Archive for month: April, 2015

First-tier Tribunal dismisses HMRC’s arguments on penalties

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Penalties have always been a controversial issue between HMRC and taxpayers, and never more so than in the area of ‘tax avoidance’ schemes. Now a new case, Herefordshire Property Company Ltd v HMRC TC/2012/02521, has shed fresh light on this important area.

 The facts

 This was an Appeal against a penalty of £162,401 (being 25% of the tax charged on the Appellant’s disposal of a real property) imposed on the Appellant, Herefordshire Property Company Ltd, (“Herefordshire”), in relation to transactions effected in September 2005.

Herefordshire’s shareholder and controlling director, Mr. Smeal, decided, following serious ill-health, that Herefordshire should sell the substantial investment property that it owned and distribute the proceeds to him.   Mr Smeal sought advice from Montpelier Tax Consultants (Isle of Man) Limited (“Montpelier”) as to whether he could mitigate the resulting tax charges.

Montpelier informed Mr. Smeal that they were implementing a scheme for clients to create an allowable capital loss that the Appellant could realise and offset against the gain on the property. In order for the scheme to succeed, the person disposing of a relevant insurance policy had to be a “second” or subsequent holder of the policy, and had to have acquired the policy otherwise than by purchase. The policy also had to rank as an asset for chargeable gains purposes and an insurance policy. Mr. Smeal was aware that that similar schemes were being marketed and used quite widely by other providers such as KPMG.

Mr Smeal decided that the scheme was reputable and proceeded accordingly. Duly advised by Montpelier, Herefordshire declared on its tax return its capital gain on the disposal of the property, the loss claimed in respect of the redemption of the policies acquired under the scheme and the DOTAS number of the Montpelier scheme.

In due course, the Special Commissioners, the High Court and the Court of Appeal all decided in the case of Jason Drummond v. HMRC [2009] EWCA Civ 608, an appeal in relation to a substantially similar scheme, that the scheme failed on the grounds that the redemption amount should be excluded from the consideration for capital gains purposes. This decision in principle meant that even if there were minor differences between the various different schemes, the Montpelier schemes were certainly undermined by this conclusion. As a result, Herefordshire conceded that its scheme had failed, the claim for the loss was withdrawn and the tax on the capital gain on the real property disposal was paid.

HRMC bring penalties into play

HMRC notified the Appellant that because of the decision in Drummond, all the participants in the Montpelier schemes were to be charged penalties on the basis that the Montpelier schemes would also have failed because of “implementation defects”, and that because the taxpayer clients of Montpelier ought to have appreciated this, they were negligent either in having implemented the schemes without seeking further independent advice, or by not challenging the basis on which the schemes were implemented,. No penalties were sought from taxpayers who had implemented schemes offered by other promoters.

The FTT’s decision

 In its decision, the FTT set out the intended steps of the Montpelier scheme, which were:-

  • A Montpelier company would advance a short-term, interest-free and unsecured loan of £2.5 million to the Appellant;
  • The Appellant would form and capitalise a new unlimited subsidiary company, Heletec Solutions (“Heletec”) by injecting £2.5 million  for Heletec shares at a premium;
  • Heletec would then purchase, by assignment, 10 policies, each for £250,000, issued by a Montpelier insurance company formed in Barbados (“Ins.co”) and held prior to the steps of the scheme by another Montpelier company, the Isle of Man company, Mossbank Enterprises Limited (“Mossbank”);
  • Following its purchase of the policies, Heletec would distribute the policies up for no consideration (either as a distribution or in reduction of capital) to its parent company, the Appellant;
  • The Appellant would then redeem the policies, receiving £2.5m and a surplus of £188, reflecting the growth on the policies realised during the short period in which they had been in issue;
  • And finally the Appellant would repay the short-term loan advanced at step 1 by Holdings.

The FTT found, however that the actual implemented steps collapsed some of the steps together in ‘a somewhat tactless and provocative manner, and certainly most of the cash movements were short-circuited.’

