On 20 April 2016 HMRC published a consultation document on reforms to the legislation on disclosure of value added tax (VAT) avoidance schemes and inheritance tax hallmark regulations for the purposes of the Disclosure of Tax Avoidance Schemes (DOTAS). The closing date for comments is 13 July 2016.

VAT Disclosure of Avoidance Schemes

The consultation document contains proposals to reform the VAT Disclosure of Avoidance Schemes (VADR) legislation to ensure that this continues to be effective. The proposed changes would move the obligation to disclose VAT schemes from the users of the schemes to the scheme promoters. The document also contains proposals to extend the scope of the VADR regime to include other indirect taxes.

The VADR has been an important element in identifying patterns of VAT avoidance and risks. Although a large number of disclosures were made in the early years of the legislation it has not been updated to keep up with the changing landscape.

Up to now users of VAT avoidance schemes have been required to disclose the schemes to HMRC. The consultation document proposes changing the rules of VADR to follow more closely the Disclosure of Tax Avoidance Schemes (DOTAS) rules by requiring the promoters of VAT avoidance schemes to disclose their schemes and to comply with obligations to supply further information to HMRC and to scheme users after the initial disclosure has been made. This would give HMRC a better overview of the activities of taxpayers and the promoters of avoidance schemes generally.

Currently the VADR contains a “purpose” test under which notification of a scheme that fulfils other conditions only needs to be made if avoidance is the main or one of the main purposes of the scheme. The consultation document proposes that this purpose test be replaced by the benefits test similar to that in DOTAS. This test looks at the benefit expected to arise from the scheme and is therefore a more objective test.

In the original legislation VAT turnover thresholds were included to ensure that small businesses were not burdened with a compliance obligation. The consultation paper now proposes that these are removed, as the disclosure obligation will not be on the promoters of VAT schemes. The document also suggests extending the reporting obligation to VAT non-taxable persons.

The document also proposes the possibility that VADR should adopt the DOTAS definition of a tax advantage for VAT, or alternatively retain the current definition but in a modified form to cover VAT non-taxable persons. The document also looks at the possibility of adapting DOTAS hallmarks for VAT avoidance schemes and invites views on penalties in connection with VADR.

The consultation also looks at how the VADR could be extended to cover other indirect taxes including gambling duty and Insurance Premium Tax (IPT).

Inheritance tax hallmarks for DOTAS

Following previous consultation on draft Regulations for the inheritance tax (IHT) hallmark for the application of the Disclosure of Tax Avoidance Schemes (DOTAS) legislation the current consultation document sets out proposed revisions to the previous drafts. The original hallmark for IHT avoidance schemes was narrow and not many disclosures of schemes were made. In a document of July 2014 the government published proposed changes to widen the IHT hallmark to cover more types of IHT avoidance.

When draft amending regulations were published in July 2015 many commentators felt that the proposed hallmarks were too wide and that some legitimate arrangements using IHT reliefs would fall within its scope. The consultation document therefore contains further revisions to deal with these concerns and legislation is to be passed later in the year.