Tax Avoidance Schemes 

(HMRC Compliance)

Comment: The Finance Act 2004 introduced rules for notifying tax avoidance schemes, including SDLT. These rules were updated in 2012, and HMRC can demand accelerated tax payments for ineffective schemes. A list of such schemes is available online.

Key Points

  • Scope and Regulations: SDLT was added to DOTAS in 2005, with consolidated regulations in 2012.
  • Identifying Notifiable Schemes: Specific criteria for SDLT schemes are detailed in the 2005 regulations and their amendments.
  • Accelerated Payments: HMRC can demand accelerated tax payments for ineffective schemes, listing 1,200 such schemes in 2014.

Main Principles

  • Notification Requirement: Schemes must be notified to HMRC if they meet specific criteria.
  • Compliance and Penalties: Non-compliance can lead to penalties up to £1 million and reputational damage.
  • Roles and Responsibilities: Promoters and users of schemes must disclose information, while introducers may need to provide information if requested by HMRC.

Understanding and complying with these rules is essential to avoid significant penalties and reputational harm.

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Introduction

The Finance Act (FA) 2004, Part 7, introduced obligations for the notification of schemes designed to avoid direct tax, potentially including Stamp Duty Land Tax (SDLT). Initially, SDLT was not included, but it was added in 2005. The detailed regulations are consolidated in the Tax Avoidance Schemes (Information) Regulations 2012, effective from September 1, 2012. The SDLT Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2005 detail the types of schemes covered, which were later amended in 2012.

The rules for identifying notifiable SDLT schemes differ significantly from those for other taxes. The Finance Act 2014, Part 4, allows HMRC to demand accelerated payment of tax if an avoidance scheme is deemed ineffective. HMRC issued a list of 1,200 schemes notified under DOTAS, including SDLT mitigation schemes, on July 15, 2014, with plans to demand tax payments over the following 20 months. The latest list, as of May 2021, was updated on January 29, 2021, and is available online.

Key Points

  • Scope and Regulations: Initially excluded, SDLT was added to the list of taxes covered by DOTAS in 2005. The regulations are consolidated in the 2012 legislation.
  • Identifying Notifiable Schemes: The criteria for identifying notifiable SDLT schemes are different from those for other taxes, as outlined in the 2005 regulations and their 2012 amendments.
  • Accelerated Payments: HMRC can demand accelerated payment of tax for ineffective avoidance schemes, with a list of 1,200 schemes issued in July 2014.

Penalties and Compliance

The regime is not limited to complex avoidance schemes; it can apply to simple modifications aimed at reducing tax costs. All parties to a transaction, including advisors, may need to disclose information to HMRC promptly. Non-compliance can result in significant penalties, with the maximum potential penalty increased to £1 million by FA 2010, Schedule 17. The reputational damage from non-compliance is often considered worse than the financial penalties.

Advisors have developed systems and procedures to quickly identify obligations, but these are effective only if advisors are vigilant and aware of when the rules apply.

Roles and Responsibilities

  • Promoters and Scheme Users: Obligations fall automatically on promoters and scheme users without HMRC’s prompting.
  • Introducers: Only required to provide information to HMRC if specifically demanded.

Introduction to SDLT within DOTAS Regime

  • SDLT (Stamp Duty Land Tax) was integrated into the DOTAS (Disclosure of Tax Avoidance Schemes) regime starting from 1 August 2005.

Initial Rules for Property Valuation

  • From the initial application date, the rules targeted specific arrangements involving properties:
    • Properties that were not purely residential and valued at £5 million or more.
    • Residential properties valued at £1 million or more were included under these rules from 1 April 2010.

Mixed Property Considerations

  • For mixed residential/non-residential properties, the rules applied if:
    • The total property value was £5 million or more.
    • The residential component alone was valued at £1 million or more.

Changes in Value Thresholds

  • The value thresholds were eliminated by the Stamp Duty Land Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) (Amendment) Regulations 2012.
  • This change applied to transactions with an ‘effective date’ of 1 November 2012 or later.

These regulations have evolved over time to adapt to the changing landscape of property values and to tighten the scrutiny on tax avoidance schemes involving SDLT.

Conclusion

The SDLT and DOTAS regulations require vigilance and prompt action from all parties involved in tax-related transactions. Compliance is critical to avoid significant penalties and reputational damage. Advisors must be aware of the specific regulations and ensure they can identify and respond to obligations quickly.

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Scheme Reference Numbers (SRNs)

(HMRC Compliance>Tax Avoidance Schemes)

➤ HMRC requires promoters and users of SDLT tax schemes to report Scheme Reference Numbers (SRNs) for schemes disclosed on or after April 1, 2010, to enhance transparency and tackle tax avoidance.

General Overview

  • HMRC issues a Scheme Reference Number (SRN) for each tax scheme disclosed under the Finance Act 2004.
  • Initially, for SDLT schemes, promoters were not required to notify users of the SRN, nor were users required to report the SRN to HMRC.
  • This approach was focused on understanding the nature of SDLT avoidance schemes rather than challenging specific schemes.

Changes from 1 April 2010

  • From 1 April 2010, similar to other taxes, promoters of SDLT schemes must provide the SRN to users.
  • Users are now required to report the SRN to HMRC along with other relevant information.
  • A specific form has been provided by HMRC for this purpose, available at their official website.

Clarification on Reporting Obligations

  • HMRC has indicated that the requirement for users to report SRNs applies only to schemes notified by promoters on or after 1 April 2010.
  • Despite some ambiguity in the sequential amendments of regulations, taxpayers can rely on HMRC Guidance, which clearly states that the relevant date is 1 April 2010.

Grandfathering Provisions

  • There is no requirement to report schemes first notified before 1 April 2010, a provision referred to as ‘grandfathering’.
  • Grandfathering was intended to exclude certain politically sensitive schemes involving residential property and sub-sales from reporting requirements.
  • However, regulations under the Finance Act 2012 have modified these rules, requiring users to notify HMRC of their use of such schemes.

Important Notes

  • The changes highlight HMRC’s evolving approach towards tackling tax avoidance, especially in the context of SDLT schemes.
  • Taxpayers need to stay updated with the regulations and HMRC guidance to ensure compliance.
  • The introduction of the SRN reporting requirement is part of a broader effort to enhance transparency and accountability in tax practices.