The FTT then said:

‘That takes us to the third point which relates to HMRC’s criticism that they normally see immaculate documentation when artificial schemes have been marketed by promoters because the promoters will know that HMRC will be scrutinising the steps and endeavouring to undermine the schemes for failures to implement the transactions properly. In this case, HMRC say, quite rightly, that the documentation was far short of the normal standard seen. It certainly was. This, however, does not mean that the documentation was necessarily ineffective. The relevant question is what construction a court would have put on it, had a court been required to interpret the documentation, address any other evidence, and reach a conclusion as to what had actually happened…..

 Dealing now with points raised by HMRC in declining order of significance, we do not accept that “nothing actually happened”….our conclusion is that this collapsing of the payment steps (and the same on the redemptionof the policies) was clearly intended by all parties. We consider that it was somewhat provocative, and we do not know why the parties chose to operate in this way. They did, however, and Mr. Smeal certainly appreciated that this was intended. In other words he could not have concluded that something must have gone seriously amiss when no money flowed into or out of the bank accounts of his two relevant companies, because he knew that this was never intended…’

Had the taxpayer been negligent?

 Based on these findings, the FTT had no difficulty in dismissing HMRC’s argument that the Appellant had been negligent in submitting its tax return as it did.

The FTT said:

‘The test of negligence is essentially whether the Appellant failed to do something that a reasonable taxpayer would have done, or did something that no reasonable taxpayer would have done…. In our judgment, Mr. Smeal was transparently honest, meticulous and diligent. He accepted that he had no way of knowing whether the proposed scheme would succeed, in terms of its technical tax requirement. In the presence of his normal, non-tax-specialist accountant, however, he was taken through all the steps in the scheme and he thoroughly understood the required transaction steps. He quite clearly understood that Heletec had to be formed and capitalised; that it was Heletec that had to take the initial assignment of the policies from Mossbank, and that the policies had to be distributed up to the Appellant, by way of distribution or return of capital. He was shown, and read, a tax opinion from David Ewart, and while his normal accountant accepted that the chances of success were something on which she could volunteer no opinion, she did say that she fully understood what was proposed, and why it was asserted that the scheme might generate a capital loss…..nobody could have expected Mr. Smeal or the Appellant to seek to verify any of the “behind the scenes” steps in the transactions. Equally, in considering the documentation, Mr. Smeal was entitled to think that his professional adviser would have prepared adequate documentation, particularly if it seemed to him to be effecting the steps that he expected to be implemented….Our immediate and very much joint judgment in this case was that the Appellant had not been negligent in submitting its tax return as it did, and we felt sufficiently clear of this conclusion to give our decision orally at the end of the hearing. We now formally confirm that decision.’

 Conclusion

 The decision of the FTT illustrates a number of important points.

  • Accurate implementation of any arrangement is absolutely critical to its success;
  • Even if the ultimate tax result is unfavourable, good implementation will prevent HMRC from raising penalty arguments based on a taxpayer not having taken reasonable care in submitting his returns;
  • Taxpayers are generally entitled to rely upon the advice given to them by their advisers, but they must also be diligent and do what they can, given that they are non-specialists, to understand the arrangements and read what is put before them;
  • Penalties for those who invest in tax schemes are seen by HMRC as one more weapon in their already formidable arsenal of weapons to discourage taxpayers from engaging in what is perceived to be ‘tax aggressive’ behavior.

There will, no doubt, be plenty of controversy yet to come in this area.

 

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.

 

The perennial issue of capital versus income

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The distinction between capital and income has been the subject of many decisions and much controversy between HMRC and taxpayers. Now, a new decision, Healey v R & C Commrs [2015] BTC 513, has been added to the mix.

The facts

The issue was whether the taxpayer, Mr Healey, realised a profit of an income nature when, on 12 September 2003, he sold in the market a floating-rate promissory note (“FRN”) which he had bought on 11 December 2001 from Kleinwort Benson Private Bank (“KB”). The profit which Mr Healey realised on the sale was £2.2 million. It was common ground that, if the profit was of an income nature, it was subject to income tax in Mr Healey’s hands under Case III of Schedule D, which at the material time charged tax in respect of “all discounts”. If, however, it was a profit of a capital nature, it was not liable to income tax and was also exempt from capital gains tax (“CGT”) as a gain accruing on the disposal of a qualifying corporate bond – see sections 115(1) and of the Taxation of Chargeable Gains Act 1992.

The FRN in question (“the ANZ FRN”) was a normal commercial security which had been issued at par (£30 million) by ANZ Bank. It was redeemable, also at par, on 13 September 2004, and carried interest in the meantime at a commercial floating rate linked to LIBOR, payable quarterly on 12 March, June, September and December each year until 12 September 2004, the day before redemption. ANZ Bank had a high credit rating. Because of that, and the floating commercial interest rate, it was predictable that the ANZ FRN would trade at a market value close to its par value throughout its term. It is therefore no surprise that the price which Mr Healey obtained for the ANZ FRN when he sold it (through KB) on 12 September 2003, immediately after payment of the interest coupon due on that day, was £29.997 million. This price reflected the rights which the purchaser acquired to receive the par value of the note on redemption a year later, together with the four remaining payments of interest which would fall due in the meantime.

When Mr Healey bought the ANZ FRN from KB on 11 December 2001, however,the interest coupons had been stripped from it and Mr Healey acquired the benefit of the coupon due on the next day, 12 December 2001, (coupon 1) and the four coupons due from 12 December 2003 until 12 September 2004 (coupons 9 to 12), while KB retained the benefit of the seven interest coupons falling due from 12 March 2002 until 12 September 2003 (coupons 2 to 8). Thus the price which Mr Healey paid to KB for the ANZ FRN reflected the right to receive the £30 million principal on redemption and the rights to interest conferred by coupons 1 and 9 to but not the rights to receive coupons 2 to 8 which had been retained by KB. These were described by KB as ‘Flexi-Notes.’   They were designed and marketed by KB as a means of providing wealthy individual UK-resident clients or their trusts with an after-tax return on their surplus cash significantly higher than the returns then obtainable on fixed-term deposits.

It was, of course, essential to the fiscal efficacy of the Flexi-Note scheme that the profit realised by the investor on sale of the FRN should not be liable to income tax. After a lengthy enquiry into Mr Healey’s self-assessment tax return for 2003/4, HMRC made amendments to it in September 2011 on the footing that the profits made by Mr Healey on sale of the ANZ FRN (and other Flexi-Note products supplied to him by KB) were chargeable to income tax under Case III of Schedule D. Mr Healey appealed to the FTT, which decided both issues against Mr Healey.

In the UT

The UT analysed the leading cases in this area, including Ditchfield v Sharp (1983) 57 TC 555, [1983] 3 All ER 681.

The UT said:

‘What, then, did Mr Healey buy? He bought a FRN which had been issued on standard commercial terms by a bank with a high credit rating, but which had been deliberately modified by the removal of the seven interest coupons covering the period of 21 months from 13 December 2001 to 12 September 2003. The price which Mr Healey paid to KB for the FRN was calculated by reference to the discounted value of the seven interest payments which he was not going to receive. By contrast, when Mr Healey sold the FRN on 12 September 2003, immediately after coupons 9 to 12 had been re-attached, the price which he obtained for it was only £3,000 less than its par value of £30 million. The reason for this, of course, was that the FRN now carried a commercial floating rate of interest over the remaining period of one year until its redemption at par on 13 September 2004. Mr Healey’s profit represented the difference between the discounted price which he paid on 11 December 2001 for the ANZ FRN in its modified form, and the price which he obtained for it on the market, after it had been restored to its original form, 21 months later.

It is now common ground that Mr Healey’s profit was a profit on a discount within the meaning of Case III, paragraph (b). The reason for this, as it seems to us, is as simple as it was in Ditchfield v Sharp: Mr Healey acquired the FRN, before maturity, at an amount less than its face value. That was a discount in the normal commercial sense of the term. The next question, therefore, is whether the discount was of a capital or an income nature. We emphasise that it is the character of the discount which has to be ascertained, not the character of the legal rights which Mr Healey bought and sold, although they are a relevant part of the circumstances which have to be taken into account.

