New regulations came into force on 23 February 2016. These amended the standardised tax product hallmark and the loss schemes hallmark, as well as creating a new financial products hallmark.

The changes to the standardised tax products hallmark significantly widen the role of the hypothetical informed observer when testing whether or not the hallmark applies. The exemption from the requirement to disclose schemes, which are the same or substantially the same as schemes that were being marketed before 1 August 2006, is also removed.

HMRC says the changes to the loss schemes hallmark seek to ensure that promoters cannot argue that the projection of a theoretical profit at some point in the distant future means they are not required to disclose the scheme.

The new financial products hallmark covers arrangements including a financial product which includes terms unlikely to have been entered into were it not for the tax advantage, and also circumstances where the arrangements includes contrived or abnormal steps without which the tax advantage could not be obtained.

The confidentiality hallmark (where there is a promoter involved) and the premium fee hallmark have been extended to include arrangements that might be expected to enable a person to obtain an advantage in relation to inheritance tax (IHT).

HMRC’s guidance states that the hallmarks are not mutually exclusive – an arrangement may be a hallmarked scheme, or hallmarked National Insurance contribution (NICs) scheme, by virtue of one or more of the hallmarks.

It is expected that the range of hallmarks will change over time, such as to test perceived changes in the avoidance market place or the effectiveness of a counter-avoidance measure. The absence of a hallmark should not be regarded as an indicator that arrangements not caught constitute practices that are acceptable to HMRC.

HMRC also says that it does not regard all arrangements that include or meet a hallmark description as practices that are unacceptable, although it cautions that individuals and promoters may have to notify HMRC about schemes that may not be considered to be avoidance.

Arrangements are prescribed if any element of the arrangements (including the way in which the arrangements are structured) gives rise to the tax advantage expected to be obtained under the arrangements; and it might reasonably be expected that a promoter would wish the way in which that element of those arrangements secures, or might secure, a tax advantage to be kept confidential from any other promoter at any time following the material date.

HMRC guidance also makes clear arrangements are prescribed if it might reasonably be expected that a promoter wished to keep the tax advantage confidential from HMRC, and a reason for doing so is to facilitate repeated or continued use of the same element, or substantially the same element, in the future.

The guidance outlines the requirements regarding one hallmark relating to confidentiality from competitors and another relating to confidentiality from HMRC. HMRC will expect promoters and users to answer the test fairly and act in accordance with the decision they make, and says the regulations put it beyond doubt that there does not need to be an explicit confidentiality agreement between the promoter and user about the arrangement before the test is met.

HMRC says it will not assume that because a scheme was not disclosed that the promoter wanted to keep it confidential from HMRC (likewise, a promoter is not required to disclose everything just to prove there was nothing to disclose), and nor will it carry out ‘fishing expeditions’ to determine what schemes have not been disclosed under this hallmark.

When HMRC investigates a scheme to achieve a view as to why it was not disclosed it will take a number of indicative factors into account, including how new, innovative and aggressive the scheme is; and whether there are formal or informal obligations for client to keep details of the scheme confidential.

Revised guidance for hallmark 6, relating to loss schemes, states that arrangements are prescribed if the promoter expects more than one individual to implement the same, or substantially the same, arrangements, and the main benefit of these is the provision of losses which the individuals concerned were unlikely to have considered were it not for the expectation they could be used to reduce their liability to income tax or capital gains tax.

The latter part of the test is subject to the concept of the ‘informed observer’, which HMRC says is to be contrasted with an ‘uninformed observer’ but is not an ‘expert’ or necessarily a tax practitioner. The informed observer is independent, has all relevant information about the scheme and has sufficient knowledge to understand both the scheme and the relevant statutory context.

The guidance says the application of the loss schemes hallmark is not limited to schemes where there are no benefits other than the tax advantage or where the value of those other benefits is insignificant compared to the tax reliefs resulting from the losses. The provision of losses will be the main benefit expected to accrue from participating in the arrangements (not merely one of the main benefits) if they are the most significant or most important element of the benefits.

Hallmark 9 covers arrangements which include one or more specified financial products and at least one of the main benefits of including the financial products in the arrangements is to give rise to a tax advantage. HMRC says it is intended to catch arrangements using financial products where there is a direct link between the financial product and all or part of the tax advantage the arrangements are expected to enable a person to obtain.

The financial products hallmark does not apply unless it is also the case that it would be reasonable to expect an informed observer to conclude that one of the main benefits of including a financial product in the arrangements is to give rise to a tax advantage. There is an informed observer test covering this, which the guidance details, plus a condition relating to ‘contrived or abnormal’ steps. It also sets out the financial products covered by the hallmark, which include loans, shares, derivatives, credit repos, and a number of other instruments. HMRC provides a number of examples of how the hallmark would operate in relation to Eurobond issues, entrepreneurs relief, employee benefit trusts, self invested personal pension schemes and other circumstances.

Guidance: Disclosure of tax avoidance schemes (DOTAS) is here.