special Commissioners making a relevant order following an application from HMRC. Whilst the precise procedure is a matter for the Special Commissioners, it is anticipated that applications will normally be subject to a hearing involving HMRC and the potentially affected promoter before an order is awarded.

When making an application, HMRC will notify the potentially affected promoter at the same time.


About the Author

© Crown Copyright 2007.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2007-08-23 12:47:05 in Tax Articles

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