Technical: Winter Warmers including DOTAS regulation
19 February 2018
To warm you up (technically speaking) for the year ahead, here are a few items of current interest that caught the eye in recent weeks.
This is quite technical, but important!
The DOTAS regulations (DOTAS is an acronym for ‘Disclosure of Tax Avoidance Schemes’) were introduced way back in 2004 to provide early information to HMRC about schemes containing defined ‘hallmarks’ of tax avoidance. They were a response to what the Government saw as an unacceptable level of tax planning and, in particular, the sale of tax-saving schemes/arrangements by certain promoters. The aim of DOTAS? To ensure that HMRC receives information about the existence of schemes as soon as possible. Essentially, once a scheme has been disclosed to HMRC, it is allocated a reference number. The promoter is obliged to pass that number to all clients to whom the planning has been made available and, if the client implements the scheme, the number must be entered on the client’s appropriate tax return.
The regime has been amended a number of times to ensure it remains up to date. Inheritance Tax (IHT) was first brought into DOTAS in April 2011 but only in very limited circumstances to detect a specific type of IHT avoidance involving the use of trusts. The Government subsequently decided this was too narrow and proposed to widen the hallmark leading to an extensive consultation exercise. Broadly, this resulted in a balancing act to ensure the new hallmark is appropriately targeted to catch IHT avoidance schemes, but not bread and butter IHT planning involving the straightforward use of reliefs and exemptions or ordinary tax planning arrangements.
Ultimately, regulations were laid on 30 November 2017 which come into force on 1 April 2018 http://www.legislation.gov.uk/uksi/2017/1172/made. In short, the regulations outline notifiable schemes but contain an exemption for arrangements which are substantially the same as arrangements entered into before 1 April 2018 and accepted by HMRC as according with established practice. In due course, HMRC will also be publishing guidance to explain how the new DOTAS hallmark works.
In the meantime, what does this mean for standard trust planning arrangements offered by insurance companies? Consider for example, discounted gift trusts (DGTs) offered by insurance companies for a number of years. It seems to me that no notification will be required as they should constitute established retail products which accord with established practice that HMRC has previously accepted. Indeed, HMRC set out its approach to DGTs as far back as 2007.
Trusts Registration Service (TRS) – Part I
Graeme wrote about this, most recently in October 2017.
An HMRC email issued on 8 December 2017 updates matters for these trusts.
• Trust already registered for Self-Assessment
o Where the trustees incur a UK tax liability in 206/17, then registration on the TRS must be completed by no later than 31 January 2018.
• Trust not registered for Self-Assessment
o Where the trustees incur either an inheritance tax, stamp duty land tax, stamp duty reserve tax, or a land and buildings transaction tax (Scotland) liability in 2016/17, then registration must be completed by no later than 31 January 2018.
The HMRC email states that for this first year of operation only, HMRC will not impose a penalty on the trustees if there is a failure to register on the TRS by 31 January 2018 but do so no later than 5 March 2018.
An added complication concerns trusts not registered for Self-Assessment where the trustees incur an income tax or a CGT liability for the first time in 2016/17. The deadline of 5 October 2017 had been extended (for one year only) to 5 December 2017 given that the TRS is in its infancy. This was further extended to 5 January 2018.
Trusts Registration Service (TRS) – Part II
Although the TRS complements HMRC’s digital strategy, the legal requirement for it originated in the EU Fourth European Money Laundering Directive. With that in mind, included in the information that must be provided will be the identity of the settlor, trustees and the beneficiaries or class of beneficiaries (where individual beneficiaries have yet to be determined or identified). In its December 2017 Trusts and Estates Newsletter, https://www.gov.uk/government/publications/hm-revenue-and-customs-trusts-and-estates-newsletters/hmrc-trusts-and-estates-newsletter-december-2017 HMRC advise that where a beneficiary is un-named, being only part of a class of persons, a trustee will only need to disclose the identity of the beneficiary when they receive a financial or non-financial benefit from the trust (applicable from 26 June 2017). In particular, HMRC comment as follows.
“We want to get an accurate picture of who can benefit from a trust. Some trusts may list named individuals who only become potential beneficiaries contingent upon, for example, the death of a named beneficiary, or in circumstances where there are no remaining named beneficiaries, or beneficiaries in a class of persons. Where this occurs, we’re content that the individuals are listed as a class of beneficiaries, until the contingent event occurs. At that point, the individual potentially stands to benefit and must be named.”
Trusts & Estates receiving small amounts of savings income
Back in 2016, following the introduction of the Personal Savings Allowance (PSA) and interest being paid gross, HMRC recognised that some trustees or personal representatives who did not then complete a tax return or make informal payments to HMRC could incur new reporting burdens. Interim arrangements were put in place so that in 2016/17 HMRC do not require notification from trustees or personal representatives where the only source of income is savings interest and the tax liability is below £100.
These arrangements have been extended to 2017/18 and 2018/19.
Tax in Wales is changing.
The Welsh Government and the National Assembly for Wales will become responsible for some of the taxes paid in Wales in April 2018. Three taxes will be affected.
1. Land transaction tax
From 1 April 2018, land transaction tax (LTT) will replace Stamp Duty Land Tax (SDLT).
LTT will be collected by the Welsh Revenue Authority (the Welsh Government published rates and bands for LTT in October 2017).
HMRC will not accept SDLT returns for land transactions in Wales with an effective date of transaction on or after 1 April 2018.
2. Landfill disposals tax
From 1 April 2018, landfill disposals tax will replace landfill tax in Wales.
3. Welsh rates of income tax
From 6 April 2019, Welsh rates of income tax will be introduced. From that date, the UK government will reduce each of the 3 rates of income tax – basic, higher and additional rate – paid by Welsh taxpayers by 10p. The National Assembly for Wales will then decide the 3 Welsh rates of income tax, which will be added to the reduced UK rates. The combination of reduced UK rates plus the Welsh rates will determine the overall rate of income tax paid by Welsh taxpayers.
If the National Assembly sets each of the Welsh rates of income tax at 10p, this will mean the rates of income tax paid by Welsh taxpayers will continue to be the same as that paid by English and Northern Irish taxpayers.
In due course, we will update our technical centre on PruAdviser to include content on Welsh income tax. For the time being our current article on Scottish income tax is available here.