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Notifiable Arrangements and Proposals

(HMRC Compliance>Tax Avoidance Schemes)

➤ Tax schemes aiming for an SDLT advantage must be reported to HMRC unless they fall under specific exclusions, and advisors often disclose uncertain cases to avoid penalties.

Definition of Notifiable Arrangement

A notifiable arrangement is any scheme or arrangement that:

  • Falls within the specific description outlined in the Stamp Duty Land Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2005 (SI 2005/1868)
  • Is expected to enable any person to obtain a Stamp Duty Land Tax (SDLT) advantage as a main benefit of the arrangement (Finance Act 2004, Section 306(1))

Criteria for Notifiable Arrangements

To be classified as notifiable, an arrangement must meet both of the following conditions:

  • The arrangement must be described in the regulations.
  • The arrangement must have the main benefit of obtaining a tax advantage.

Simply obtaining a tax advantage does not automatically make an arrangement notifiable. It must also align with the descriptions set out in the regulations. Conversely, if an arrangement falls within the regulatory description but does not aim to provide a tax advantage, it is not considered notifiable.

Penalties and Precautionary Disclosures

Given the severe penalties associated with failing to notify notifiable arrangements, many advisers opt to disclose arrangements in uncertain cases to ‘play safe.’ This precaution helps avoid any potential non-compliance issues.

Notifiable Proposals

A notifiable proposal refers to a proposal for arrangements that would be considered notifiable if they were actually entered into (Finance Act 2004, Section 306(2)). This means that even potential arrangements that could meet the criteria of notifiable arrangements need to be considered for disclosure.

By understanding these criteria and the importance of precautionary measures, advisers and taxpayers can navigate the complexities of SDLT regulations more effectively.

Notifiable Arrangements for SDLT

  • In the context of income tax, corporation tax, and capital gains tax, certain arrangements must have specific characteristics, known as ‘hallmarks’, to be considered notifiable.
  • For Stamp Duty Land Tax (SDLT), however, the concept of ‘hallmarks’ does not apply. Instead, all arrangements related to the acquisition of chargeable interests, which might aim to provide a tax benefit concerning SDLT, are considered notifiable unless they fall within specific exclusions or are ‘grandfathered.’

Exclusions from Notifiable Arrangements

  • The exclusions for notifiable arrangements in relation to SDLT are detailed through six steps and two rules that define acceptable combinations of these steps. The sequence of these steps is generally not crucial.

Steps for Exclusions

The steps outlined below describe how certain property transactions can be structured to be excluded from being notifiable arrangements for Stamp Duty Land Tax (SDLT). Each step involves specific actions or claims to relief under the Finance Act 2003.

Step A: Acquisition by Special Purpose Vehicle

  • Special Purpose Vehicle (SPV): A company is created specifically for acquiring a chargeable interest in land. This SPV is used to isolate financial risk and manage the property transaction.

Step B: Claims to Relief

Single claims to relief under specific provisions of the Finance Act 2003 are made to reduce SDLT liability. Examples include:

  • Sale and Leaseback Arrangements: Transactions where the property is sold and then leased back to the seller.
  • Relief for New Zero Carbon Homes: Tax relief is available for the purchase of newly built zero-carbon homes.
  • Compulsory Purchase Facilitating Development: Relief for properties purchased under compulsory purchase orders for development purposes.
  • Compliance with Planning Obligations: Relief when the property transaction is necessary to comply with planning obligations.
  • Demutualisation of Insurance Companies and Building Societies: Relief for transactions involving the conversion of mutual insurance companies and building societies into public companies.
  • Incorporation of Limited Liability Partnerships: Relief for the transfer of property to newly formed LLPs.
  • Transfers Involving Public Bodies: Relief for property transfers involving government or public bodies.
  • Reorganisation of Parliamentary Constituencies: Relief for property transfers necessitated by constituency reorganisation.
  • Acquisitions by Bodies Established for National Purposes: Relief for transactions by bodies serving national purposes.
  • Acquisitions by Registered Social Landlords: Relief for property acquisitions by registered social landlords.
  • Collective Enfranchisement by Leaseholders: Relief for leaseholders collectively purchasing the freehold of their building.
  • Crofting Community Right to Buy: Relief for crofting communities exercising their right to buy land.
  • Disadvantaged Areas Relief: Relief for property transactions in designated disadvantaged areas.
  • Acquisitions of Residential Property: Various reliefs related to residential property acquisitions.
  • Transfers Involving Multiple Dwellings: Relief for transactions involving multiple residential properties.
  • Group Relief and Reconstruction Acquisition Reliefs: Relief for property transactions within corporate groups or during corporate restructurings.
  • Charities Relief: Relief for property transactions involving charities.
  • Right to Buy and Shared Ownership Leases: Relief for transactions under right-to-buy schemes and shared ownership leases.
  • Alternative Finance Investment Bonds: Relief for transactions involving certain types of Islamic finance products.
  • Multiple Claims to Relief under Specific Provisions Relating to Alternative Property Finance: Relief for multiple claims related to alternative property finance mechanisms.

Step C: Sale of Shares in Special Purpose Vehicle

  • Sale of Shares: Instead of selling the property directly, the shares in the SPV holding the property are sold to an unrelated party. This transaction structure can help mitigate SDLT liability.

Step D: Non-Exercise of VAT Exemption

  • VAT Exemption: No election is made to waive the exemption from VAT regarding buildings and land. This means that the transaction is not subject to VAT, which can have implications for the overall tax liability.

Step E: Transfer of Business as a Going Concern

  • Business Transfer: The transaction involves the transfer of a business associated with the land, treated as a transfer of a going concern for VAT purposes. This can provide relief from VAT.

Step F: Undertaking a Joint Venture

  • Joint Venture: A partnership is created, and the property subject to the land transaction is transferred to this partnership. Joint ventures can be used to structure transactions in a tax-efficient manner.

Summary

The rules for SDLT notifiable arrangements operate inversely compared to other taxes like income tax, corporation tax, and capital gains tax. All arrangements are notifiable unless they fit into specified exclusions outlined through detailed steps and combinations. This ensures that the focus is on transparency and proper reporting in the realm of property transactions and associated tax benefits.

