Just say NO to tax avoidance “schemes”Make Text Bigger
For the avoidance of any doubt, let’s first be clear of what a “scheme” is.
DOTAS (Disclosure of Tax Avoidance Schemes) is the acronym used for the procedure introduced by the UK government in 2004 aimed at minimizing tax avoidance. Tax avoidance in the UK, unlike tax evasion, is not illegal since it involves using the available tax laws to reduce one’s tax burden. However, the government is actively seeking ways to eliminate the methods by which tax can be avoided by continually amending its tax policies.
The primary purpose of the Disclosure of Tax Avoidance Schemes (DOTAS) is to alert Her Majesty’s Revenue and Customs (HMRC) of the schemes which individuals or corporations use to avoid tax. HMRC can investigate these schemes and their providers and, as a result, may amend legislation where deemed necessary to reduce tax avoidance options that can circumvent the law. Under the DOTAS legislation, anyone involved in an arrangement which offers tax benefits must notify Her Majesty’s Revenue and Customs (HMRC).
The types of tax covered by the DOTAS requirements include income and capital gains tax, corporate tax, stamp duty land tax, inheritance tax, value-added tax (VAT), and national insurance contributions.
Disclosure is required to be made by any party entering a program which offers the benefit of minimizing taxes if the program falls within the disclosure rules. Anyone failing to comply with these DOTAS regulations may have penalties imposed.
Let’s also be clear that none of the following property ownership structures are schemes:-
- sole owner
- joint ownership
- ordinary partnership
- Limited Liability Partnership
- Limited Company
Both HMRC and the Government are aware that businesses evolve and their owners may well want to attract new investment or to bring in business partners. Likewise, owners of family run businesses (such as rental property business owners) often want to do some succession planning, to increasingly involve the next generation in the running of their business to ensure they are not completely tied to it for life.
The above are just a few examples of how businesses evolve, there are many more.
To facilitate the evolution of businesses, the Government created legislation to ensure that owners of businesses are not penalised during metamorphic stages, e.g. when transferring from sole ownership to a Partnership or when a Partnership transfers its whole business into a limited company structure.
One such example of this is TCGA92/S162 which says …
“TCGA92/S162 applies where a person other than a company transfers a business as a going concern with the whole of its assets (or the whole of its assets other than cash) to a company wholly or partly in exchange for shares. Provided that various conditions are satisfied, see CG65710, the charge to CGT on the whole or part of the gains will be postponed until such time as the person transferring the business disposes of the shares.
The way the relief works in practice is that all or part of the gains arising on the disposals of the assets are ‘rolled over’ against the cost of the shares.
Relief under TCGA92/S162 is sometimes referred to as ‘incorporation relief’.”
The role of the Property118 Tax Team is to identify the optimal business structure for landlords, having considered the available transitional reliefs and provided links to HMRC manuals and legislation, and then to obtain quotations for implementation. Where appropriate, such as when transferring shares of companies into a group structure, non-statutory clearance continues to be available from HMRC.
Our recommendations are always bespoke. Prior to implementation they must first be adopted by a fully qualified, experienced and insured Barrister-At-Law (who is regulated by the Bar Standards Association) as his own “professional advice”. His professional indemnity insurance is provided by Bar Mutual and cover is for up to £2,500,000 per claim. Unlike solicitors and accountants, barristers cannot absolve themselves from accountability by operating within a Limited Liability structure.
Methods and structures recommended to negate the need to refinance when transitioning from one business structure to another are not schemes either, e.g. substantial incorporation or transfers of beneficial interest between spouses, into Partnerships/LLP or Limited Companies. Neither do such structures change anybody’s tax position. That occurs as a result of a change of ownership structure.
In addition to DOTAS, HMRC also has powers under GAAR “General Anti Avoidance Rules”
An example of this anti-avoidance legislation can be found in the Finance Act 2003, to prevent sole owners from avoiding Stamp Duty by forming a Partnership and then immediately incorporating the business. If such a transition occurs within three years, and/or if HMRC can demonstrate that the partnership was formed for no other commercial purpose other than to avoid Stamp Duty, then the relief provided within the same legislation is disallowed.
Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).
Professional advice from a qualified Barrister-At-Law, insured up to £2,500,000 per claim.Show Form To Book A Tax Planning Consultation
There will never be an optimal ‘one-size-fits-all’ business structure for tax purposes. The presentation below provides a useful overview of some of the options you might like to discuss with us.
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