Disclosure of VAT Avoidance Schemes to HMRC and a Possible Increase in Regulatory Compliance Disputes.
The new political reality is that HM Revenue & Customs (“HMRC”) are under increasing pressure from the Government to maximise the ‘tax-take’ for the public purse.
It used to be the case that tax-payers could legitimately arrange their tax affairs so that anything not considered to be evasion was permissible. By and large there was no question that one could legitimately minimise one’s tax liability within any lawful means available. The duty to disclose one’s arrangements did not exist beyond very limited specified circumstances. All this has now changed.
The rules relating to disclosure of avoidance schemes within the context of VAT follow the spirit of the recent rule changes that we have seen in relation to Corporation Tax and Income Tax. As a result we anticipate an increase in regulatory compliance disputes in this arena.
This article looks at what HMRC must be told about, what the triggers are for disclosure, what the thresholds are, when HMRC must be notified and the penalties for failure to notify, before finishing with some advice on possible defences for non-disclosure.
What Must I Tell HMRC About?
Subject to the Trigger Event (detailed below), and the minimum thresholds being met, Taxable Persons who knowingly take part in a scheme of VAT avoidance must tell HMRC about the following transactions:
- ‘Listed Schemes’
- Arrangements and Transactions that include or are associated with at least one of a range of designated provisions that are often linked with avoidance. These are referred to in the legislation as the ‘Hallmark Schemes’
What Are The Listed Schemes?
- Scheme 1 – The first grant of a major interest in a building
- Scheme 2 – Payment handling services
- Scheme 3 – Value shifting
- Scheme 4 – Leaseback agreements
- Scheme 5 – Extended approval periods
- Scheme 6 – Groups: third party suppliers
- Scheme 7 – Education and training by a non-profit making body
- Scheme 8 – Education and training by a non-eligible body
- Scheme 9 – Cross-border face-value vouchers, and
- Scheme 10 – Surrender of a relevant lease
The Hallmarks of a VAT Avoidance Scheme
HMRC prescribe the following types of arrangements or agreement terms as having the ‘hallmarks’ of a VAT avoidance scheme (and ought, therefore, to be notifiable to HMRC):
- confidentiality condition agreements
- agreements to share a tax advantage
- contingent fee agreements
- prepayments between connected parties
- funding by loans, share subscriptions or subscriptions in securities
- off-shore loops
- property transactions between connected persons, and
- the issue of face-value vouchers
The Trigger for Disclosure
Participation in either a Listed Scheme or an arrangement that bears the ‘Hallmark” of avoidance does not of itself require a disclosure to be made to HMRC. The requirement to disclose is prompted when one of the following occurs:
- you show in a VAT return, in respect of any VAT accounting period starting on or after 1 August 2004, a higher or lower net amount of VAT than would be the case but for the listed scheme
- you make a claim (such as by submitting a voluntary disclosure), in respect of any VAT accounting period starting on or after 1 August 2004 for which a VAT return has been submitted, for the repayment of output tax over-declared or input tax credit under-claimed that is greater than would be the case but for the listed scheme
- the amount of non-deductible VAT you incur, in respect of any VAT accounting period starting on or after 1 August 2005, would have been higher but for the listed scheme
What are the Thresholds for Disclosure?
Even in circumstances in which the Trigger Event occurs, a disclosable arrangement does not arise unless the minimum threshold amounts are exceeded.
A Taxable Person’s turnover exceeds the minimum threshold when the total amount of taxable and exempt supplies made by that Taxable Person is, or is greater than:
(a) £600,000 in the year immediately prior to the VAT accounting period that triggers notification, or
(b) the appropriate proportion of £600,000 in the VAT accounting period immediately prior to the VAT accounting period that triggers notification. (For example, the ‘appropriate proportion’ is one twelfth of £600,000 (ie, £50,000) where the VAT accounting period is one month; and one quarter of £600,000 (ie, £150,000) where the VAT accounting period is three months.)
At What Time Must I Notify HMRC?
The notification to HMRC must be made within 30 days of the following events:
- in the case of the net amount of VAT shown in a VAT return being different to what would otherwise be the case, the due date for making the return
- in the case of a claim being made that is greater than would otherwise be the case, the making of the claim, or
- in the case of the amount of your non-deductible VAT in respect of a VAT accounting period being less than would otherwise be the case, the due date for making a return in respect of that accounting period
What are the Penalties for Failure to Notify HMRC?
The failure to notify HMRC in accordance with these rules can result in the following penalties:
- 15% of the VAT saved for listed schemes; and
- £5,000 for Hallmarked Schemes
How to Defend Yourself if you Have a Regulatory Compliance Dispute with HMRC
If you fall foul of these new regulations, it is important to be aware that the implementation of the penalties noted above is subject to a defence of ‘reasonable excuse’. Therefore, if you have a reasonable excuse for failing to notify HMRC a penalty may not be imposed.
In essence, if you have a regulatory compliance dispute with HMRC regarding a VAT avoidance scheme and you believe you have a ‘reasonable defence’ excuse, you may need advice about whether you need to disclose your taxable arrangements and the earlier advice is taken, the better.
Similarly, where HMRC seek to enforce penalties arising from a failure to disclose, advice ought to be obtained as to whether a defence or mitigation is available and the process that needs to be followed.
The NDP Team is experienced in defending clients engaged in regulatory compliance disputes and problems with HMRC and other bodies. If you are facing such a dispute, contact us for a FREE initial discussion, or call us on 0121 200 7040. The sooner you contact us, the more we are likely to be able to help. We often agree to work on affordable fixed fees for clients based anywhere in the UK.