The new tax scheme disclosure requirements in the UK Finance Act 2004



One of the measures in the UK Finance Act this year which has provoked particular concern is the new disclosure and registration regime for certain tax schemes. Under the provisions, promoters of certain "arrangements", or in some circumstances the clients that use them, are required to disclose those arrangements to the tax authorities before they are implemented. Although the measures initially came in with the Finance Bill in March 2004, there have been a number of significant adjustments to the provisions since then, the latest of which is an attempt to counteract the effects of legal professional privilege in arguably overriding the provisions where disclosure would otherwise be required by lawyers.

The motive for the new regime is clear: the Inland Revenue and Customs & Exercise had become increasingly concerned that they generally heard details of a tax avoidance scheme only after the taxpayer had filed the relevant tax return, which could be up to two years after the scheme had been put into practice. Under the previous, "plug and fix" approach, the only way the Revenue was able to counteract a scheme they considered abusive was with targeted anti-avoidance legislation, by which time substantial numbers of taxpayers had often already successfully used the scheme. Another problem with this approach is that it has led to ever more complex legislation.

The Treasury considered and rejected one possible solution, the introduction of a general anti-avoidance rule, as used, for example, in Canada and Australia. Instead, they have settled on provisions requiring the disclosure of arrangements which meet certain criteria. The US introduced similar laws four years ago and the Chancellor apparently took his inspiration from these. The US rules are widely drawn and, initially at least, created considerable uncertainty. As a result there was a significant increase in the compliance burden on companies and the Internal Revenue Service was initially unable to deal with large numbers of notifications, the vast majority of which were ultimately not deemed abusive.

The UK provisions are more narrowly focused than their US equivalent: they are to be aimed, initially at least, only at certain kinds of "financial" and "employment" products and, under a separate set of rules, VAT schemes. There was a period of consultation following release of the Bill and the draft regulations and a number of changes were made to the details of the provisions. These changes have, largely, made the regime considerably less indiscriminate and more workable. Although the legislation is finalised for the moment, however, it is likely we will see some future adjustments as the regime is tested in practice.

Direct tax provisions

Notifiable arrangements

Arrangements must be disclosed if all of the following tests are met:

  • they give rise to a tax advantage

  • that advantage is a main benefit of the arrangements

  • the arrangements are "connected with employment" or "relate to financial products"

"Tax advantage" is widely defined, in a manner similar to but slightly broader than that in the transactions in securities legislation in section 709 of the Income and Corporation Taxes Act 1988: in addition to a relief, repayment or the avoidance or reduction of a charge to tax it also includes a deferral of tax or the advancement of any repayment. The concept of "main benefit" also looks as if it has been derived from the "main object" test in the transactions in securities legislation; this may lead to uncertainty as the interpretation of "main" has caused some trouble in the earlier context.

Employment arrangements are certain transactions to which an employee or associate of an employee is party. The transactions which are caught are those which involve one or more of:

  • securities or associated rights

  • payments to trustees and intermediaries

  • loans

"Securities or associated rights" are widely defined, though securities and options obtained through approved share/share option and pension schemes are exempt, as, generally, are options granted under enterprise management incentive arrangements.

The category of "payments to trustees and intermediaries" is designed to catch employee benefit schemes and includes any payment by an employer or connected person to a trust or third-party for the benefit of an employee (or associate). Again, payments relating to certain approved pension funds and other approved schemes are exempt.

"Loans" are arrangements which include the making (including arranging, guaranteeing or facilitating), release or writing off of any loan by an employer or associate to or for the benefit of an employee or any other person by reason of their employment. Any arrangement which is taxable in its entirety under ITEPA 2003 or which is exempt under that Act as a bridging loan is excluded from the rules.

The notifiable schemes are currently limited to those which might be expected to produce an advantage in relation to "income tax, capital gains tax or corporation tax"; it is perhaps notable that there is no reference to national insurance.

The original approach to defining financial products involved two rather misconceived formulae; following criticism these were removed and replaced by the requirement that the tax advantage expected to be obtained under the arrangements arises "to a significant degree" from the inclusion of the financial product or products.

The specified financial products are broadly drafted:

  • loans including all debt securities

  • derivatives

  • repos and stock loans

  • shares

  • anything which in accordance with UK accounting practice is in substance a loan or the advancing or depositing of money

Examples of contracts which in substance may represent a loan include, according to the Revenue guidance, rent factoring transactions, financial reinsurance contracts and sales of receivables; but not finance leases, which are explicitly excluded. "Simple loans" and ordinary shares were originally carved out but have been reintroduced, presumably as a quid pro quo for the introduction of other exemptions, described in the next section.

The Revenue has implied that the rules may be extended beyond the areas of employment and financial products in the future. One strategy which, it is understood (and hoped) that the Revenue may use to reduce the volume of disclosure, is the eventual publication of a "white list" of arrangements which need not be disclosed, however there have not been concrete signs of this as yet.


