It is now just over a year until April 2015 when the first devolved taxes will come into effect in Scotland. The Land and Buildings Transaction Tax (LBTT) will replace Stamp Duty Land Tax (SDLT) on transactions involving land in Scotland, and the Scottish Landfill Tax (SLFT) will start to be levied on landfill in Scotland in place of the UK tax. The first two Scottish tax acts have received royal assent, the Land and Buildings Transaction Tax (Scotland) Act 2013 on 31 July 2013, and The Landfill Tax (Scotland) Act 2014 on 21 January 2014.
The introduction of LBTT and SLFT is not in any way dependant on the outcome of the referendum on Scottish independence, and preparations for the new taxes are underway in a number of different areas. The Scottish Government decided not to use HM Revenue & Customs to administer the devolved taxes, and instead has adopted the innovative approach of using two existing Scottish bodies to collect the taxes under the control of the new Scottish tax authority, Revenue Scotland. Collection of LBTT is to be carried out by Registers of Scotland, the body responsible for registration of land in Scotland, and the Scottish Landfill Tax will be collected by the Scottish Environmental Protection Agency (SEPA).
There are some aspects of LBTT which are still to be finalised. LBTT will be payable on some types of licences, and details of these are to be included in regulations on which there should be consultation later this year. There are also likely to be further changes to the transitional rules, particularly in relation to leases, and a decision is likely to be made shortly about a targeted relief for sub-sales in forward funding transactions.
Revenue Scotland is turning its attention to writing the guidance on the new Scottish taxes, setting up its website and establishing the procedures for enquiries into LBTT and SLFT returns, and increasing its headcount accordingly. Registers of Scotland is focusing on the mechanics of collection of LBTT, and the new online LBTT return system, which is being developed in-house. All the signs are that this will result in a system that is more agile and fit for purpose than the SDLT equivalent and that LBTT returns will be simpler and easier to complete than SDLT returns.
THE REVENUE SCOTLAND AND TAX POWERS BILL
Of course, LBTT and Landfill Tax cannot operate in a vacuum and the third Scottish tax bill, the Revenue Scotland and Tax Powers Bill (RSTPB), was introduced to the Scottish parliament in December 2013. The RSTPB sets out the framework under which the devolved taxes will operate, including the establishment of Revenue Scotland itself, the administrative procedures, penalties, enquiries and appeals.
It is not often that a new tax authority is set up and some interesting questions arise. Does it make sense for the board of Revenue Scotland only to have non-executive directors, or should the executives who are to run Revenue Scotland on a day-to-day basis also be members of its board? Which approach will make Revenue Scotland most effective?
In relation to tax tribunals the Scottish Government has decided not to use the existing UK tax tribunals to hear appeals in relation to LBTT and SLFT but instead to set up a separate Scottish tax tribunal. This will operate for a limited period as a standalone tribunal but will then become part of the new Scottish tribunals structure from mid-2016.
THE SCOTTISH GOVERNMENT’S APPROACH TO TAX AVOIDANCE
Of particular importance is the approach which has been taken in relation to tax avoidance. Here there are likely to be significant differences compared with the current UK tax system. In his speech announcing the introduction of the RSTPB, John Swinney, cabinet secretary for finance in the Scottish Government, promised ‘a vigorous approach to combatting tax avoidance’. This very firm approach is to be welcomed, particularly given the many SDLT avoidance schemes which have been used by taxpayers in recent years. It is to be hoped that Mr Swinney’s words will be translated into action by Revenue Scotland in terms of a robust approach to enquiries into LBTT returns. The fact that very few enquiries into SDLT returns were made in the early days was probably a contributory factor in the spread of marketed SDLT avoidance schemes.
As widely expected, a key aspect of the Scottish Government’s approach is a General Anti-Avoidance Rule (GAAR) which will apply to the devolved taxes. Most of those responding to the consultation on the RSTPB supported the idea of a GAAR and simpler legislation. There are a number of significant differences, however, between the Scottish GAAR and the UK GAAR which was introduced last year.
ANTI-AVOIDANCE OR ANTI-ABUSE?
Although both measures have the same acronym, the UK measure is a General Anti-Abuse Rule whereas the Scottish measure is a General Anti-Avoidance Rule. The UK GAAR is intended to allow HMRC to counter tax arrangements which are abusive and is therefore only likely to apply to tax schemes which are highly artificial and contrived. The Scottish GAAR, on the other hand, will allow Revenue Scotland to counteract tax avoidance arrangements which are artificial. It seems clear that the Scottish GAAR will have wider application than the UK GAAR and could apply to transactions where the UK GAAR would not. Taxpayers will have to consider both the Scottish GAAR in relation to the devolved taxes, and the UK GAAR in relation to UK taxes.
The policy memorandum which accompanies the RSTPB confirms that this is quite deliberate and that the Scottish GAAR is intended to take a wider and more rigorous approach than the UK GAAR.
WHEN DOES THE SCOTTISH GAAR APPLY?
