HMRC have published legislation amending the hallmarks in the Disclosure of Tax Avoidance Schemes (DOTAS) regime. A summary of responses to the technical consultation has also been published. The primary change is to introduce a new financial products hallmark. The changes also extend the confidentiality and premium fee hallmarks to include IHT and refocus the standardised tax product and loss schemes hallmarks. HMRC will consult again on introducing a hallmark specifically targeting IHT arrangements. The hallmark changes come into effect from 23 February 2016.
The main change introduces a new financial products hallmark designed to capture schemes where there is a direct link between the use of a financial product and the gaining of a tax advantage. The hallmark requires that an ‘informed observer’, having regard to all relevant factors, would conclude that one of the main benefits of including the financial product is the gaining of the tax advantage. The informed observer must also be reasonably expected to conclude that either:
- The financial product includes at least one term unlikely to have been entered into but for the tax advantage; or
- The arrangements include one or more contrived or abnormal steps without which the advantage could not be obtained.
The use of the informed observer test is designed to allow consideration of matters outside of the legislation such as commercial factors or HMRC guidance.
The definition of financial product is wide but the legislation provides for certain affected transactions to be excluded including, broadly:
- The sale of a business in a manner which allows for the rollover of the gain;
- Ensuring the debt is not in the equity note legislation by ensuring it has a term less than 50 years;
- Certain hive-down transactions;
- Certain hedging transactions; and
- Securities that provide for conversion or redemption in a foreign currency (for example, so they are not Qualifying Corporate Bonds).
It also includes an exclusion for financial institutions within the Code of Practice on Taxation for Banks and the transaction is one which HMRC could reasonably be expected to confirm is acceptable within the Code.
The accompanying consultation response lists more transactions, “non-abusive” versions of which are intended to be excluded including ‘short’ loans, Quoted Eurobonds, certain earn-out agreements as well as Enterprise Investment Schemes (EIS), self-invested personal pensions (SIPPs) and real estate investment trusts (REITs). More detail will be provided in guidance.
The second change is that the confidentiality and premium fee hallmarks have been extended to include Inheritance tax (IHT). HMRC have confirmed they will consult again on introducing a specific IHT hallmark.
Thirdly, the standardised product hallmark, which targets marketed arrangements, has been refocused. It now requires the consideration of ‘all relevant circumstances’, including whether the main purpose of the arrangement is to obtain a tax advantage and whether the arrangements would likely have been entered into absent the advantage.
Again, financial institutions within the Code of Practice on Taxation for Banks are exempted under this hallmark where the transaction would otherwise fall within the financial products hallmark but HMRC could reasonably be expected to confirm the transaction is acceptable.
Finally, the losses hallmark, which targets loss schemes for individuals, has widened ‘the main benefit’ test to ‘one of the main benefits’. Again, an ‘informed observer ’test is used which is intended to prevent the hallmark from catching genuine commercial losses.
Further information will be included in guidance. The changes come into effect on 23 February 2016.
For further information please contact: