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No avoiding these taxing new hallmarks.

In the Budget of 2004, a recurring area of focus was collecting more taxes through new 'tax avoidance' regulations. Some of those measures, which took effect from August 1, could have an impact on VAT-registered businesses.

Persons registered for VAT now have to provide notice to Customs of arrangements entered into for the purpose of obtaining a tax advantage.

There are nine 'designated schemes' that must be notified to Customs by all businesses with turnover exceeding pounds 600,000.

These designated schemes include structures such as the 2.5% card-handling charges made by retailers.

Also introduced is the concept of 'hallmarks of avoidance' which Customs consider to be commonly used. The use of any mechanism bearing hallmarks of avoidance must be notified to Customs by any business with turnover exceeding pounds 10m.

For example, if business A implemented a 'VAT-saving' mechanism on the advice of professional services company B and was required to sign a clause agreeing not to share information relating to that mechanism with others, this would be a hallmark of avoidance.

If the consideration, or part of it, paid to company B for this mechanism was based upon a percentage of the VAT saved by business A, this would also be a hallmark of avoidance.

If a VAT-saving mechanism involved company A transferring property to subsidiary company B, this would also be a hallmark of avoidance, as would arrangements for obtaining certain supplies of services from offshore companies.

These would have to be notified to Customs if the main purpose of entering into these arrangements, or one of the main purposes, was to gain a tax advantage.

The notion of 'tax advantage' has been broadly defined to include reducing VAT payments to Customs, deferring these payments, increasing VAT repayments from Customs and/or bringing these repayments forward to an earlier date.

The requirement for tax advantages to be the 'main, or one of the main purposes' is also rather ambiguous, and it appears likely that arguments over these points will reach the Courts in the near future.

Failure to disclose a designated scheme, can result in a penalty of up to 15% of the tax 'saved'. A fixed penalty of pounds 5,000 can be charged to businesses who do not notify Customs of a scheme with hallmarks of avoidance.

The new rules lack clarity over what businesses are required to notify. Disclosure rules can appear to catch arrangements which were not principally VAT-driven.

The new disclosure requirements are a further compliance burden to businesses, and every business that suspects it may be liable to make a disclosure should seek advice.

The responsibility for notifying Customs lies with the businesses operating these schemes, and reliance upon external tax advisers to make disclosure is not sufficient.

Michael Bailey, Indirect Tax Partner; 029 2080 2216
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Copyright 2004 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Features
Publication:Western Mail (Cardiff, Wales)
Date:Dec 15, 2004
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