VAT avoidance disclosure rules

Background

The VAT avoidance disclosure regulations took effect on 1 August 2004 by way of a statutory instrument The Value Added Tax (Disclosure of Avoidance Schemes) Order 2004. These regulations outline designated VAT avoidance schemes and describe the hallmarks of VAT avoidance under which a business may be required to disclose certain arrangements to HMRC.

The primary law was amended by Finance (No 2) Act 2005. The regulations were also amended by the Value Added Tax (Disclosure of Avoidance Schemes) (Designations) (Amendment) Order 2005. The amendments became effective on 1 August 2005.

How do the rules work?

• Unlike direct tax, the obligation to disclose an arrangement or transaction to HMRC rests with the business rather than the promoter (e.g. accountant, solicitor etc).
  
  
• The regulations will apply to any VAT return commencing post 1 August 2004.
  
  
• The disclosure requirements cover all transactions, series of transactions and arrangements where a person obtains a tax advantage and which is either:
  
  
  • A designated scheme (which carries a 15% penalty irrespective of the effectiveness of the arrangements if not disclosed) or
    
    
  • A scheme which contains or is associated with a "provision" if a person obtains a tax advantage. (Failure to disclose carries a £5,000 penalty).

These penalties can however be mitigated.

Designated schemes

Designated schemes are, broadly, as follows:

• Grants of major interests in property to a connected person where there is exempt occupation of the property at the time of the grant or after the grant;
• Merchant charges arrangements;
• Leaseback arrangements between connected persons;
• Value shifting by retailers where there are linked supplies;
• Use of extended approval periods by retailers;
• Transfer of education or vocational training to a non-profit making body;
• Arrangements involving VAT group members affected by the new eligibility criteria;
• Transfer of education or vocational training to a non-eligible body.
• The use of face value vouchers to pay for telecom, broadcasting or electronic services provided by an offshore supplier to a final consumer;
• The surrender of a lease by a connected party that is subject to VAT where the occupier continues to occupy the property after the surrender.

Schemes which contain or are associated with a "provision"

There are a number of provisions (referred to as the "hallmarks of avoidance") which when associated with and included within schemes where the main purpose is to gain a VAT advantage, mean that the scheme is notifiable. Provisions include:

• Confidentiality agreements - limiting disclosure of the details of the arrangements;
• Contingent fee arrangements - where fees are in whole or part contingent on the tax savings achieved;
• Prepayments between connected parties;
• Funding of supplies of goods or services between connected parties by loans or shares;
• Offshore routing of certain supplies where the beneficiary of those services is in the UK; and
• Construction services between connected parties where one of the parties is partly exempt.
• Face value voucher transactions where the redemption rate, within three years, is reasonably expected to be less than 75%.

What should I do now?

• Why not try the PricewaterhouseCoopers VAT Disclosure Toolkit (free of charge) to help you determine disclosure requirements?
• Make sure that you know the obligations under the disclosure rules outlined in Schedule 11A VAT Act 1994.
• Speak to your PwC contact (or contact one of our specialists) who will be available to give advice on the interpretation of the provisions, identification of notifiable proposals and arrangements, staff education, suitability of systems and procedures and the implications of disclosure.

Want to know more?

Other Frequently Asked Questions

The Value Added Tax (Disclosure of Avoidance Schemes) Order 2004
The Value Added Tax (Disclosure of Avoidance Schemes) (Designations) (Amendment) Order 2005