2005 Budget VAT Disclosure Rules Come Into Force

by Amanda Banks, Tax-News.com, London

29 July 2005

The UK's Revenue and Customs has announced details of Budget VAT changes to disclosure rules which will come into force on 1st August 2005.

The existing rules require taxable persons to notify the use of either of two types of VAT scheme to HM Revenue & Customs (HMRC). Taxpayers with an annual turnover exceeding £600,000 must notify the use of certain schemes described in the legislation ("listed schemes"). Taxpayers with an annual turnover exceeding £10 million must notify the use of schemes that contain features associated with avoidance ("hallmarked schemes"), if one of the main purposes of
entering the scheme is to gain a VAT advantage. If the taxpayer is part of a corporate group, these turnover figures are those for the whole group.

There are three main changes to the rules. First, two new listed schemes are added:

• cross-border face-value voucher schemes involving telecommunications, broadcasting or electronically supplied services. These schemes attempt to avoid paying any VAT on the provision of the services to final retail customers within the UK; and
• the surrender or termination of certain taxable leases of buildings, where the tenant remains in occupation of essentially the same area of the building, but following the surrender or termination pays no or substantially less VAT on the rent. Disclosure is only required if the tenant cannot recover VAT in full on the rent, and the tenant or someone connected to him treats the building as a capital item for the purposes of the capital goods scheme.

This change targets exempt or partially exempt occupiers who have in the past put in place taxable lease structures in order to obtain full VAT recovery on the capital cost of the building, and who now try to obtain further VAT benefits by avoiding irrecoverable VAT on the rent payable for the remainder of the lease term.

Second, a new hallmark is added:

• the issue of face value vouchers with either low expected redemption rates, or those issued to other members of the same corporate group (except members of the same VAT group). Most VAT avoidance schemes involving vouchers in the past have had one or other of these features. Disclosure is only required if the issue is part of a scheme with a main purpose of gaining a VAT advantage.

The new listed schemes and hallmark are described more fully in the VAT (Disclosure of Avoidance Schemes) (Designations) (Amendment) Order 2005 (SI 2005/1724), a copy of which will be available shortly on the HMSO online Website accessed at www.opsi.gov.uk.

Third, the Finance (No. 2) Act 2005 amends the definition of "tax advantage" so as to include schemes that are intended to reduce any person's irrecoverable VAT, even when there is no effect on a VAT return (eg because none of the VAT being avoided would have been deductible as input tax). However, the disclosure requirement only applies to those taxable persons who are both knowing parties and meet the normal disclosure rules, such as having a turnover in excess of the relevant turnover threshold.

Transitional arrangements will ensure that a taxpayer will not have to notify one of the new listed schemes if they have previously notified it as a hallmarked scheme.

One of the existing hallmarks is that a confidentiality condition prohibits or limits a person from giving others details of how a scheme gives a tax advantage. It is standard practice for advisers to include a "general confidentiality condition" within their terms of engagement, prohibiting the client from passing on advice to third parties.

Professional advisers have raised concerns that a literal interpretation of the legislation would result in any tax advice that
was subject to such a general confidentiality condition falling within the hallmark.

The confidentiality hallmark is aimed at confidentiality conditions that are intended to protect the competitive advantage of a promoter or creator of the scheme over other promoters. That competitive advantage is most likely to arise from the promoter being aware of an opportunity to profit from innovative tax avoidance ideas so that he would want to keep his tax scheme secret from other persons. Such conditions are usually imposed by a promoter on a potential user before explaining the workings of the scheme.

Consistent with this, HMRC's interpretation of the legislation is that a confidentiality condition does not fall within the hallmark if it is simply a general confidentiality condition that is imposed in relation to all advice, not merely the scheme in question.

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