The main objective of the Mandatory Disclosure regime is to provide Revenue with early intelligence on tax planning in respect of which they may wish to take action. Broadly speaking, this is achieved by requiring promoters (i.e. tax advisers and financial institutions) to disclose upfront to the Revenue any tax planning products which they market (or intend to market) to taxpayers and any bespoke planning advice which they assist clients to implement.

Does this signal ‘The End’ for Irish tax planning? The wide drafting of the new rules initially raised fears that advisers would be required to notify Revenue of practically everything they say and everything they do, sometimes before even doing it at all. Having said that, the legislation is remarkably similar to the existing UK regime on disclosure (‘DTAS’) introduced there in 2004 (although the Irish rules are based on the 2010 update to the UK rules that is as yet untested). The experience in the UK since 2004 is somewhat reassuring - UK advisers have continued to provide meaningful tax planning advice to fee-paying clients, while at the same time satisfying HMRC's demands for upfront disclosure.

The Irish Story – So Far

The primary legislation giving effect to the framework for Mandatory Disclosure was introduced at the Committee Stage debate to Finance Bill 2010 and is in sections 817D-817R of Taxes Consolidation Act 1997. The ‘nuts and bolts’ of the regime are contained in secondary legislation (draft ‘Mandatory Disclosure of Certain Transactions Regulations 2010’), (the “Regulations”), which at the time of writing have yet to be implemented. A draft of the Regulations and Revenue's Guidance Notes were released in June and a period of consultation ensued over the summer months. Consultation ceased in mid-September and its outcomes are now being considered by Revenue. Revenue will then forward their recommendations for the final version of the Regulations to the Minister for Finance; it is expected that the final Regulations will be formally signed in mid-November. At the time of writing, it is not clear the date on which the first disclosures will be required.

Who discloses?

In the majority of cases, the obligation to disclose falls on the promoter. The promoter definition applies to persons who carry on a relevant business (i.e. a business which includes providing tax advice or a banking business). In practice, the definition captures accountants, lawyers, specialist ‘boutique’ tax advisers, banks and financial institutions. Where there is no promoter (i.e. the scheme is devised ‘in-house’) or where the promoter is outside the State, the taxpayer implementing the scheme must make the disclosure to Revenue.

The legislation contains certain provisions to deal with cases where legal professional privilege (‘LPP’) might be asserted. In such cases, the lawyer providing the tax advice is required to advise the client of their obligation to disclose and to inform the Revenue of the that fact that LPP has been asserted. This difference in treatment on grounds of LPP is disappointing and its inequity is demonstrated in the very recent UK decision in the Prudential case.¹ In this case, the Court of Appeal concluded that LPP does not extend to accountants giving tax advice. However, this ruling was expected as it was based on superior precedence that the Court of Appeal could not ignore. In its submission as part of the consultation phase, CCAB-I highlighted this imbalance in how the rules apply to promoters and suggested that there should be a level playing field for all promoters (i.e. the same reporting obligations should apply to all, irrespective of LPP). It is hoped that the legislative amendments required to remedy this imbalance will be made in Finance Act 2011.

What is ‘disclosable’?

The disclosure net is being cast very widely by Revenue. Any transaction or proposal for any transaction must be disclosed if:

• it will or might be expected to enable a person to obtain a tax advantage, and
• the tax advantage is or might be expected to be the main benefit or one of the main benefits of the transaction, and
• it falls within any one of the eight specific categories of transactions outlined in the draft Regulations.

Eight categories or ‘Specified Descriptions’ of schemes are identified, many of which imitate the ‘hallmarks’ used in the UK equivalent regime. These eight categories effectively specify the types of schemes which Revenue wants to know about. The current wording of the draft Regulations and Guidance Notes is very widely drawn, and it is possible to conclude that virtually all tax planning (apart from ‘ordinary’ tax planning) may be considered potentially disclosable. There is a need to take a reasonable approach to the disclosure categories so as to minimise the risk of over-reporting by promoters to Revenue. Over-reporting would impose both an undue administrative burden on an advisory practice and would create so much paperwork for the Revenue to deal with that it could potentially frustrate the objectives of the regime.

The Specified Descriptions

The eight categories can be summarised as follow:

1. Confidentiality – Is there a desire to keep the scheme confidential from competitors or the Revenue?
2. Fees – Is the fee attributable to a significant extent to the tax advantage? This question needs to be considered in each case on its own merits. It is not possible to restrict this category to contingency fees or percentage fee arrangements only.
3. Standardised Tax Products – Does the scheme involve standardised documentation, the form of which is determined largely by the promoter? The term “shrink wrapped” has been coined to encapsulate the type of products that are the subject of this category.
4. Loss Schemes for Individuals – Is it a type of loss creation scheme designed to create a tax advantage for more than one individual user?
5. Loss Schemes for Companies – Is it a type of corporate loss buying scheme that seeks to free up losses with would otherwise go unrelieved?
6. Employment Schemes – Is it a type of scheme designed to create a tax advantage for employee or employer by reason of any employee's employment?
7. Income into Capital Schemes – Is it a type of scheme that converts income into capital so as to minimise income tax by having the receipt treated as an asset or gain for CGT purposes instead?
8. Income into Gift Schemes – Is it a type of scheme that converts income into a gift so as to minimise income tax by having the receipt treated as a gift for CAT purposes instead?

The categories are of two broad types. The first type is the generic categories of Confidentiality and Fees. These are intended to capture at an early stage ‘new and innovative’ tax planning. The second type targets areas of specific concern and perceived ‘high risk’ areas, i.e. schemes which either use standardised transactions or give rise to a particular type of tax advantage. This article focuses on the first type: the generic categories of Confidentiality and Fees.