Clearly, no part of the discount was intended to compensate Mr Healey for capital risk. ANZ was a “blue chip” borrower, with a high credit rating. The ANZ FRN traded on the market at around its par value both when it was bought by KB and when it was sold by Mr Healey. Equally clearly, in our view, the purpose of the discount was to compensate Mr Healey for the absence of interest on his investment over the period covered by the seven stripped coupons…..from the perspective which matters, namely that of Mr Healey, the position was in our judgment the same in all essential respects as it would have been if he had bought a non-interest bearing note issued at a discount. In cases of that nature, as the authorities show, the conclusion that the discount is of an income nature is all but irresistible, unless the taxpayer adduces evidence to establish the contrary.

Furthermore, to characterise the discount as one of an income nature would not in our judgment involve falling into either the trap of characterisation by economic equivalence, or the trap of confusing the measure of a payment with its essential nature. Rather, the conclusion would follow from a proper assessment of the reasons which led Mr Healey to pay the discounted price for the modified FRN. The only reason, on the evidence before the FTT, lay in the absence of an income return on the note for Mr Healey during the stripped period. It is wholly immaterial to this analysis that, during the same period, the interest was payable to KB.

It is a further advantage of this approach, in our view, that it accords with common sense, and with the emphasis placed by Dixon J in the Hallstroms case “on what the expenditure is calculated to effect from a practical and business point of view”.

Levy and Levy comment

The UT in this case was of the clear view that the appellant’s return was not capital in nature and that the discount on the FRN was not attributable to the acceptance by the appellant of a capital risk. The absence of risk meant that the structure was simply designed to give a return on the use of the appellant’s funds and was therefore income. The result makes it extremely hard for a taxpayer with similar circumstances to persuade HMRC that a return on such banking products can meet the criteria necessary for an exemption for capital gains tax.

 

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.

Practice note: DOTAS – HMRC’S early warning system

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What is DOTAS?

The Finance Act 2004 introduced an early warning system in respect of tax avoidance schemes. The objective is to give HMRC earlier and better intelligence on avoidance schemes, in order that they can take action earlier than would otherwise be the case. The Disclosure of Tax Avoidance Schemes (DOTAS) is that early warning system.

There are two different disclosure regimes, one for VAT and one for direct taxes and National Insurance contributions.

Direct taxes

The DOTAS regime covers Income Tax, Corporation Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance Tax, Annual Tax on Enveloped Dwellings and National Insurance contributions.

Under DOTAS certain people must provide information to HMRC about avoidance schemes within five days of the schemes being made available or implemented. Usually the person providing the information will be the promoter of the scheme (the person who designs or markets the scheme).  However, users of a scheme must also inform HMRC.

The legislation imposes a number of tests to determine if disclosure is required. Briefly these are:

  1. Are there arrangements (i.e. a scheme) or proposals for arrangements?
  2. If there are is that scheme expected to provide a tax advantage?
  3. Is getting a tax advantage expected to be one of the main benefits?
  4. Does the scheme fall within one of a number of descriptions (called ‘hallmarks’)?

There are seven hallmarks aimed at new and innovative schemes, marketed schemes and targeting specific schemes (for example, loss schemes).

Promoters must provide the Scheme Reference Number (SRN) that HMRC gives them.  The user must then declare the SRN on each return affected.

Promoters may be liable for a penalty for failure to disclose such arrangements to HMRC.

Indirect taxes

The disclosure regime for VAT is limited to two  broad categories – listed schemes and hallmarked schemes.

Listed schemes are specific schemes (there are currently 10) that are defined in the disclosure legislation. If a taxpayer is registered for VAT in the UK and involved in a listed scheme they must notify HMRC unless the annual turnover, or group turnover if applicable, is below £600,000.

Hallmarked schemes are schemes that include or are associated with a ‘hallmark’ of avoidance defined in the legislation. A disclosure is not necessary, however, if:

  • a third party, such as the scheme promoter, has voluntarily disclosed the scheme to HMRC and provided the taxpayer with the Voluntary Registration Scheme (VRS) reference number;
  • the taxpayer or the group concerned has an annual turnover below £10 million (the turnover threshold).

Failure to disclose a scheme may be liable to a penalty as follows:

  • 15% of the VAT saved for ‘listed schemes;’
  • Up to £5,000 for ‘hallmarked schemes.’

