Last week, I looked at the enormously important subject of tax avoidance and the history of litigation to prevent it. I commented that one of the important consequences of HM Revenue & Customs’ willingness to litigate to prevent what it believes is unacceptable avoidance is to cause would-be avoiders to think twice before entering into transactions that may be subject to attack. This air of uncertainty suits the Treasury.For tax planners, as well as the uncertainty emerging from general tax-avoidance litigation, there is also the significant increase in specific anti-avoidance legislation to take into account. At this point, it is worth mentioning that the Institute of Chartered Accountants for Scotland has been pressing for some time, so I understand, for the Government to introduce a general anti-avoidance rule. As a corollary to this rule, it is proposed that there should be a system of pre-transaction rulings whereby HMRC would make a decision on any particular tax-avoidance plan that was to be promoted. The ruling would be as to whether it was caught by the general anti-avoidance rule. Be that as it may, it seems as if HMRC currently has very little appetite for such a system so we will have to live with uncertainty. What we do have are the new disclosure provisions in respect of mass-marketed and bespoke tax-avoidance schemes. Unsurprisingly, there is misunderstanding and uncertainty over the extent to which these provisions apply and just who is caught by them. This again serves HMRC well, I expect. More on this below. Broadly speaking, there is a requirement for promoters of tax-avoidance arrangements contemplated by the disclosure provisions to disclose these to the anti-avoidance group of HMRC. The key HMRC purpose is then achieved. It has information at an early stage about innovative tax-avoidance arrangements. It is important to bear in mind that the overall intention of this disclosure legislation is to flush out at an early stage innovative tax-avoidance schemes and ensure that HMRC has a clear idea of what the schemes involve. This way, HMRC believes that it will be more often on the front foot rather than finding out about schemes only when many taxpayers have them. It is important to note that the provisions only currently apply to two reasonably well defined categories of scheme for income tax, capital gains tax and corporation tax purposes. These are schemes based on financial products and schemes which are founded on employment arrangements. Both of these terms are defined more precisely in the regulations and explained well in the HMRC guidance notes on the disclosure provisions. However, in the Chancellor’s pre-Budget report last week, it was announced that from April 2006, disclosure for income tax, capital gains tax and corporation tax will apply to all types of arrangement and not just arrangements related to employment and financial products. I will look at the various definitions shortly but it is important to make clear that HMRC is seeking only for promoters of schemes – and in some cases users of schemes – to register the scheme. Registration does not represent any form of approval. A registration number is allocated and this number must be given to any taxpayer using the scheme. The taxpayer includes this registration number on his tax return at the appropriate time and HMRC then knows the nature of the scheme. The fine for not disclosing an arrangement that should have been disclosed is a one-off 5,000. An additional amount of 600 a day could also be payable. It is the severity of these fines that will no doubt cause many to disclose, even if there is some uncertainty about whether they need to. Again, I am sure that this suits HMRC. Which schemes need to be disclosed? As I mentioned above, only schemes founded on financial products or employment arrangements, as defined, currently need to be disclosed. The scheme must seek to avoid income tax, capital gains tax or corporation tax. It is critical to note that the disclosure provisions do not apply to arrangements designed to reduce or avoid inheritance tax, regardless of the fact that the scheme is founded on a financial product. For those in the financial services industry, including most product providers and financial advisers, I do not believe that the disclosure provisions will have a significant impact on their lives. First, the fact that the provisions do not apply to schemes designed to avoid inheritance tax is a significant help. Of course, this can all change but currently that is the rule. Second, looking at financial products, the definition includes shares, loans, repos but not insurance contracts or, it would seem, collective investments. Thus, the products targeted under the regulations, as currently drafted, do not contemplate the main retail investment products dealt in by most financial planners. Looking at employment arrangements, it is important to bear in mind that while securities and payments to third parties are incorporated in the definition (and securities include collective investments), arrangements contemplated by the legislation as being tax-effective, such as approved pension arrangements and approved share schemes, are not caught by the disclosure provisions, so no disclosure has to be made in respect of them. Thus, the second point for financial planners to bear in mind is that it would seem that the relatively narrow definition of employment arrangements and financial products would currently exclude most of the arrangements which financial planners would deal with in their everyday lives. Of course, financial planners deal with collective investments which come under the definition of securities in the context of employment arrangements but schemes using such products in the context of employment arrangements to minimise income tax, capital gains tax or corporation tax are, I believe, rarely contemplated by most financial planners. Even if the arrangements fall within the definition of financial products or employment arrangements and seek to avoid one of the specified taxes, then there are the filter tests to consider – another way in which particular transactions are not disclosable. I will look at these tests in my next article.