There are three useful exclusions which should take many arrangements outside the scope of the regime. The application of these was originally restricted to financial products, but the first two exemptions have now been extended to apply to employment products also. The exclusions are:

  • where no promoter of the type of arrangements in question, nor any person connected with a promoter, might reasonably be expected to obtain a "premium" fee, i.e. tax saving-related

  • where, disregarding any normal duty of client confidentiality, the promoter would not be expected to wish to keep the relevant element of the arrangements confidential from other promoters

  • in respect of financial products only, where the product is offered on open-market terms

These exceptions are clearly designed to exclude both routine tax planning and some of the more standard, widely used financial products from the requirements for notification. The "premium fee" exception looks like it may be the most effective at this. It seems likely that the legislation will, nevertheless, still catch many transactions in the financial sector, where tax is always going to be an integral factor of the core business, particularly now that vanilla loans and ordinary shares are also caught.

There are also a number of exclusions which exempt certain parties from disclosure, described in the next section.

Responsibility for disclosure

Disclosure must generally be made by the "promoter" of relevant arrangements. Promoter is initially defined widely to include any person who in the course of a relevant business is responsible for the design, organisation or management of notifiable arrangements or who makes them available for implementation by others. A "relevant business" is one involving the provision of services relating to tax or that carried on by a bank or securities house. The concept of "making available for implementation" seems, from the guidance, to be a relatively narrow one, aimed at those who are instrumental in marketing a scheme. The main obligation will therefore fall on the accountants, investment bankers, tax consultants and lawyers that are generally involved in creating such schemes.

In either of the following two circumstances, however, clients themselves will be required to disclose in place of promoters:

  • where the arrangements are purchased from a promoter operating outside of the UK and the promoter does not disclose the scheme

  • where the arrangements are designed by the client itself

The Revenue expects disclosure by a user in these circumstances to be a rare scenario, on the basis that most users seek professional advice before implementing a scheme, the adviser normally making some changes to the design and therefore becoming liable to make disclosure in his own right. The Revenue has recently introduced a further occasion on which disclosure should be made by clients, however. In September, the Law Society issued guidance that the disclosure requirements would generally breach the principle of legal professional privilege, effectively advising that lawyers cannot in fact comply with the regime. Not surprisingly, the Inland Revenue does not agree with the Society’s position. It has attempted to deal with the issue by amending the regulations to provide that where a promoter is covered by legal professional privilege then the client must disclose in his place. There is a view that this measure will not be effective since it is the advice itself that is privileged, regardless of who holds the physical documents; however, clients may in any case decide to waive any such privilege in order to avoid the penalties of non-compliance. The new rules apply from 14 October 2004 but allow a later deadline for disclosure: see below.

Advice between group companies (51% group) is carved out; however, such advice may still be notifiable in the same way as arrangements devised in-house by a single company (the difference will be that the time allowed for disclosure is much longer: see below). A number of new exclusions have been added following the Revenue's consultations. Employees (and officeholders) cannot now be liable in their own right. Persons responsible for organising or managing a scheme who do not have any connection with the designer of the scheme are also carved out. The remaining exclusions involve so-called "secondary designers":

  • the "non-tax adviser" exemption applies to firms which, though they have a tax capacity, do not provide tax advice in relation to that particular structure

  • the "benign tax advice" provision is for the benefit of persons who give tax advice but who are not responsible for the design of the element from which the tax advantage arises

  • finally, there is an "ignorance" test which excludes persons who are not responsible for the design of all of the elements and have insufficient information to enable them to know whether or not the proposal is a notifiable proposal or to comply with the reporting obligations

Time for disclosure and commencement dates

The deadlines for disclosure are generally tight. For promoters the cut off is within five days of the earlier of the date on which the promoter makes a scheme available and the date on which he first becomes aware of a transaction implementing the scheme. For clients, the deadline in relation to imported schemes is similarly within five days of the day on which the client enters into the first relevant transaction. For schemes developed in-house, however, the details need not be provided until the normal date for submitting the relevant tax return.

The point at which a promoter makes a scheme "available for implementation" is described in the guidance notes as "a matter of degree" and may be difficult to gauge in some circumstances. A few examples are given in the guidance. Disclosure is not required at the point of discussion of a general idea; however, where further work has been done to research a proposal, such that it is sufficiently advanced and communicated in sufficient detail that the taxpayer can decide whether or not to implement it, this would amount to "making available". A general outline presentation at a conference will not be caught; however a presentation which goes into detailed mechanics and which is aimed at marketing a particular proposal would be.

Each disclosed scheme will be given a registration number and where the discloser is a promoter, the promoter will be required to give the number to clients, who in turn must include it on the relevant tax return(s).