Failing to give registration numbers to clients will expose the promoter concerned or other person concerned to a penalty of £5,000 per client. Users of the scheme who fail to show SRNs on the affected returns will be liable to an initial penalty of £100 rising to £500 for subsequent failures.

Who is a promoter?

A person may be a promoter if, in the course of providing services relating to tax services they:

  • are to any extent responsible for the design of a scheme;
  • make a firm approach to another person with a view to making a scheme available for implementation by that person or others;
  • make a scheme available for implementation by others; or
  • organise or manage the implementation of a scheme.

Both UK and non-UK based promoters are subject to the disclosure rules but they only apply to the extent that the scheme enables or is expected to enable a UK tax advantage to be obtained.

The hallmarks

(A)   Confidentiality.

  • Arrangements are prescribed as falling into this hallmark if any element of the arrangements give rise to the tax advantage expected to be obtained and it might reasonably be expected that a promoter would wish the way in which that element of those arrangements secures, or might secure, a tax advantage to be kept confidential from any other promoter at any time following the material date; or
  • The promoter would, but for the requirements of the Regulations, wish to keep the way in which the element of these arrangements that secures, or might secure, the tax advantage confidential from HMRC at any time following the material date, and a reason for doing so is to facilitate repeated or continued use of the same element, or substantially the same element, in the future.

(B)   Premium fee

The ‘premium fee’ hallmark

Arrangements are hallmarked if it ‘might reasonably be expected’ that a hypothetical promoter of the same or a similar scheme would, in the absence of the disclosure requirements, be able to obtain a ‘premium fee’ from ‘a person experienced in receiving services of the type provided’. The intention is to limit this hallmark to marketed schemes aimed at large corporations.

(C )   Tax loss schemes

This hallmark looks at the objective behind the scheme and targets those where:

  • The promoter expects the same arrangements, or substantially the same arrangements, to be implemented by two or more individuals; and
  • An informed observer, after studying the details, would conclude that the main benefit expected to arise to the individuals was the provision of tax losses which would then be used to reduce their liabilities to income tax or capital gains tax.

D)     Leasing schemes

This hallmark is aimed at schemes involving the leasing of plant and machinery. An overriding condition is that there must either be a promoter involved or, if it is an in-house scheme, the expected tax advantage is to be obtained by a large business.

Other conditions which have to be met for the scheme to be hallmarked are:

  • the arrangements must include a ‘plant or machinery lease’ which is not a ‘short-term’ lease;
  • the ‘relevant value condition’ is met; and
  • one of three ‘additional conditions’ is met.

The relevant value condition is satisfied if either the cost to the lessor (or the market value, if lower) of any asset forming part of the plant or machinery is £10m or more; or the aggregate cost (or market value as appropriate) of all the assets is £25m or more.

The first condition is satisfied if one of the parties to a lease comprised in the arrangements would have a right to claim capital allowances in respect of the plant or machinery; and one of the other parties is not within the charge to corporation tax.

The second condition is that the lessor’s risk of non-payment of the lease rentals by the lessee is limited by the provision of money or a money debt, whether expressed in sterling or some other currency.

The third condition is satisfied if the arrangements are designed to include either sale and finance leaseback or a lease and finance leaseback.

E)   Employment Income

A scheme will be prescribed under this hallmark if:

  • Conditions 1 and 2 are met and Condition 3 is not met; or
  • Conditions 1, 2 and 3 are met and at least one of Conditions 4 and 5 is met

Condition 1 will be met if the arrangements involve at least one of the following:

  • a relevant third person taking a relevant step under ITEPA 2003, s. 554B (earmarking of money or assets);
  • any person taking a relevant step under ITEPA 2003, s. 554C (payment of sums or transfer of assets) or 554D (making assets available); or
  • B taking a step under ITEPA 2003, s. 554Z18 (Earmarking) or 554Z19 (Provision of security).

Condition 2 is met if the main benefit, or one of the main benefits, of the arrangements is that an amount that would otherwise count as employment income is reduced or eliminated;

Condition 3 is met if, by reason of at least one of ITEPA 2003, s. 554E to 554X ( exclusion for steps under certain schemes such as SIPS).