Acceptable Combinations of Steps

(HMRC Compliance>Tax Avoidance Schemes)

➤ Tax schemes must follow strict step combinations to be exempt from HMRC notification, and any unlisted or multiple key steps disqualify the arrangement from exclusion.

Rule 1

Rule 1 specifies the combinations of steps that can be considered excluded arrangements. The acceptable combinations under this rule include:

  • Combinations of Steps B, D, E, and F: These steps can be combined in any way.
  • Inclusion of One Instance of Steps A, C, or D: These can be added to the combinations of Steps B, D, E, and F, but only as a single instance.

However, it’s important to note the specifics of Step B:

  • Step B Part (a) and (b): If there is more than one claim to any relief listed in part (a), or claims to reliefs in both part (a) and part (b), the combination does not fall within Step B. Thus, the arrangement is not excluded.

Rule 2

Rule 2 states that arrangements are not excluded if they:

  • Include All or at Least Two of Steps A, C, and D: If an arrangement includes all or at least two of these steps, it is not excluded.
  • Involve More Than One Instance of Step A, C, or D: If there is more than one instance of any of these steps, the arrangement is not excluded.

Key Considerations

These rules highlight that certain multi-step transactions can be exempt from disclosure if they strictly involve combinations of the specified steps. However, the presence of any additional steps not listed can disqualify the arrangement from being exempt.

Example Case: Notification Requirement

Scenario

Paynotax LLP, a tax advisory firm, develops a scheme for SDLT-free acquisition of leasehold commercial buildings. The scheme involves the following steps:

  1. Setting up a Special Purpose Vehicle (SPV): This is a step not listed in the rules.
  2. Entering into a Joint Venture with the Vendor (Step F): This is a listed step.
  3. Acquiring an Interest in the Property (Step A): Another listed step.
  4. Claiming Group Relief (Step B): Yet another listed step.

Analysis

  • The combination includes only one instance of a step listed in Rule 2 (Step A).
  • However, setting up an SPV is a step not listed in the acceptable combinations but is essential to obtaining the SDLT advantage.

Conclusion

  • Despite meeting some criteria for exclusion under Rule 1, the scheme involves an unlisted step (setting up an SPV) that is crucial to the tax benefit.
  • Therefore, the scheme is not exempt from notification because the unlisted step is essential to achieving the SDLT advantage.

Practical Implications

In practice, this means that many real-world schemes will likely not be exempt from notification due to the inclusion of unlisted steps that are essential to obtaining the intended tax advantages. Understanding the specific combinations and their implications is crucial for ensuring compliance with disclosure requirements.

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Arrangements which are ‘Substantially the Same’

(HMRC Compliance>Tax Avoidance Schemes)

➤ Tax schemes that are substantially the same as previously disclosed ones don’t require new disclosures, but significant changes, legal shifts, or variances in tax attributes do.

Separate Disclosure Requirements

  • Different schemes must be disclosed separately.
  • Once a scheme is disclosed, no further disclosure is required for subsequent implementations of the same scheme, even for different clients.
  • Minor differences in subsequent implementations do not necessitate further disclosure if the schemes are substantially the same.

HMRC Guidance on Substantially the Same Schemes

  • A scheme is not substantially the same if changes would make previous disclosures misleading for subsequent clients.
  • HMRC considers schemes substantially the same if the tax analysis remains consistent and only the client changes.
  • Changes due to new laws, accounting treatments, or shifts in tax attributes (e.g., from income losses to capital losses) make schemes not substantially the same.

Exclusions and Grandfathering Provisions

  • From 1 April 2010, most arrangements do not need disclosure if they are the same or substantially the same as those available before this date. This is known as ‘grandfathering’.
  • For non-residential property, previous rules required disclosure, but for residential property, only new or significantly altered schemes need disclosure.
  • FA 2012, s 213, and the Stamp Duty Land Tax (Avoidance Schemes) (Specified Proposals or Arrangements) Regulations 2012 removed the grandfathering concession for specific schemes from 1 November 2012.
  • Schemes using sub-sale relief in combination with various other mechanisms must be disclosed if used after 1 November 2012.

Example: Fiscality’s Arrangement

  • Original Scheme: Fiscality developed an arrangement for low SDLT cost leases between subsidiaries, disclosed before 1 April 2010.
  • First Change: Using a nominee company in a different overseas jurisdiction for easier administration—considered substantially the same, no new disclosure needed.
  • Second Change: Reversing the order of execution steps—considered a significant change, triggering a new disclosure obligation when the new version is used or known to be implemented.

Key Takeaways

  • Disclosure is mandatory for different schemes unless minor differences make them substantially the same.
  • HMRC provides specific guidelines on what constitutes substantial sameness.
  • Changes due to legal or tax attributes can invalidate substantial sameness.
  • Grandfathering provisions limit the need for repeated disclosures but have exceptions for specific schemes.

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Promoters and Introducers

(HMRC Compliance>Tax Avoidance Schemes)

➤ Promoters must disclose tax schemes they design or propose, while the concept of ‘introducers’ broadens the responsibility to include those facilitating scheme implementation, effective from January 1, 2011.

Changes Introduced by FA 2010, Schedule 17

  • The Finance Act (FA) 2010, Schedule 17 brought amendments to the provisions concerning the identity and obligations of ‘promoters’.
  • A new concept of ‘introducers’ was introduced.
  • These amendments became effective from January 1, 2011 (SI 2010/3019).

Primary Obligations on Promoters

  • Promoters are individuals involved in tax advisory, banking, or securities house businesses.
  • Their obligations relate to notifiable arrangements or proposals.

Responsibilities of Promoters

Promoters have the following responsibilities:

  • Design Responsibility: Responsible for the design of the proposed arrangements.
  • Firm Approach: Making a firm approach to another person to implement the proposal.
  • Availability: Making the proposal available for implementation by any person.

Definition of a Firm Approach

  • Introduced by FA 2010, Schedule 17 to broaden the responsibility net.
  • Occurs when arrangements are substantially designed and information, including tax advantages, is communicated with a view to entering into transactions forming part of the proposal.

Substantially Designed Arrangements

  • Arrangements are substantially designed if they are developed enough for someone to reasonably believe they can obtain the expected tax advantage.
  • This concept was not explicitly in the legislation before FA 2010 but was used similarly by HMRC.