The Scottish GAAR can be invoked where there are tax avoidance arrangements which are artificial. An arrangement is a tax avoidance arrangement if it would be reasonable to conclude that obtaining a tax advantage is its main purpose, or one of the main purposes.
A tax avoidance arrangement is artificial for the purposes of the Scottish GAAR if it satisfies one or both of two conditions. The first is that carrying out the arrangement is not a reasonable course of action in relation to the tax in question, in other words that the results of the arrangement in tax terms are not in line with the policy objectives of the relevant tax.
The second condition is that the arrangement lacks commercial substance. The Bill sets out a number of ways in which a transaction could be said to lack commercial substance. These include the arrangement being carried out in a manner that would not normally be employed in reasonable business conduct, the legal steps being inconsistent with the substance of the transaction, the presence of self-cancelling steps or the fact that the transaction is circular in nature.
TAXPAYER SAFEGUARDS
The problem with a GAAR is the perception that it could catch innocent transactions where tax saving really isn’t the main objective. It is often the case that the innocent are more concerned about the possible application of the GAAR than tax schemers, who can still be heard to say that the UK GAAR does not apply to any of their schemes. Concern about whether the GAAR applies could lead to taxpayer uncertainty about how the tax rules will apply to particular transactions, and the possibility of Scotland being at a competitive disadvantage to the rest of the UK because of this. It is therefore necessary to strike a balance between combatting avoidance and giving taxpayers certainty about the operation of the tax system. Does the Scottish GAAR include sufficient taxpayer safeguards?
THE IMPORTANCE OF GUIDANCE
If a tax avoidance arrangement is in line with existing practice and Revenue Scotland has indicated its acceptance of the practice, this indicates that the transaction is not artificial. Guidance is therefore all important – comprehensive, easy to understand and up-to-date guidance will be required on which taxpayers will be able to rely to establish the tax implications of what they are proposing to do. This is particularly important since Revenue Scotland is new, and so taxpayers have no previous experience of what its view is on particular issues.
Comprehensive guidance has been issued for the UK GAAR which sets out the basis on which HMRC will approach the operation of the UK GAAR, including a series of examples of transactions which are accepted as not being subject to the UK GAAR, and this is generally considered to be helpful for taxpayers.
INDEPENDENT PANEL
Perhaps the most significant safeguard for the UK GAAR is that an independent panel, the GAAR Advisory Panel, has been set up. Before HMRC can issue a counteraction notice under the UK GAAR, an application has to be made to the GAAR Advisory Panel which considers whether the transaction in question is a reasonable course of action under all the circumstances. It is true that HMRC could proceed with a counteraction notice even if the Advisory Panel did believe the transaction was reasonable, but that is likely to be extremely rare. The GAAR Advisory Panel also approves HMRC’s guidance in relation to the GAAR.
There is currently no proposal in the RSTPB for an independent panel to consider whether a transaction falls foul of the Scottish GAAR. This means that Revenue Scotland could use the Scottish GAAR without reference to an external body.
Why is the question of an independent panel so significant? Taxpayers will always take tax implications into account when deciding how to structure a particular transaction, and taxpayers have to be able to make a ‘tax-informed’ choice. It would certainly be unreasonable to expect taxpayers to structure transactions in the way which leads to the highest tax charge. Tax authorities, by definition, will focus on the tax implications and are more likely to conclude that obtaining a tax advantage was the main purpose of adopting the structure. The advantage of an independent panel is that it can steer a middle course and take an impartial view.
Changing economic circumstances can also lead to changes in the way in which transactions are undertaken – this can clearly be seen in the way that transactions have been structured since the financial crash. It may be difficult for the tax authority to keep up to date with such developments. An independent panel can carry out an informed analysis of whether a particular transaction is artificial, or just a product of the times.
REVENUE SCOTLAND CLEARANCES
There are alternative approaches to give taxpayer certainty. The importance of guidance has already been mentioned. In addition, taxpayers could apply for an advance clearance that a transaction which is envisaged will not be caught by the GAAR. The Scottish Government has indicated that a formal clearance procedure will not be introduced because of the resource implications for Revenue Scotland, though taxpayers can apply for informal clearances. For this to give sufficient certainty to taxpayers it will be essential that Revenue Scotland has the resources and expertise to give informal rulings that will give taxpayers sufficient certainty.
START AS YOU MEAN TO GO ON?
From the Scottish Government’s point of view there is a lot of merit in taking a very firm approach to tax avoidance from the outset. Tax avoidance in the UK has been a serious issue in recent times, and a stream of measures have been necessary to try and counter it; from the Disclosure of Tax Avoidance Scheme rules and the UK GAAR to the measures recently announced in January 2014 on tackling marketed tax avoidance, that aim to accelerate the date on which tax has to be paid where a decision has been made on a similar case at the court or tax tribunal. Provided there is sufficient clear and detailed guidance and Revenue Scotland clearances can be obtained in more complex cases, there is a lot to be said for stamping out tax avoidance in the Scottish tax system before it even starts.
By Isobel d’Inverno, director of corporate tax, Brodies LLP.
E-mail: isobel.dinverno@brodies.com.