There is a fine line between legitimate tax planning and tax avoidance. The latter can be caught under the statutory "general anti-avoidance rule" if it constitutes a tax arrangement that is sufficiently abusive in nature; but the former represents an individual's right to fairly organise their affairs to keep their tax exposure to a minimum. Tax avoidance has been in the Government spotlight for some time, and has also recently hit the headlines following the so-called "Panama Papers" leak.
One of the Government's recent initiatives to clamp down on tax avoidance is their consultation on the Disclosure of Tax Avoidance Schemes ("DOTAS") regime published on 20 April 2016 ("the Consultation"). Under DOTAS, certain types of tax planning must be disclosed to HMRC, giving them a chance to review and rule on the legitimacy of the planning. To date, in relation to inheritance tax, the DOTAS regime has only applied in a fairly narrow context, but the recent consultation proposes widening this significantly.
Under the Consultation, any planning that enables a person to obtain a tax advantage through one or more contrived or abnormal steps is disclosable. "Contrived or abnormal" is not defined, leaving it open to question whether straightforward, ordinary planning – such as making an interest free loan to a trust or a family member - might be described as contrived or abnormal. Without an explanation of what these words mean, virtually all inheritance planning could be within scope given that it constitutes planning that one would not ordinarily undertake unless legitimately trying to minimise tax exposure.
We believe that the conditions for a disclosure need to be more tightly drafted so that it is clear what planning does and does not need to be disclosed. Ideally, the conditions should be drafted so as to target specific areas of inheritance tax planning that the Government considers to be abusive. Failing which, we may be in a position whereby simple planning routinely requires disclosing to HMRC.
Wedlake Bell Response
We have responded to the Consultation to explain why we disagree with the proposed disclosure conditions, and a copy of our response can be read here. We will be closely monitoring the Government's response to the Consultation and its impact on our clients.
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