HMRC’s Interpretation of Substantially Designed

  • According to HMRC, a scheme is substantially designed if the nature of the transactions is sufficiently developed for it to be reasonable to believe a person might enter into:
    • Transactions of the developed nature.
    • Transactions not substantially different from those developed at the time.

DOTAS Guidance

  • The rules are expressed in broad, inclusive terms.
  • Reporting obligations may arise at an early stage.
  • DOTAS Guidance was last updated on April 20, 2018 (para 3.6.2).

These provisions ensure that the responsibilities for the design and implementation of tax-related schemes are clearly defined and broadly applied, capturing a wide range of potential promoters and introducers early in the scheme’s development.

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Unclear Arrangements and Disclosure Obligations

(HMRC Compliance>Tax Avoidance Schemes)

➤ Disclosures are required when a tax scheme is developed enough to be communicated, even if technical details are not shared, and ambiguity in the development stage necessitates evidence like emails and notes to prove timely disclosures.

Clarity Issues in Arrangement Development

The determination of whether an arrangement is substantially designed or developed to a particular stage remains ambiguous. This ambiguity poses challenges for promoters who may face allegations from HMRC regarding the failure to make timely disclosures. In such scenarios, HMRC is likely to demand comprehensive evidence, including:

  • Copies of emails
  • Notes from telephone conversations
  • Other relevant documentation

These pieces of evidence are crucial for demonstrating the development process of the scheme.

Example 9.8: Timing of Obligations

Scenario: Paynotax LLP’s SDLT Reduction Arrangement

Paynotax LLP is in the process of developing an arrangement aimed at significantly reducing the SDLT cost associated with house purchases. Here is a sequence of relevant events:

  • 1 February 2022: Mark, a partner at Paynotax, attends a conference with a leading tax counsel. The counsel confirms the general soundness of their technical analysis but points out areas needing further attention, such as the country of incorporation for a new company essential to the arrangement.
  • 2 February 2022: Judith, another partner at Paynotax who has not been directly involved in developing the proposal, contacts Kim at Houseller plc, an estate agent. She informs him about the tax scheme and encourages him to introduce the scheme to potential house purchasers. Judith outlines the general steps required for the arrangement, emphasising the potential to reduce the SDLT cost to less than one-tenth of the usual amount. Paynotax LLP and Houseller have an existing agreement for commissions on successful introductions.

Analysis of Disclosure Obligations

Despite Judith not providing technical details or being involved in the scheme’s development, her actions likely trigger disclosure obligations under HMRC guidelines. The key points include:

  • Judith’s communication on 2 February 2022 likely constitutes a trigger for Paynotax LLP’s disclosure obligations.
  • The lack of technical details in her communication does not negate the obligation.
  • HMRC views Paynotax LLP as a tax advisory business and thus, the promoter, regardless of individual involvement within the firm.

Understanding the Role of an Introducer

(HMRC Compliance>Tax Avoidance Schemes)

➤ An introducer promotes a tax scheme through marketing contact for financial gain but does not have direct disclosure responsibilities unless required by HMRC, distinguishing them from promoters.

Definition

An introducer is someone who makes a marketing contact with another person regarding a notifiable proposal. This involves communicating information about the proposal, including the expected tax advantage, with the intention of encouraging the other person to enter into the proposed arrangements.

Key Points

  • Marketing Contact: This occurs when the introducer shares information about the proposal with someone else, aiming to promote the arrangement.
  • Disclosure Responsibilities: An introducer does not have direct disclosure responsibilities unless required by HMRC to provide information about the scheme.
  • Not a Promoter: If the introducer is not also a promoter, they only have to pass on information when asked by HMRC.

Example Scenarios

Example 1: The Introducer

  • Scenario: Kim contacts Irena, who is negotiating to buy a UK house for around £2 million. Kim shares information received from Judith about a tax advantage scheme and suggests Irena speak to Paynotax LLP.
  • Role of Kim: Kim and his company, Houseller, are not tax advisers, banks, or securities houses. Therefore, they are not promoters.
  • Financial Gain: Houseller will earn a commission from the introduction, making this a marketing contact.
  • Conclusion: Houseller is considered an introducer because they have a financial interest in the introduction.

Example 2: No Obligations

  • Scenario: Irena mentions the Paynotax scheme to a colleague at her advertising agency, passing on the contact details for Paynotax.
  • Role of Irena: Neither Irena nor her employer is a tax adviser, bank, or securities house.
  • Casual Discussion: Irena does not gain financially from this discussion.
  • Conclusion: This is not a marketing contact, so Irena and her employer are not acting as introducers.

Summary

  • Introducer: A person who makes a marketing contact about a notifiable proposal.
  • Marketing Contact: Sharing information to promote an arrangement with financial gain involved.
  • Disclosure: Introducers may need to provide information to HMRC but are not direct promoters unless specified.
  • Examples: Differentiating between professional introductions with financial gain (introducer) and casual, non-financial discussions (not an introducer).

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Who is Not a Promoter?

(HMRC Compliance>Tax Avoidance Schemes)

➤ A person is not a promoter if they only design the scheme, give benign input, are not acting as a tax adviser, lack enough information, or act solely as an intermediary or introducer.

Under HMRC guidelines, not everyone associated with a tax scheme is considered a promoter. Various roles and actions can exclude a person from being categorised as a promoter. Below are the conditions and examples that clarify who is not a promoter.

Benign Input

  • Definition: A person’s input is considered benign if their advice does not contribute to the tax-saving aspect of the scheme.
  • Example: Advising whether a particular shareholding arrangement permits a claim to group relief is considered benign because it does not affect the tax-saving strategy directly.
  • Non-example: Advising on how to change the arrangement to qualify for group relief is not benign because it directly contributes to achieving a tax-saving outcome.

Not Acting as a Tax Adviser

  • Definition: If an individual is not acting in the capacity of a tax adviser, they are not considered a promoter.
  • Example: An unrelated lawyer consulted only on company law implications is not acting as a tax adviser since their advice is limited to legal aspects unrelated to tax.
  • Non-example: A tax consultant advising on specific tax strategies would be acting as a tax adviser.

