Tax Avoidance, DOTAS, and the Substantial Incorporation Structure (SIS)

The integrity of landlord business incorporation has been massively damaged by the attack on Property 118 and Cotswold Barristers by Dan Neidle (DN) and his largely anonymous Tax Policy Associates. In an effort to bring some stability to the situation we are left with no choice but publicly to explain in detail the history and operation of the SIS in the hope that he will adhere to his undertaking to retract his reckless destabilising allegations.

This article is the first in a series that will address all the allegations made by DN.

Tax Avoidance

Tax avoidance has been defined in various ways. The most relevant is of course from HMRC.

What tax avoidance is:

Tax avoidance involves bending the rules of the tax system to try to gain a tax advantage that Parliament never intended.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.

The SIS is not tax-avoidance. The structure uses reliefs and exemptions in the manner intended by the legislature. There are no contrived steps with no commercial purpose. CGT incorporation relief, the SDLT rules, and the ESC/D32 shows that it is the intention of the legislature, supported by HMRC’s practice, to allow businesses to transition from one platform to another as they mature, without negative tax consequences, so long as the underlying ownership remains the same and in the same proportions on each side of the transaction. This is of particular relevance to the private rented sector given the tax regime that applies to unincorporated sole traders and partnerships, which puts an additional incentive on such business owners to move into the more transparent structure of a limited company.

The only difference between the SIS and incorporation with the concurrent transfer of loans (as advocated by DN) is the timing of the transfer of the legal titles. There is no difference in the ultimate purposes of the structures, such as limited liability status, to help succession planning, professionalisation, development of the business by use of retained profits, improved mortgage affordability criteria as well as optimisation of the tax structure.

It is also of great significance that in over 20 compliance checks since 2019 HMRC has never hinted that they consider the SIS to be contrived, artificial, or not for legitimate purposes. It is impossible to predict which case will be selected for HMRC enquiry, as to the best of our knowledge they are selected at random. This means that every case must be approached as if it was going to be enquired into, and thus every case must meet the criteria for qualification for the reliefs and tax treatments claimed.

These enquiries are comprehensive and often run for many months. The appointed tax agent deals with the enquiry, with the assistance of Property118 and the client’s appointed barrister.

HMRC requires;

• Justification of incorporation relief against CGT with reference to the ‘business’ test, the effective transfer of the business as a going concern, the issue of shares and indemnity against business liabilities by the company, the correct calculation of share premium and of the capital gain rolled into the shares.
• Explanation of the business case for incorporation.
• Justification of the application of the special SDLT rules where partnerships are involved, including establishing a genuine partnership existed prior to incorporation.

The requirements of HMRC are satisfied by;

• Evidence showing the business was operated as claimed, with financial/business records and a full narrative of the tasks undertaken, time spent etc.
• Evidence of ownership of property assets and their use for the business, including Land Registry records, tenancy agreements, insurances, and HMO licences where applicable.
• The full set of transactional documents which effect the business transfer with a description of the assets transferred, the company’s contractual indemnity against liabilities, the mechanism for the company discharging this indemnity, and the contract for the transfer of the legal estates. Where bridging finance is included, this is specified in the document suite. (Many accountants include this documentation in the clients’ tax returns for the year of incorporation). The SIS documentation has been scrutinised on many occasions by HMRC.

What we are able to say is that where a client who has used the SIS is enquired into by HMRC the response is sent by the tax agent and is always complete and transparent. Nothing is concealed from HMRC. This would not be allowed by HMRC in any event; they want to know everything relevant to the tax treatment of the transactions, which is the whole purpose of the enquiry.

Each completed enquiry has been closed with no adverse consequence to the client and HMRC concurrence with the claimed tax treatment. This is as near as is possible to us being able to say HMRC says SIS is ‘fine’: which HMRC will never say.

SIS is ‘fine’ when the client’s particular case meets the criteria to justify the tax treatment claimed. These criteria are correctly identified according to the outcomes from HMRC to date. HMRC will never say any tax planning is ‘fine’, but our record of success to date in the face of a significant number of detailed enquiries over several years must result in us being able to say with confidence that SIS is compliant with all tax rules where properly implemented.

DOTAS (Disclosure Of Tax Avoidance Schemes)

We have advised HMRC of our reasoning for not notifying SIS under DOTAS. The SIS has been known to HMRC since 2019 and has been scrutinised on at least 20 occasions by way of the compliance checks mentioned above. We have always endeavoured to assist our clients and their professional advisers with absolute transparency to HMRC and have no wish at all to breach any regulatory requirements.

The submissions on the relevant hallmarks, in summary, are:

1. Confidentiality from HMRC or promoters. The SIS is not confidential-we publicise the workings of the structure widely, on our website and at landlord events. Many accountants send the transactional documents to HMRC when they submit the tax returns for the year of incorporation, as well as during compliance checks. We never use NDAs or other secrecy measures.
2. Standardised tax product. Any client who has been through the process will know that their individual case is scrutinised thoroughly before SIS can take place. One size does not fit all.
3. Premium fee. Our fees do not relate to the value of the transaction or the amount of tax advantage, nor are they conditional on obtaining a tax advantage. They are fixed fees, but based on fair rates for the amount of work we commit to.

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