Condition 4 is met if the arrangements involve one or more contrived or abnormal steps without which a reduction or elimination of employment income would not be obtained.

Condition 5 is met if the arrangements involve a relevant step being treated as taking place and ITEPA 2003, Pt. 7A, Ch. 2 (treatment of relevant steps where employment income provided by third parties) applies.

Conclusion

The DOTAS provisions are one of the main weapons in HMRC’s unceasing campaign against what they consider to be the ‘unacceptable’ side of tax planning.  The provisions are highly technical and expert advice is essential for promoters and taxpayers who may be affected by them.

 

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells

 

 

 

 

 

Tax Promoters are in the firing line – again!

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Just when the hard pressed promoter thought things could get no worse, along comes the Finance Act 2014 (High Risk Promoters Prescribed Information) Regulations 2015 (SI 2015/549). This legislation was introduced on 6 March to implement further aspects of a new regime with enhanced disclosure obligations to certain promoters of tax avoidance schemes, and their intermediaries and clients.

Where it all started

In February 2015, HMRC published guidance explaining the new rules that apply to promoters of ‘tax avoidance schemes’.   Legislation was also published to implement the new regime – The Promoters of Tax Avoidance Schemes (Prescribed Circumstances under Section 235) Regulations 2015 (SI 2015/130) and the Finance Act 2014 (Schedule 34 Prescribed Matters) Regulations 2015 (SI 2015/131).

The key points of the new regime are as follows.

  • According to HMRC, ‘the objectives of the regime are to change the behaviour of a small and persistent minority of promoters of avoidance schemes who are not transparent with HM Revenue and Customs (HMRC) and display other behaviours detrimental to the fairness of the tax system;’
  • A promoter is defined in terms of the activities it carries out in the course of a business that includes the design, marketing or implementation of avoidance schemes. The definition is modelled closely on the existing DOTAS definition at s307 FA 2004;
  • The regime builds on the existing regime for the disclosure of tax avoidance schemes (DOTAS);
  • There are two key elements to the new regime. Firstly, a conduct notice which may be issued by HMRC where a promoter meets a certain threshold condition and:
  • Secondly, a monitoring notice – which may be issued by HMRC where a promoter breaches a requirement in a conduct notice and approval is obtained from the First-tier Tribunal.  A promoter that is subject to a monitoring notice is referred to in the legislation is monitored promoter;
  • The threshold conditions are: HMRC publishing information about the promoter as a deliberate tax defaulter; or the promoter breaches the Banking Code of Practice in respect of schemes that it promotes; or the promoter is given a conduct notice as a dishonest tax agent; or the promoter fails to meet DOTAS obligations; or the promoter is charged with a relevant criminal offence; or arrangements that the promoter has promoted are regarded as unreasonable by the GAAR Advisory Panel; or a professional body of which the promoter is a member takes certain disciplinary action against it; or a regulatory authority imposes certain sanctions on the promoter; or the promoter fails to comply with an information notice; or the promoter imposes certain restrictive contractual terms on clients; or the promoter continues to promote arrangements despite being given a stop notice in respect of those arrangements.
  • A conduct notice is issued by an authorised officer of HMRC and imposes conditions on a promoter that must be complied with. There is no right of appeal against the issue of a conduct notice, which can last for up to two years.
  • If a monitoring notice is issued the monitored promoter is subject to a more stringent regime that includes: publication by HMRC of information about the promoter; publication by the promoter of its status on the internet and in publications and correspondence; a duty on the promoter to tell clients that it is a monitored promoter and to provide them with a promoter reference number (PRN); a duty on clients to put the PRN on their returns or otherwise to report the PRN to HMRC; enhanced information powers for HMRC, backed by new penalties; preventing any attempt by a promoter to impose confidentiality on clients in relation to disclosure to HMRC; limitations to the defences of reasonable care and reasonable excuse against the imposition of penalties; extended time limits for assessment on clients; and a criminal offence of concealing, destroying or disposing of documents.