Insufficient Information

  • Definition: A person who cannot reasonably be expected to have enough information to determine whether a scheme is disclosable or to make the disclosure is not a promoter.
  • Example: If a newly appointed tax adviser asks the outgoing adviser for an opinion on the implications of a proposed action but the outgoing adviser is not provided with details of the proposal, the outgoing adviser likely does not have enough information to assess or disclose the scheme.
  • Non-example: A fully briefed tax adviser who has all the details and still fails to disclose the scheme.

Intermediaries and Introducers

  • Definition: A person who acts solely as an intermediary or introducer, without any involvement in the design, implementation, or management of the scheme, is not a promoter.
  • Example: A broker who introduces clients to a tax adviser but does not participate in the scheme’s design or management.
  • Note: Despite this exclusion, HMRC can still demand information from intermediaries or introducers following changes enacted in the Finance Act 2010, Schedule 17.

By understanding these exclusions, individuals and entities can better navigate their roles in tax schemes and ensure compliance with HMRC’s guidelines.

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Co-promoters: Disclosure Requirements

(HMRC Compliance>Tax Avoidance Schemes)

➤ Co-promoters must ensure information sharing, notify HMRC of each other’s details, and communicate SRNs to qualify for a single disclosure and exemptions, while still fulfilling other obligations.

When multiple promoters are involved in the same or substantially the same proposal or arrangement, it is possible for a single disclosure to suffice. This can be managed under the following conditions:

  • Information Sharing: The non-disclosing promoter must hold or be provided with the information that has been disclosed to HMRC.
  • Notification to HMRC: The disclosing promoter must provide HMRC with the name and address of the other promoter involved.
  • SRN Communication: If a promoter becomes a co-promoter after the initial disclosure, the disclosing promoter must inform the other promoter of the Scheme Reference Number (SRN).

Exemption from Disclosure

  • Exemption for Co-promoters: If the above conditions are met, the co-promoter is exempt from making a separate disclosure.
  • Similarity of Proposals: It is the responsibility of the co-promoter to determine if their proposal or arrangement is sufficiently similar to the one disclosed, thus qualifying for the exemption.

Ongoing Obligations

Even when exempt from making a separate disclosure, co-promoters are still required to fulfill other obligations, such as providing their clients with the SRNs.

Overseas Promoters and DOTAS Rules

(HMRC Compliance>Tax Avoidance Schemes)

➤ DOTAS rules apply to all promoters, including those outside the UK, but enforcement is difficult, and non-compliance shifts disclosure obligations to involved clients unless the promoter meets DOTAS requirements.

Application of DOTAS Rules

  • The Disclosure of Tax Avoidance Schemes (DOTAS) rules are designed to apply to promoters regardless of their residence status, including those based outside the UK.
  • While the rules technically apply to non-UK promoters, enforcing compliance can be challenging for HM Revenue and Customs (HMRC), particularly if the promoter does not operate through a permanent establishment in the UK.

Compliance Challenges

  • If a promoter based overseas fails to meet DOTAS obligations, the responsibility shifts to any person (referred to as the ‘client’) involved in the transaction that forms part of the arrangements.
  • This responsibility includes the vendor, despite the fact that the tax advantage usually benefits the purchaser.

Vendor Responsibilities

  • Vendors are not expected to disclose arrangements they are unaware of.
  • However, vendors typically have some knowledge of the purchaser’s arrangements, which necessitates caution and diligence on their part.

Client Obligations

  • When an overseas promoter does not comply with DOTAS, the obligation to disclose shifts to the clients involved in the transaction.
  • These obligations include any person entering into a transaction related to the arrangements, meaning vendors must be vigilant.

Relief from Disclosure Obligations

  • If the promoter complies with DOTAS requirements, the clients are relieved of their disclosure obligations.
  • This relief is specified under FA 2004, section 309(2).

Key Points to Remember

  • The DOTAS rules aim to cover all promoters, including those outside the UK.
  • Enforcing these rules on overseas promoters can be problematic for HMRC.
  • Non-compliance by an overseas promoter transfers disclosure obligations to the client involved in the transaction.
  • Vendors must be careful and aware of any arrangements to ensure compliance.
  • Clients are exempt from disclosure if the promoter meets the DOTAS obligations.

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Arrangements with No Promoter

(HMRC Compliance>Tax Avoidance Schemes)

➤ Individuals or companies using self-devised notifiable tax schemes must disclose them to HMRC, with the implementer in a corporate group being responsible for disclosure, ensuring transparency and accountability.

When a person engages in a transaction that is part of notifiable arrangements without the involvement of a promoter, specific responsibilities come into play. This often happens when the taxpayer independently develops the scheme.

Key Points

Personal Responsibility:

  • Disclosure Obligation: The individual or entity entering into the transaction must take responsibility for making the appropriate disclosure to HMRC. This ensures that even self-devised schemes are reported and scrutinised.

Group Companies:

Scheme Creation and Implementation: Within a corporate group, the responsibilities for disclosure can vary based on which company is involved in creating and implementing the scheme:

  • Creator vs. Implementer: If one company within the group devises the scheme and another company uses it, the company that creates the scheme is not considered a promoter. Instead, the company that implements the scheme holds the responsibility for disclosure.
  • Transparency and Accountability: This delineation ensures that there is clarity and accountability in transactions involving self-devised notifiable arrangements. It prevents companies from avoiding disclosure by shifting responsibilities within the group.

These provisions ensure that all parties involved in notifiable arrangements, regardless of whether a promoter is involved, are held to the same standard of transparency and compliance.

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Duties of Promoters

(HMRC Compliance>Tax Avoidance Schemes)

➤ Promoters must disclose information to HMRC via form AAG1, obtain and notify clients of SRNs, maintain records, and provide additional details upon request to ensure compliance with tax laws.

Promoters of tax avoidance schemes have several key duties as outlined by HMRC, ensuring transparency and compliance with tax laws. These duties encompass disclosure, notification, record-keeping, and additional reporting requirements.

Disclosure to HMRC

Promoters are required to:

  • Provide Prescribed Information: They must furnish HMRC with specific information about the schemes they promote.
  • Submit Within Prescribed Period: This information must be submitted within a set timeframe following the relevant date of the scheme.