The rules came into effect on 1 August 2004. In some circumstances, however, promoters have been required to disclose notifiable arrangements made available, or in relation to which the first step implementing the scheme took place, before this date: in relation to employment products, the relevant date is 18 March 2004; in relation to financial products, the date is 22 June 2004. Where clients are liable to disclose a scheme, the relevant date for employment products is the slightly later 23 April 2004; the date for financial products is again 22 June 2004. There were transitional rules which relaxed the deadlines for disclosure in certain circumstances. Schemes made available or implemented before 1 August 2004 did not need to be disclosed until 31 October 2004. Schemes whose relevant date falls after 1 August 2004 and which would otherwise be disclosable before 30 September 2004 were not required to be disclosed until that date. Schemes which become notifiable by the client as a result of the legal professional privilege amendment discussed above are subject to the later deadline for disclosure of 19 November 2004.

It is not entirely clear how the provisions apply to a scheme which has been implemented before 18 March 2004 or 22 June 2004 but which is used on another occasion after that date. The Revenue takes the view in their guidance that where the recent implementation is by a new client, this will cause the scheme to fall within the rules. The implication, though not explicitly stated, is that if the client is a repeat client as regards that structure then no disclosure is required, at least if there are no significant variations in the structure. If the structure is a little different, however, might this amount to a new scheme so that disclosure is necessary nevertheless? There is a test for whether to make more than one disclosure as regards the same scheme, which is whether the details are “substantially” the same. However, it is not explicit that this also applies to the question of whether to disclose a scheme at all when the first version had a relevant date prior to 22 June 2004 and therefore was not notifiable. The test as described by the Revenue is whether or not a previous disclosure would be misleading, which clearly cannot in practice be applied where there has not been a previous notification. Further, this point interacts with the issues discussed above in relation to the definition of a promoter. If the Revenue considers that even minimal changes made to a proposal by an adviser are liable to make that adviser a promoter in relation to that proposal, might this effectively "refresh" the proposal, giving it a new promoter and therefore bring it within the regime? The answer is not clear from the legislation or the guidance.

Details required

The main information required on disclosure will be a summary of the scheme and the legal provisions relied upon. The Revenue has stated that disclosure will not generally require any more information than is necessary to explain a scheme and that disclosers will not normally need to supply documents such as contracts or correspondence. Promoters will not be required to disclose the name of, or other information that would identify, their client (and so breach client confidentiality): they will be able to supply anonymous copies of proposals. However, this distinction may not be so straightforward in cases where for example a scheme is tailor-made to one client and the facts are unique. A related point is that clearly a client will eventually have to disclose a scheme number on a return so that any anonymity will effectively only be temporary.

Disclosure must take place on a specific form; these are available from the Revenue web site. Amended corporation tax returns for disclosure of reference numbers were slated to appear in October 2004 but as at the date of authorship are still in draft form; amended P35 returns will not be available until the 2006/07 tax year. In cases where there is no updated return the Revenue states that a user should notify the reference number in a letter accompanying the return.

The disclosure requirements do not have an impact on the effectiveness of a scheme and there is not any system of advance clearance; rather, the Revenue will have time to investigate the scheme in the interim so that by the time a tax return is filed they will have made a decision on whether they consider it to be "abusive" or not and possibly to close down future use of the scheme with new legislation where the amount of tax at stake is large.


A promoter or client which has an obligation to disclose arrangements but fails to do so will be liable to an initial penalty of up to £5000, followed by continuing daily penalties of up to £600. The penalty for clients who fail to provide the Revenue with the reference number of a scheme is, initially, £100, rising to £1000 for repeated failures.

VAT provisions

The disclosure rules relating to VAT schemes operate a little differently. Most crucially, they place the onus of disclosure on clients rather than on the promoters of schemes. Another important point is that the obligation of one party to notify a scheme is not met if another party notifies: all parties must make a disclosure (though it is possible to disclose jointly). The measures are two-pronged:

1) Businesses with supplies of £600,000 or more, or which are part of a group containing an enterprise that meets this criterion, are required to disclose the use of specific avoidance schemes listed by the Treasury. As with the Revenue provisions, a reference number will be allocated to each scheme; disclosure in this case will merely involve the inclusion by the client of that reference number in the relevant return.

2) In addition to disclosure of listed schemes, businesses with a turnover of £10 million or more are also required to provide details of arrangements which contain certain designated features, termed "hallmarks". The time limit for disclosure in each case will be 30 days from the last day for making the relevant VAT return (or in some cases, repayment claim).

Regulations have now come into force listing the initial designated schemes and hallmarks, which are beyond the scope of the current article but are described in more detail in a new Customs Notice 700/8.

The provisions apply from 1 August 2004, though transitional provisions provide that there is no need for notification if the accounting period in which the tax advantage arises begins before 1 August 2004.

Failure to disclose a listed scheme will result in a penalty of 15% of the VAT saving. Failure to disclose a notifiable scheme that is not listed will result in a flat rate penalty of up to £5000. There is a reasonable excuse defence in each case, but note that this is a defence that appears in other areas of the VAT legislation and which has been narrowly construed in related case law.