VADR was the slightly ominous-sounding set of rules that used to govern the disclosure of VAT schemes to HMRC. Introduced back in 2004, the VADR rules only covered certain types of VAT scheme, set out in some detail in schedule 11A VATA 1994. The VADR rules were relatively straightforward and had not changed for some time. There was thus some initial consternation in 2017 when a proposed redraft rules was tabled. The issue was that those were so widely drafted that almost anything, conceivably even vanilla TOGCs, would have been caught.
Fortunately, sense prevailed and the scope of the 2017 changes was much reduced. Indeed, for those familiar with the direct tax disclosure rules, the good news is that there has been some considerable alignment of the VAT disclosure rules with the direct tax DOTAS rules. The new rules do not cover just VAT though; they cover many other indirect taxes (though not SDLT which has its own disclosure regime). That is the reason for the loss of the acronynm VADR for the newer, but far less memorable, DASVOIT - disclosure of avoidance schemes for VAT and other indirect taxes.
The new DASVOIT rules came into effect on 1 January 2018 and HMRC has now updated its general disclosure guidance and issued Notice 799 which deals with DASVOIT specifically.
Importantly, there is extensive grandfathering that in effect means that any arrangements that have previously been implemented or are well known will not be in scope. However, businesses do need to consider how these new rules might be relevant to future VAT planning arrangements.
What arrangements are caught?
Disclosure will need to be considered whenever arrangements enable, or might be expected to enable, a "tax advantage" to be obtained where that advantage is the main benefit, or one of the main benefits, of the arrangements. That will often be the case so whether or not arrangements will be disclosable will often come down to whether they satisfy the so-called "hallmarks" (set out in SI 2017/1216 ). The term "hallmark" is not used in those regulations but, again will be familiar to those that have looked at the direct tax DOTAS regime. In particular, there are the following hallmarks which apply not just to VAT arrangements but to any of the (list of defined) indirect taxes:
- a promoter or a party might reasonably be expected to keep confidential from HMRC or another promoter.
- a person might reasonably be expected to obtain a premium fee in relation to the arrangements.
- have standardised or substantially standardised documentation, there are specific or standardised transactions to implement the arrangements and the main purpose of the arrangements is to obtain a tax advantage or they would not be entered into were it not for that advantage.
There is also a specific set of VAT hallmarks which include arrangements concerning:
- supplies to a retail customer, where what would be a single supply is split into separate supplies (whether by using two suppliers or otherwise);
- There are two sets of hallmarks which seem very broadly designed to stop services being routed out of the UK to a non-EU entity and then back into the EU in a way which reduces the ultimate VAT take. In essence:
— the first hallmark seems to relate to the sort of supplies of finance or insurance to non-EU persons where
the supplier obtains VAT recovery under the little-known rules in article 3 SI 1999/3121. Where such
services are routed through a non-EU person and then back into the UK, this hallmark will need to be
considered (article 5 SI 2017/1216); and
— the second is where VAT-able supplies of services are made to non-EU businesses (thus allowing the
original supplier to recover its input tax) but the services are then routed back into the EU without VAT
(article 6 SI 2017/1216); and
- the deliberate switching off of an option to tax land under the "developers of exempt land" rules in paragraph 12(1) of Part 1 of Schedule 10 to the Value Added Tax Act 1994. For example, anyone considering the sort of planning in the Shurgard case would now need to consider this hallmark.
As noted above, existing arrangements that have been marketed, made available or implemented prior to 1 January 2018 are excluded from the rules, and this grandfathering extends to arrangements that are substantially the same as these. The previous VAT disclosure regime continues to apply in respect of VAT schemes entered into before that date.
Who must disclose notifiable arrangements?
The old VAT disclosure rules applied only to scheme users. Under DASVOIT, the main duty to disclose falls on the promoter – again tracking the DOTAS rules - with parties to the arrangements having an obligation to disclose if there’s a non-UK promoter who hasn’t disclosed the arrangements, or if the promoter is a lawyer who is unable to disclose due to legal professional privilege or if there is no promoter, for example, it is an in-house scheme.
Administration
The administrative aspects of DASVOIT largely mirror those found in DOTAS. Following disclosure, HMRC will issue the promoter or user with a scheme reference number, which a promoter must then provide to users while also notifying HMRC of the users. Scheme reference numbers must then be referenced on relevant tax returns.
There are daily penalties of up to £600 for failure to disclose, but this can be increased to up to £1m if the First-tier-Tribunal deems the statutory maximum daily penalty to be insufficient, taking into account considerations such as the deterrent effect, the amount of fees earned by the promoter or the amount of the expected tax advantage.
The grandfathering provisions should ensure that few arrangements would need to be disclosed under DASVOIT for the immediate future. However, given the scope for significant penalties, the introduction of these new rules cannot be ignored.