Submission of Form AAG1

To comply with disclosure requirements:

  • Form AAG1 Completion: Promoters must complete and submit form AAG1 to disclose the necessary information about the tax avoidance scheme.
  • Submission Methods: The form can be downloaded for manual completion or submitted online through HMRC’s platform.

Scheme Reference Number (SRN)

After the submission of form AAG1:

  • Issuance of SRN: HMRC usually issues a Scheme Reference Number (SRN).
  • Notification Obligation: Promoters must notify any person to whom they are providing services related to the scheme, or any similar scheme, of the SRN.
    • Form AAG6: This notification must be made using form AAG6, available for download from HMRC’s website.
    • Notification Timing: The SRN must be communicated within 30 days of either the promoter becoming aware of a transaction that forms part of the arrangements or HMRC notifying the promoter of the SRN.

Record Keeping and Client Notification

Promoters are also required to:

  • Maintain Records: Keep detailed and accurate records of all schemes they promote.
  • Client Details: Notify HMRC of the details of clients who implement these schemes.

Additional Reporting Requirements

According to FA 2013, s 223:

  • Supply Additional Information: If required by HMRC, promoters must provide additional prescribed details about other persons who might be involved in the arrangements.
    • Information Required: This includes names, addresses, tax reference numbers, and enough information for HMRC to understand each person’s involvement in the scheme.

SDLT Schemes and SRN Notification

Since 1 April 2010:

  • Notification to Clients: Promoters must inform clients of the SRN for Stamp Duty Land Tax (SDLT) schemes.
    • Applicability: This requirement applies to schemes notified to HMRC from 1 April 2010 onwards, although there is some ambiguity as regulations suggest it might also apply to schemes notified from 1 April 2009.

 —

Duties of Scheme Users

(HMRC Compliance>Tax Avoidance Schemes)

➤ Users of SDLT schemes must report scheme use to HMRC using Form AAG4, provide specific information to promoters, and notify others involved of the SRN within 30 days.

From April 1, 2010, certain obligations were imposed on users of SDLT (Stamp Duty Land Tax) schemes and individuals who are notified of a Scheme Reference Number (SRN). These duties are essential for ensuring compliance with HMRC (HM Revenue and Customs) regulations.

Reporting Requirements for SRNs

  • Mandatory Reporting: Anyone notified of an SRN must report their use of the scheme to HMRC and quote the SRN.
  • Scheme Operation: Some SDLT schemes operate by removing the transaction from the charge, which means there is no obligation to submit an SDLT return. However, the SDLT return does not have a section to report an SRN.

Submission of Form AAG4 (SDLT)

  • New Form Introduction: HMRC has introduced a specific version of form AAG4 for SDLT schemes.
  • Form Availability: The form can be downloaded from HMRC website or completed and submitted online via HMRC’s tax schemes forms link.
  • Compulsory Use: Submission of this form is now mandatory in all cases.

Information Provision to Promoters

  • FA 2013, Section 223: This added the requirement for scheme users to provide specific information to the promoter.
  • Prescribed Information: Details prescribed in the Tax Avoidance Schemes (Information) (Amendment, etc) Regulations 2013 (SI 2013/2592), regulation 16, effective from November 4, 2013, include:
    • User’s tax reference number
    • National insurance number
    • Confirmation if the user does not have a tax reference number and/or a national insurance number

Notification Obligations

  • SRN Notification: Anyone who receives an SRN must notify any other party they reasonably expect to be involved in the scheme and to gain a tax advantage from its implementation.
  • Form AAG6: This notification should be done using form AAG6.
  • 30-Day Deadline: The notification must be made within 30 days of the later of:
    • Becoming aware of any transaction forming part of the arrangements
    • Receiving notification of the SRN

 –

Time for Disclosure – Promoters

(HMRC Compliance>Tax Avoidance Schemes)

➤ Promoters must disclose notifiable tax schemes to HMRC within five days of making them available or becoming aware of a relevant transaction, with definitions and timings varying for marketed and bespoke schemes.

Timing Rules

  • Promoters must disclose within five days (excluding weekends and bank holidays) of the ‘relevant date’.
  • The relevant date is the earlier of:
    • The date the notifiable proposal is ‘made available for use’.
    • The date the promoter first becomes aware of any transaction forming part of arrangements implementing the proposal.

Definition of ‘Made Available for Use’

  • The legislation does not specify when a proposal is regarded as ‘made available for use’.
  • HMRC guidance distinguishes between bespoke and marketed schemes.

Marketed Schemes

  • Developed for potential use by a range or category of users.
  • Considered made available when:
    • The promoter has a high degree of confidence in the tax analysis.
    • Communicated to the first potential user in sufficient detail for them to:
      • Understand the expected tax advantages.
      • Decide whether or not to enter into it.
  • Internal approval processes within firms are respected; a proposal is not made available until such approval is given.

Bespoke Schemes

  • Designed for a specific client’s situation.
  • Not generally regarded as ‘made available’.
  • The relevant date is when the promoter first becomes aware of any transaction forming part of the arrangements.
  • Risk of missing the five-day deadline if multiple individuals in a firm are in contact with the client and the significance of a transaction is not understood by the first contact.

Outlining Partially Developed Ideas

  • Advisers may outline a planning idea in general terms, not making a proposal ‘available for use’.
  • If the client develops and implements the arrangement without further adviser involvement:
    • The adviser is still seen as responsible for the design to some extent.
    • The adviser must disclose within five days of becoming aware of any transaction forming part of the notifiable arrangements.
  • Good client communication and robust internal systems are essential to capture such information.

Time for Disclosure and Other Notification – Scheme Users

(HMRC Compliance>Tax Avoidance Schemes)

➤ Promoters must disclose notifiable tax schemes to HMRC within five days of making them available or becoming aware of a relevant transaction, with definitions and timings varying for marketed and bespoke schemes.

As noted previously, the general requirement for users to notify the use of Stamp Duty Land Tax (SDLT) schemes was introduced in April 2010. The rules governing the timing of this notification differ from those applicable to other taxes. These differences align with the tight timetable for submitting SDLT returns. While the general filing/payment deadline has recently been reduced from 30 days to 14 days, the specific 30-day deadline for disclosure of SDLT schemes remains unchanged.

Deadlines for Notification

  • The deadline for notifying the use of an SDLT scheme is set at 30 days from the relevant event.