HMRC say:-

‘HMRC expects that few promoters will be issued with conduct notices and hopes the great majority of those will comply with the conditions in the notices. So the much more significant sanctions consequent on a monitoring notice will only be imposed in very few cases and subject to prior approval by the First-tier Tribunal that the issue of the notice is justified. Further, the provisions that would publicly identify a monitored promoter do not apply until the promoter’s appeal rights have been exhausted….

According to HMRC, there are some safeguards for the promoter as follows:-

  • the authorised officer must give the promoter an opportunity to comment in writing or at a meeting on the proposed terms of the conduct notice before finalising its terms. The officer must then consider fairly any comments made, taking into account the purpose of the legislation
  • the notice may include only conditions that are reasonable and proportionate for the purposes listed above
  • when making representations to the First-tier Tribunal on an application by an authorised officer to approve the issue of a monitoring notice the promoter can ask the Tribunal to refuse approval on the basis that the condition was not reasonably imposed in the conduct notice.

SI 2015/549

SI 2015/549 fleshes out further details for the new regime.

A monitored promoter must give its clients a notice stating that it is a monitored promoter, and which of the conditions in a conduct notice it has been determined that has failed to comply with. Such notification must be in writing; set out clearly and precisely the information required; make is clear that the promoter is being monitored by HMRC because it breached a condition or conditions of a conduct notice; and make clear the specific details of each of the conditions which it has been determined that the person has failed to comply with. If regulations are made to this effect, the monitored promoter shall publish this information of its website.

If a promoter or a client of the promoter is notified of a promoter reference number they must report the number to the Commissioners if they expect to obtain a tax advantage from relevant arrangements in relation to which the monitored promoter to whom the reference number relates is the promoter. This includes the full name and address (including postcode) of the person reporting the promoter reference number; the promoter reference number; the type of tax in respect of which the person expects to obtain a tax advantage; the relevant date of the transaction; a declaration that the information provided is correct and complete to the best of the knowledge and belief of the person making the report; the signature of the person making the report; the full name of the person signing the report; and the date on which the report is made.

There are stipulated time limits for such a report to be made. For example, in the case of an individual, partnership, trustee, company, where a tax return has not as yet been submitted, the report must be made by the end of the fifth working day following the date on which the return was required to be submitted.

There is an ongoing duty to provide documents and information following an HMRC notice including:

  • the name or names by which the monitored promoter refers to the monitored arrangements or monitored proposal;
  • a summary description of the monitored arrangements or monitored proposal and how they are intended to result in a tax advantage;
  • a detailed description of each part of the monitored arrangements or monitored proposal and the details of how they are intended to result in a tax advantage;
  • the legislative provisions that provide the basis for the intended tax advantage under the monitored arrangements;
  • if the monitored arrangements or monitored proposal have not been disclosed under Part 7 of the Finance Act 2004 (disclosure of tax avoidance schemes), an explanation as to why the monitored arrangements or monitored proposal have not been disclosed;
  • if the monitored arrangements or monitored proposal are funded by or will require funding from third parties, the names and addresses of the third parties, the level of funding required and the date on which the third parties agreed to provide funding;
  • the name and address of any person (including any legal advisers) consulted in respect of the monitored arrangements or monitored proposal;
  • the name and address of any person otherwise involved in planning, organising or operating the monitored arrangements and detailed information on the involvement and role of that person;
  • a list of each and every fee paid or to be paid by clients to use or participate in the monitored arrangements with a description of what each fee is charged for or will be charged for;

Promoters must also provide detailed information about clients including, for individuals, their national insurance number and unique tax reference number; and for trusts, partnerships and companies, their unique tax reference number. They must also give the date the person concerned became a client of the monitored promoter and the date on which the client entered into the transactions.

Conclusion

HMRC say they have already written to a number of promoters warning them of the consequences if they do not change their behaviour. They have also sent the first Conduct Notice, which requires a promoter to change its ways. There is no doubt that more will follow.

This is truly draconian legislation aimed at a small minority of professional tax advisers who have engaged in what HMRC believe to be ‘unacceptable’ tax avoidance. Whether such legislation is reasonable and proportionate, and thus in accordance with the Human Rights Act and other relevant principles of natural justice, remains to be seen.

 

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells

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