On 1 January 2018, the Disclosure of Tax Avoidance Schemes for VAT and Other Indirect Taxes rules (shortened to the catchy acronym DASVOIT) came into force. These rules are designed to provide HMRC with an early warning of the development and use of VAT (and other indirect tax) arrangements or “schemes” which could constitute tax avoidance.
DASVOIT essentially replaces the previous VAT disclosure regime (VADR) introduced in 2004, shifting responsibility for disclosure from scheme users to those that have devised the arrangements (usually, but not always, an accountancy practice or law firm – the “promoter”).
Real estate practitioners (including tax specialists) can be forgiven for not having the previous VAT disclosure regime at the forefront of their minds. Immediately following the introduction of VADR, a considerable number of arrangements were disclosed and certain legislative changes were introduced.
On 1 January 2018, the Disclosure of Tax Avoidance Schemes for VAT and Other Indirect Taxes rules (shortened to the catchy acronym DASVOIT) came into force. These rules are designed to provide HMRC with an early warning of the development and use of VAT (and other indirect tax) arrangements or “schemes” which could constitute tax avoidance.
DASVOIT essentially replaces the previous VAT disclosure regime (VADR) introduced in 2004, shifting responsibility for disclosure from scheme users to those that have devised the arrangements (usually, but not always, an accountancy practice or law firm – the “promoter”).
Real estate practitioners (including tax specialists) can be forgiven for not having the previous VAT disclosure regime at the forefront of their minds. Immediately following the introduction of VADR, a considerable number of arrangements were disclosed and certain legislative changes were introduced.
As time passed, the number of VAT disclosures received by HMRC radically reduced to the point where, a decade on from its launch, fewer than five VAT disclosures a year were made (according to HMRC’s published figures).
This fall can probably be attributed to a general shift in attitudes and declining taxpayer appetite to enter into potentially abusive tax arrangements – together with the European Court of Justice decision in Halifax plc v Commissioners of Customs & Excise Case C-255/02; [2006] ECR I-1609.
Halifax considered arrangements designed to enable otherwise irrecoverable VAT incurred on the construction of call centres by Halifax to be recovered. The ECJ held that arrangements entered into with the essential aim of reducing a company’s liability to VAT can be disregarded as an abuse of rights and that, in those circumstances, VAT liabilities should be recalculated on the basis of the arrangements that would have been in place absent the abusive transactions.
It is clear from a consultation document produced prior to the introduction of DASVOIT that HMRC considered that dwindling disclosure was, at least in part, a consequence of failings with and/or efforts to circumvent VADR. Despite tax and real estate industry representations to the contrary, the government felt DASVOIT should be introduced to:
strengthen the VAT disclosure regime;
align the VAT disclosure regime more closely with the regime that applies to income tax, CGT, corporation tax and SDLT (Disclosure of Tax Avoidance Schemes, or DOTAS); and
capture other indirect taxes (such as gaming and betting duties).
When is disclosure triggered?
Under DASVOIT, disclosure is triggered if “notifiable” arrangements are entered into on or after 1 January 2018, unless they are protected from disclosure by “grandfathering” rules. Grandfathering applies where the promoter has marketed the arrangements, made them available for use or become aware of their use prior to 1 January 2018. Arrangements are notifiable if:
they give rise or are expected to give rise to an advantage in relation to VAT (or other indirect tax);
obtaining that advantage is one of the main expected benefits of the arrangements; and
the arrangements either: fall within a list of four specific “designated schemes” or are covered by one of the three general “hallmarks” of avoidance.
Designated schemes
Of the four designated VAT schemes, one is of particular relevance to real estate transactions. It is common for “options to tax” to be made over commercial property by landowners to turn otherwise exempt supplies of property into taxable supplies and, in doing so, enable input VAT to be recovered.
Once made, an option can only be revoked in certain specific circumstances so that it is generally not possible for the VAT status of land to be manipulated by a landlord to suit the best interests of its tenant at any given time.
A specific anti-avoidance provision was introduced into the option to tax rules to combat historic schemes used to enable VAT-exempt occupiers to recover VAT on construction and other property expenditure.
That provision worked by automatically disapplying the option to tax in certain situations and, ironically, the anti-avoidance rule has itself been used to manufacture abusive scenarios which allow landlords to reduce VAT costs for tenants.
HMRC wants to know when its anti-avoidance rule is being used against it in this manner so has specifically identified such arrangements as being disclosable.
Hallmarks
The hallmarks are deliberately broad in scope and trigger disclosure in respect of arrangements that have a VAT advantage as one of their main benefits in any of the following scenarios:
Confidentiality – where the promoter would wish to keep the arrangements confidential from HMRC or other potential promoters;
Premium fees – where the promoter expects to charge a fee which is largely attributable to, and is contingent on, the tax advantage being obtained; or
Standardised tax products – where the promoter makes the arrangements available for implementation to more than one person and, broadly, the arrangements make use of standardised documentation that doesn’t require any material bespoke tailoring.
Impact on real estate advisers
During early consultation on DASVOIT, it was unclear whether grandfathering provisions would be included, prompting concerns that arrangements that HMRC appears to accept (such as common structuring that takes place to maximise input VAT recovery on student accommodation developments) may be subject to disclosure.
Thankfully, the inclusion of the grandfathering provisions means that most established tax and legal professionals advising on residential developments (notoriously complex for VAT purposes) can take some comfort from their past practices.
This does call into question whether new entrants to the market are at a disadvantage in that they won’t be able to rely on their own records to determine whether grandfathering applies to a particular scenario.
Care also needs to be taken in assessing whether arrangements, although based on concepts that pre-date 1 January 2018, are in fact materially different in nature and therefore constitute “new” arrangements for disclosure purposes.
It is possible that new arrangements that rely on parties entering into fairly standard form leases that are replicated with ease for different clients could fall within the “standardised product” hallmark, triggering disclosure where a favourable VAT position is considered to be “one of the main benefits” of structuring arrangements in a particular way.
Is it my problem?
For those obtaining tax advantages, at first sight, these changes could be helpful – the disclosure responsibility has shifted from you to your adviser in many instances. However, subtle changes to the rules and the introduction of the standardised tax products hallmark meant that more scenarios are potentially caught.
Disclosure does not, of itself, cause a tax advantage to be denied but arrangements become more vulnerable to challenge. Interestingly, unlike DOTAS, DASVOIT disclosure does not currently enable HMRC to demand payment of disputed tax upfront (before the dispute is finally resolved by a court or tribunal).
For legal and tax advisers (including those who do not consider themselves to be “promoters” of tax schemes), an awareness of the new rules and appreciation of their broad scope is crucial.
It is possible that, during the course of providing advice on alternative approaches to structuring a real estate transaction, an adviser could become the promoter of a notifiable scheme. Failure to follow the disclosure procedure could then give rise to potentially significant penalties and reputational consequences.
Julia Cockroft is a senior associate at Bristows LLP and is both a solicitor and chartered tax adviser
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