Guidance on Forms

  • Detailed guidance on the nature and content of the various forms required for notification is provided to ensure compliance with the regulations.

These regulations and deadlines aim to streamline the process while ensuring that all necessary disclosures are made in a timely manner.

Forms for Disclosure and Notification

AAG1

  • Responsible Person: Promoter
  • Reason: Disclosing scheme
  • Deadline for Receipt by HMRC or Other Party: 5 days from making available or becoming aware of the first transaction in the scheme

AAG2

  • Responsible Person: User
  • Reason: Disclosing scheme from overseas promoter, no other disclosure made
  • Deadline for Receipt by HMRC or Other Party: 5 days from entering into the first transaction in the scheme

AAG3 (Legal Professional Privilege)

  • Responsible Person: User
  • Reason: Disclosing scheme from lawyer claiming legal professional privilege
  • Deadline for Receipt by HMRC or Other Party: 5 days from entering into the first transaction in the scheme

AAG3 (Internally Developed Scheme)

  • Responsible Person: User
  • Reason: Disclosing internally developed scheme, no external promoter
  • Deadline for Receipt by HMRC or Other Party: 30 days from entering into the first transaction in the scheme

AAG4 (SDLT)

  • Responsible Person: User
  • Reason: Notifying use of scheme with UK promoter (or overseas promoter who complies with disclosure requirement)
  • Deadline for Receipt by HMRC or Other Party: 30 days from the later of receipt of SRN and effective date of the first transaction in the scheme

AAG5

  • Responsible Person: Anyone
  • Reason: Continuation sheet where information does not fit on another form
  • Deadline for Receipt by HMRC or Other Party: As related form

AAG6

  • Responsible Person: Promoter and user
  • Reason: Informing other users of SRN
  • Deadline for Receipt by HMRC or Other Party: 30 days from the later of receiving SRN and becoming aware of the first transaction in the scheme

 —

Content of Disclosure

(HMRC Compliance>Tax Avoidance Schemes)

➤ Use HMRC-prescribed forms, including additional documents if needed, to provide clear and sufficient information about tax schemes for valid disclosure.

Forms and Information Required

  • The prescribed forms dictate the necessary information to be provided.
  • Using the appropriate forms, including continuation sheet AAG5 when necessary, is mandatory.
  • Notifications given through other means will not be considered sufficient.
  • Forms are available in Appendix B.
  • PDF versions for manual completion and posting can be downloaded, or forms can be completed and submitted online via HMRC Forms.

Specific Forms

  • Most forms are the same as those used for disclosure of other direct tax schemes.
  • An SDLT-specific version of form AAG4 is available.
  • The entries required on the forms are mostly self-explanatory.
  • Assistance on completing the forms is available in the HMRC guide.

Common Difficulties

  • The sections in forms AAG1 to AAG3 relating to the description and explanation of the scheme often cause difficulty.
  • According to HMRC guidance, sufficient information must be provided so that an Officer of the Board of HMRC can understand how the expected tax advantage is intended to arise.
  • The explanation should:
    • Be in straightforward terms
    • Identify the steps involved
    • Refer to relevant UK tax law
    • Common technical or legal terms and concepts do not need in-depth explanations.
    • For complex schemes, providing copies of any prospectus or scheme diagrams is helpful.

Additional Documents

  • Even if additional documents are provided, forms AAG1, AAG2, or AAG3 must still be used.
  • It is acceptable for these additional documents to exclude information that would identify a client.

Reference to Legislation

  • Each form has a separate section for identifying relevant statutory provisions.
  • It is advisable to refer to appropriate sections of legislation within the description and explanation provided on the forms.

 —

Requirement to Notify HMRC of Users

(HMRC Compliance>Tax Avoidance Schemes)

➤ Promoters of certain tax schemes must notify HMRC about their clients, including names, addresses, and scheme details, within 30 days after each calendar quarter ends.

Legal Obligation

Under FA 2004, s 313ZA, as inserted by FA 2010, Sch 17, promoters providing services to clients regarding certain arrangements must notify HMRC about these clients. This includes providing specific details within a set timeframe.

Information to be Provided

Promoters must submit the following information to HMRC:

  • Name and address of each client involved in a notifiable scheme.
  • The Scheme Reference Number (SRN) of the scheme.
  • The promoter’s own name and address.
  • The end date of the calendar quarter in which the services were provided.

Timeline for Submission

  • Information must be submitted within 30 days of the end of the relevant calendar quarter.

Example of Disclosure: Partner Retirement Plan

Explanation

Purpose: The primary goal of this arrangement is to facilitate the exit of a partner from a property-investment partnership and the entry of a new partner, all while reducing the Stamp Duty Land Tax (SDLT) costs associated with these transactions.

Statutory References: This scheme is governed by the Finance Act 2003.

Details of the Scheme

The scheme involves a complex restructuring of a property-investment partnership, aiming to manage the retirement of a partner and the admission of a new partner while efficiently handling the distribution of assets. Here are the detailed components of the scheme:

Partnership Structure

ABC Partnership

  • Nature: ABC is a property-investment partnership based in an overseas territory, engaging primarily in property investments.
  • Partners: The partners are A, B, and C, who are unconnected individuals. They share the profits and capital of the partnership equally, each holding a 33% share.
  • Assets: The partnership’s assets include primarily chargeable interests, such as UK properties subject to SDLT (Stamp Duty Land Tax), as well as substantial overseas properties that may not be subject to the same tax regulations.

Retirement and Admission

Retirement

  • Partner A’s Retirement: Partner A intends to retire from the partnership, and will withdraw his 33% share of the partnership’s assets.
  • Asset Allocation: A’s share will include his entitlement to one-third of one specific chargeable UK asset and a portion of the overseas assets.

New Partner Admission

  • Individual D’s Admission: Individual D, who has no prior connection to A, B, or C, will join the partnership.
  • Contribution: D will contribute cash equivalent to a 33% share of the partnership’s value, effectively buying into the partnership.

