By Karl Pocock and Matheu Smith, Corporate Tax Team, Keystone Law
In response to falling tax revenues, HM Revenue & Customs (HMRC) are adopting a more confrontational and aggressive approach to combating perceived tax abuse. Karl Pocock and Matheu Smith explore HMRC's current approach to counter-acting tax mitigation schemes involving stamp duty land tax (SDLT).
How is HMRC currently approaching perceived tax avoidance?
HMRC is currently engaged in unearthing perceived tax avoidance having announced, earlier in the year, that it would be working with the Land Registry to identify transactions where HMRC thought that insufficient SDLT had been paid.
We have already witnessed the result of a number of these investigations. Once it has identified a perceived shortfall of SDLT, HMRC has (without any prior notice) issued determinations and disclosure assessments to tax payers requiring the recipient to pay the "unpaid" tax together with interest within a thirty day period.
How might this affect you?
You may be affected if you have utilised a scheme or arrangement which was designed to reduce the SDLT payable on the acquisition of a UK property during the last four years. In many cases HMRC have already opened enquiries into such schemes so you may already be on notice. However, in some instances where the enquiry window has already closed (usually nine months after completion of the acquisition), HMRC are now issuing determinations and disclosure assessments as the start of the process.
What to do if you receive an enquiry, determination or a disclosure assessment.
We would urge anyone receiving a determination or disclosure assessment, whether relating to SDLT or any other tax matter, to seek legal advice as soon as possible to ensure that any right to appeal is not lost. Disclosure assessments and determinations are formal demands for tax and, as such, must be treated with a sense of urgency as you only have thirty days in which to appeal.
The nature of the appeal depends on the precise circumstances so it is advisable to seek professional assistance in formulating your response. This is particularly the case if you wish to appeal, as there are specific rules that need to be followed. Furthermore, with recent changes to the time limits in which HMRC are entitled to issue such assessments, there is also a chance that an assessment could be successfully challenged on the basis that it was made out of time. It is always worthwhile checking the rules that govern HMRC's conduct as well as those rules that set out what the tax payer must do.
What has changed in HMRC's approach?
Shortly after the introduction of SDLT in December 2003 mitigation schemes were being utilised. These schemes often used certain reliefs from SDLT to reduce the SDLT charge in situations which had not been anticipated by the draftsman. HMRC's approach to this was to amend the legislation, either by simply repealing a relief or adding in anti-avoidance rules to stop the perceived abuse. In the majority of situations those schemes which had taken place prior to the change in law were generally considered, correctly or not, unlikely to be challenged and attention then focussed on new schemes to replace those that had been closed.
This position changed in December 2006 when HMRC introduced a general anti-avoidance rule (GAAR) which set out, in very broad terms, to ignore non-commercial steps in a transaction so that the ultimate purchaser was treated as if it had simply acquired the property from the seller. However, due to perceived faults in the drafting, together with various exceptions to the rules, SDLT mitigation schemes continued to be used.
In June 2010 HMRC published "Spotlights" on SDLT avoidance schemes. The publication of "Spotlights" signified a change in HMRC's approach. Not only was HMRC publicly stating that it did not consider that such schemes worked, either because the legislation utilised did not work in the way the scheme intended, or because the scheme was caught by the GAAR, but it also warned that it would actively pursue such schemes through the courts if necessary. The upshot of this newly found zeal to counter SDLT avoidance was demonstrated at the beginning of this year when HMRC, as discussed above, announced that it would be working with the Land Registry to identify potential users of the saving schemes.
In addition to this reconciliation with the Land Registry, the GAAR and a more active and aggressive attitude to potential users of such schemes, it is also interesting to note that HMRC are prepared to litigate.
In March 2011 the First-tier Tribunal published its judgment in the first case brought by HMRC challenging an SDLT avoidance scheme. The Tribunal ruled in favour of the tax payer but HMRC are expected to appeal so this is unlikely to be the end of the story. The details of the case are beyond the scope of this article, but it is important to note that the transaction in question took place prior to the GAAR being introduced and, therefore, the GAAR legislation did not form part of HMRC's argument. Depending on the outcome of the case we still may see further cases reaching the courts where HMRC will seek to rely on the GAAR.
So where does this leave us?
HMRC, particularly in the context of SDLT, are clearly showing a desire to recover as much tax as they can from transactions completed in the recent past. They are also aiming to shut down these schemes by amending the legislation in the most recent Budget yet HMRC is, in effect, arguing that these changes are not necessary in that the schemes did not work in the first place. Is HMRC simply trying to stop the market for such schemes so that they can concentrate on maximising returns from those currently under enquiry and/or determination? Is there a genuine fear that the arguments put in front of the Tribunal will fail on appeal and/or that the GAAR may not work in the way HMRC intend? This should become clear in the next few months. In the meantime, it is clear that HMRC are fully prepared to challenge perceived avoidance, particularly in relation to SDLT, even if this means a trip to court.
We have advised clients in relation to a number of these determinations and disclosure assessments and we would be pleased to utilise this experience to assist you or your clients if you are unfortunate enough to receive such correspondence from HMRC.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date this article was published.
Karl Pocock is a corporate tax lawyer with significant experience gained in private practice. He advises on stand-alone tax issues and provides tax advice arising from corporate and property transactions. Karl is also a member of the Stamp Tax Practitioners Group. He can be contacted at email@example.com
Matheu Smith joined Keystone Law in 2008 from a specialist litigation firm where he had dealt with complex taxation and customs duties disputes valued at over £100M. Prior to that he worked for DLA Piper, one of the world's largest law firms. He can be contacted at Matheu.firstname.lastname@example.org