New VAT and indirect tax avoidance rules explained
Jan Garioch CA outlines the key aspects of the new DASVOIT rules.
The disclosure of avoidance schemes for VAT and other indirect taxes (DASVOIT) rules came into effect on 1 January 2018.
There are significant changes from the previous VAT avoidance disclosure regime, but with grandfathering arrangements so that arrangements which are already implemented or are already well known are not caught.
DASVOIT now extends beyond VAT alone and includes other indirect taxes including IPT, Customs duty, and duties on spirits, tobacco and hydrocarbons.
What does DASVOIT do?
In most cases DASVOIT transfers the obligation to disclose schemes from the user to the promoter, which moves into line with the direct tax disclosure regime. However, a user must provide the scheme reference number to HMRC every time they use the arrangements.
DASVOIT replaces the old test of whether obtaining a tax advantage was a main purpose of arrangements because that was seen as subjective and the production of evidence to prove purpose was problematic.
DASVOIT tests instead whether obtaining a tax advantage is one of the main benefits arising from the arrangements. Where it is a main benefit, the next step is to decide whether any of a list of hallmarks is present in the arrangement.
The list of hallmarks is changed in DASVOIT to move it more in line with the direct tax disclosure regime by including generic features which can trigger an obligation to disclose.
In broad terms, these generic features are premium fees contingent on the tax advantage, standardised tax products which require little modification to suit circumstances and certain confidentiality stipulations.
The hallmarks list continues to include specific VAT hallmarks which applied in the old regime, like option to tax disapplication and splitting supplies and these are necessarily restricted to VAT and do not apply to other indirect taxes.
Penalties for non-compliance are severe
The complexity of DASVOIT is borne out by the very substantial length of Notice 799 which gives guidance on the topic.
Despite its length, it admits that “examples are given to illustrate the principles involved and should not be taken as the ‘right’ answer”, with it always being up to the person responsible to decide whether a disclosure is required.
On occasions where judgement has to be exercised regarding DASVOIT, it would be advisable to keep records of the evidence which backed up that judgement because, if it is ever disputed, the penalties for failure to disclose can be severe.
Since the responsibility for disclosure now falls to the promoter, it is important for advisors to have a clear understanding of how promoter status is determined to ensure they do not inadvertently become involved in notifiable arrangements.
Notice 799 gives the example of provision of advice on whether two companies are connected under VATA1994. If the advice given goes beyond explaining the interpretation of the legislation and highlights opportunity to exploit the relevant provisions, that will go beyond what is held to be ‘benign advice’ and could make the adviser involved in notifiable arrangements.