HM Revenue & Customs has published a consultation document on draft legislation to extend the regime for disclosure of tax avoidance schemes. The draft legislation includes measures to require disclosure of arrangements which may result in a tax advantage by reason of an employment and so-called "income to capital" schemes. The consultation closes on 19 February 2010.
Background
The direct tax disclosure regime is designed to provide HM Revenue & Customs (HMRC) with information about potential tax avoidance arrangements at an earlier stage than otherwise would have been the case. Timely information about new arrangements is intended to enable HMRC to investigate and, if appropriate, take measures to counteract these arrangements more quickly.
The legislation on disclosure of tax avoidance schemes (DOTAS) applies to "notifiable arrangements" that have as a main expected benefit the obtaining of a UK tax advantage. To fall within the DOTAS regime, arrangements must fall within any one of eight widely drawn "hallmarks".
HMRC has published a consultation document on extending the DOTAS regime, together with a consultation stage impact assessment.
The consultation document includes draft legislation to extend the DOTAS regime, including a proposal to include in the DOTAS regulations new hallmarks relating to :
Arrangements intended to confer a tax advantage by reason of an employee's employment.
Arrangements ("income to capital" arrangements) as a consequence of which:
a person who might otherwise incur an income tax liability will incur no (or a smaller) income tax liability; and
will acquire an asset the disposal of which would be a chargeable gain for capital gains tax purposes.
Grants of qualifying options under the enterprise management incentive (EMI) legislation (but only with only such other steps as are reasonably necessary to facilitate the grants).
Amongst other things, the consultation document seeks respondents' views on whether:
They can identify any practical problems with the proposed new hallmarks.
The new hallmarks are "effective and proportionate".
Respondents to the consultation must provide their comments by 19 February 2010.
Comment
In proposing new hallmarks in relation to employment income tax avoidance arrangements and "income to capital" arrangements, HMRC is seeking more information on how these arrangements are structured, and how common they are, probably to enable it to target these schemes with specific anti-avoidance legislation.
The exclusion from both of the proposed new hallmarks of HMRC-approved arrangements is not surprising, but the restriction of the exclusion to EMIs which involve only necessary additional steps is curious. HMRC may have in mind specific arrangements intended to achieve a tax advantage which involve the grant of EMI options as one of a number of other steps. (However, the EMI legislation already contains a general anti- avoidance provision (in paragraph 4 of Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003.) Under this provision, an option cannot qualify as an EMI option if it is granted as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax.)
HMRC justifies the need for the new employment income tax avoidance schemes hallmark by saying that many schemes involving EBTs are not disclosed, since they are not designed to achieve both a corporation tax deduction for the employer and the avoidance of income tax and National Insurance contributions (NICs).
The proposed "income to capital" hallmark
The commentary in the consultation document refers specifically to arrangements targeting the 50% income tax rate, by seeking to convert income into capital. It draws a distinction between schemes which are "transparent" and are "normal uses of statutory arrangements" and those which are not, giving the example of "guaranteed growth schemes" where the employee receives securities which are guaranteed to go up in value (see Legal update, HMRC threat of legislation to counter the "Growth Securities Ownership Plan").
There had been industry speculation that HMRC might use the 2009 Pre-Budget Report to attack "joint ownership" or "shared growth" share plans (see Practice note, Joint ownership arrangements: an overview), and although HMRC may only be intending to target particularly artificial schemes in which the employee's interest is guaranteed to grow in value, the more mainstream forms of these arrangements may now become disclosable.