Amendment to Partnership Deed

Economic Value Assignment

  • Deed Amendment: The partnership deed will be amended to specify how the economic value of the partnership’s assets will be allocated among the individual partners.
  • Allocation for Partner A: A’s allocation will focus on a combination of overseas assets and one-third of a specific chargeable UK asset.
  • Remaining Allocation: Partners B and C will receive the remaining chargeable assets (which may include UK properties) and some non-chargeable assets, ensuring they maintain their 33% shares.
  • Unchanged Shares: Despite these amendments to the economic value assignments, the overall share percentages in the partnership (33% each) will remain unchanged.
  • Legal Validation: Legal advice confirms that these amendments are valid according to the law of the overseas territory where the partnership is established.

Financial Transactions

Payment to Partner A

  • Payment Method: The partnership will use its available cash reserves and possibly secure bank loans to pay Partner A for his share of the assets.
  • Retirement Payout: This payout will represent A’s 33% share in the partnership, covering both chargeable and non-chargeable assets.

Contribution by Partner D

  • Cash Contribution: Partner D will inject cash into the partnership, equivalent to the value of A’s relinquished 33% share.
  • Acquisition of Interests: In return, D will acquire A’s interest in the partnership, which includes the specific assets assigned to A in the amended deed.

Analysis of the Scheme

Asset Division

  • Subdividing Partnership Interests: The subdivision of partnership interests to assign specific assets does not change the overall partnership share. According to Schedule 15, paragraph 34(2), this subdivision does not have SDLT consequences.

Transfer of Interests

  • Category A Transfer: The withdrawal of Partner A and the admission of Partner D are treated as a Category A Transfer of partnership interest.
    • Relevant Property: Only the UK property in which Partner A has an interest is considered relevant partnership property for SDLT purposes.
    • SDLT Calculation: SDLT is calculated based on 33% of the market value of the relevant UK property, as outlined in Schedule 15, paragraphs 14(6) and 14(7).

Statutory Provisions

The scheme in question relies on several specific provisions within the Finance Act 2003, Schedule 15, which outline how Stamp Duty Land Tax (SDLT) applies to various transactions involving partnerships. Understanding these provisions is essential for compliance and strategic planning.

Paragraph 14(3B)

  • SDLT on Partnership Interests: This provision addresses the circumstances under which SDLT applies to the transfer of partnership interests. When a partnership interest is transferred, SDLT may be levied based on the value of the underlying property held by the partnership. This ensures that property transactions within partnerships do not escape SDLT merely due to their structure.

Paragraph 14(5)(c)

  • Cash Contributions by New Partners: This specifies the treatment of cash contributions made by new partners joining the partnership. When new partners contribute cash, this provision clarifies how such contributions are factored into the SDLT calculations. It helps in determining the taxable amount and ensuring that contributions are appropriately taxed.

Paragraph 14(6)

  • Calculation Based on Market Value: This paragraph details how SDLT should be calculated based on the market value of the relevant property. It ensures that the tax is levied on the actual market value rather than any nominal or artificial value that might be declared. This provision helps prevent undervaluation of property for tax purposes.

Paragraph 14(7)

  • SDLT Calculation Methodology: Further elaborating on the SDLT calculation methodology, this provision provides additional details on how to compute the tax owed. It might include specific formulas, considerations for apportioning value among partners, and other technical aspects to ensure accurate tax assessment.

Paragraph 34(2)

  • Subdivision of Partnership Interests: This explains the conditions under which the subdivision of partnership interests does not alter the partnership share for SDLT purposes. If a partnership interest is subdivided, it clarifies that this action alone does not change the overall partnership structure in a way that would affect SDLT liability. This provision helps maintain consistency and fairness in how SDLT is applied to partnership interests.

Understanding the intricacies of scheme transactions, such as the Partner Retirement Plan, is crucial for compliance with SDLT regulations. The key considerations involve:

  • Purpose and Intent: Identifying whether the transaction is designed to reduce SDLT.
  • Structure and Amendments: Ensuring that any amendments to the partnership deed and the allocation of assets comply with legal standards and do not inadvertently trigger additional SDLT liabilities.
  • Legal and Financial Validity: Obtaining legal advice to confirm the validity of the transaction under applicable laws, particularly when dealing with overseas jurisdictions.

By meticulously analysing these factors, individuals and entities can navigate the complexities of SDLT legislation, ensuring compliance while potentially minimising tax liabilities.

 –

Information Powers

(HMRC Compliance>Tax Avoidance Schemes)

➤ If HMRC suspects non-disclosure of a tax scheme, they can require formal statements, set tight deadlines, impose penalties for non-compliance or delays, and may demand further information through the Tax Tribunal.

If HMRC suspects that a scheme has not been disclosed, they have the authority to take certain actions against individuals or entities they suspect of being promoters. These actions include:

  • Requiring Formal Statements: HMRC can compel anyone they suspect of being a promoter to formally state whether they believe a scheme is disclosable. If they do not consider it disclosable, they must explain why not.
  • Time Constraints: The notice from HMRC will specify a deadline by which a reply must be given. This deadline can be as short as ten days.
  • Penalties for Non-Compliance: Penalties may be imposed if the individual or entity fails to comply with the requirement to provide a formal statement.
  • Further Information Requirements: HMRC has powers to demand additional information. However, these generally require an order from the Tax Tribunal, which is beyond the scope of this discussion.

Penalties

The Tax Tribunal has the authority to impose penalties for various failures related to disclosure requirements:

  • Failure to Disclose: Penalties can be imposed for failing to disclose a notifiable proposal or arrangement.
  • Late Disclosure: Penalties may also apply for late disclosure of required information.
  • Non-Compliance with Orders: If an individual or entity fails to comply with orders requiring disclosure or the provision of information, penalties can be imposed.

The specifics of these penalties include:

  • Monetary Penalties: The penalty can be up to £5,000.
  • Daily Penalties: There may be additional penalties of up to £600 (or, in some cases, £5,000) for each day the failure continues.
  • Exceptional Cases: In exceptional cases, the Tax Tribunal can impose penalties of up to £1 million if daily penalties are not deemed sufficient to induce compliance.

Specialist Advice

Anyone at risk of incurring such penalties would likely need specialist advice. This advice is crucial for navigating the complexities of compliance and penalty avoidance, as this discussion is beyond the scope of basic guidance.

 

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This Article Written By Nick Garner
Founder Stamp Duty Advice Bureau
Author of Stamp Duty Land Tax Guide
For Property Investors.