Professionals dealing with financial products will need to be wary of new regulations which could expose them and their clients to scrutiny from HMRC.
The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) (Amendment) Regulations 2016 came into force on 23 February 2016 and widen the Disclosure of Tax Avoidance Schemes (DOTAS) regime to include arrangements involving products covered by a new financial products hallmark (detailed in the Technical Consultation).
Arrangements involving “financial products” will be prescribed (and so subject to DOTAS) by reference to a hypothetical informed observer who has studied the arrangements and has regard to “all relevant circumstances”. It must be reasonable for that observer to conclude that the product has been included in the arrangements to give rise to a tax advantage, and that:
· the product contains at least one term unlikely to have been entered into were it not for the tax advantage; or
· the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.
Where to draw the line with this new test is a contentious and difficult issue for advisors. Prompted by responses to that effect, HMRC have identified a ‘whitelist’ of arrangements which should not be caught by the hallmark. This includes choosing debt over equity and using discounted bonds. However advisors should be careful not to over-rely on the list as it is caveated by being based on arrangements entered into “for ordinary, genuinely commercial, reasons”, which “would not apply where they are used as part of wider arrangements which are structured in such a way that their main purpose becomes the generation of a tax advantage”.
Professionals who advise on arrangements involving any sort of financial product will need to fully comprehend and be alive to this test and the related guidance. The risks of getting a DOTAS disclosure wrong have of course been increased in recent years through the introduction of Accelerated Payments Notices (APNs).
If you would like to discuss the issues raised in this article, please do not hesitate to contact a member of Schofield Sweeney’s Complex Financial & Tax Disputes Team.