Confidentiality

This applies if the promoter would, aside from disclosure considerations, like to keep the operation of the scheme secret from:

• other promoters, in order to preserve a competitive advantage, or
• Revenue, to allow repeated or continued use of the scheme

In practice, it is a difficult test to apply because of the degree of subjectivity involved. It requires a promoter to assess its own state of mind and to make a hypothetical assessment of the state of mind of competitors. Presumably, a promoter would not be minded to keep a particular scheme confidential from a competitor if the scheme was already widely known in the marketplace? Does this mean that tax planning techniques which are ‘well known’, which are written about in text books, commentated on in journal articles or discussed at seminars would not meet this confidentiality criterion? Greater clarity in the Regulations and Guidance Notes is required to address the uncertainty as to how this test applies in practice.

Fees

This is a notional test focusing on whether the scheme would appear so valuable to an experienced client that hypothetically, any promoter could recover a premium fee if he chooses to charge one. The test is notional in that it requires a promoter to speculate on the ability of hypothetical persons to recover a ‘premium fee’. It doesn't require that the promoter actually charge a premium fee - it is enough that he considers that another practitioner could have negotiated a ‘premium fee’ for the same service. Whose benchmark should be used to determine whether a fee should be considered a ‘premium fee’? Clearly, this test will be difficult to apply in practice. A disclosure will only be triggered by this category if there is a ‘premium fee’ and that fee is to a significant extent attributable to the tax advantage. This in itself raises some difficulty in its application. In practice, there may be several reasons why a project could command a premium fee (e.g. the project is so urgent that it requires the engagement team to work over weekends or bank holidays). Surely that scenario would not fall within the ‘premium fee’ category and require disclosure?

Contingent fee arrangements for a rudimentary PAYE review or VAT review engagement may also be caught. This work is typically secured with a view to identifying potential tax savings and/or tax inefficiencies for the client and the fees are typically calculated as a percentage of any tax saving arising from the review. This type of project should be excluded from disclosure under this category on the basis that it is a review of past events. If tax was not considered when the transactions originally took place then tax cannot have been a main motivating factor for the transactions on a subsequent review of them.

The Confidentiality and Fee tests are designed to capture at any early stage ‘new and innovative’ tax planning schemes that Revenue considers unacceptable. Bearing this in mind, it would seem logical to take the view that Revenue would not expect promoters to make a disclosure each and every time a ‘confidential’ commercial transaction is undertaken, as part of which tax planning advice is provided to a company or to its shareholders? Similarly, a sensible approach to the Fees test would be to regard it as not giving rise to a disclosure in circumstances where a promoter charges a client a standard fee for work done based on ordinary time and outlay incurred. It is hoped that the final version of the Regulations and Guidance Notes will clarify how these tests are to apply in practice.

Ordinary Tax Planning

It is encouraging that Revenue's Draft Guidance Notes open with the following statement - “it is important to note that the Mandatory Disclosure Rules do no impact on ordinary day to day tax advice between a tax adviser and a client or on the use of schemes that rely on ordinary tax planning using standards statutory exemptions and reliefs as intended by the legislature”. Unfortunately, this statement is not expanded upon in the Guidance Notes. In particular, there are no examples provided of the types of transactions which would, in Revenue's view, constitute “ordinary tax planning”. Advice is commonly provided to clients on how to maximise CGT reliefs on their retirement, how to plan one's estate in a tax-efficient manner, and on the tax aspect of various business decisions made in the normal course. Are these examples of “ordinary day to day tax advice” or are they disclosable? Unfortunately, these questions have yet to be answered. It remains to be seen whether Revenue will require each scheme to be tested against each of the eight specified categories to ensure that they do not trigger a disclosure obligation before accepting that use of those schemes merely amounts to “ordinary tax planning”.

For the regime to operate effectively, the meaning of a ‘disclosable scheme’ needs to be sufficiently clear and understood by promoters. This is important so as to ensure that promoters are aware of when a disclosure obligation has been triggered. In the absence of this clarity, promoters will likely err on the side of caution and make vast numbers of disclosures to Revenue, many of which may not be required. This will have a knock on impact on Revenue resources as all disclosures will have to be investigated. With this in mind, it is hoped that the final version of the Regulations and supporting Guidance Notes will clarify what is intended by “ordinary day to day tax advice” and “ordinary tax planning”.

What now?

It is no surprise that Revenue are motivated to prevent aggressive tax schemes from being used in the first place. However, for the disclosure rules to be effective, greater clarity is needed as to how the rules will apply to both promoters and to taxpayers in practice. The revised regulations need to set down ‘bright line’ tests that can be easily applied by promoters when considering their disclosure obligations. Promoters will now need to be proactive in designing and rolling out internal information systems to capture any ‘disclosable’ activity. Bearing in mind the onerous timeframes within which promoters needs to make the disclosures required, such systems will need to be highly sophisticated and capable of recording a ‘disclosable’ event as and when it takes place.

Conclusion

The regime is likely to impact on behaviours generally in the market for tax advice. Having said that, it remains to be seen how effective the rules will be in tackling ‘aggressive tax schemes’. Given that Revenue already has at its disposal a wide range of legislative powers, not least in the form of section 811 along with section 811A (which, it might be added, has not been available to the UK authorities), it seems difficult to justify the introduction of this regime without the repeal of some of the other powers and reporting obligations. Constantly adding to an already complex legislative framework is not the way to encourage business activity.

It is expected that Revenue will alter the categories of disclosable schemes over time, to reflect perceived changes in the tax avoidance landscape and the actual effectiveness of a particular category. It is hoped that Revenue will continue to engage in open and early consultation on future proposals for changes. Ongoing consultation will be key to the disclosure regime's effectiveness into the future.

Grace Brennan is a Tax Manager with KPMG

Email: grace.brennan@kpmg.ie