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HMRC have published a short guide for payroll professionals covering the new Tax Avoidance Disclosure (TAD) regime, which takes effect from 1 May 2007.

The new rules are designed to give HMRC early warning of new avoidance schemes and inform anti-avoidance legislation and compliance work. HMRC describe TAD as being designed to "capture new and innovative schemes".

Prior to 1 May 2007, a person who had to disclose a scheme for both tax and NICs could make a single disclosure. The only change after 1 May 2007 is that they must now explicitly explain how the scheme works for NICs. The main impact of the extension will therefore, be upon schemes that are notifiable for NICs only.

TAD applies only to schemes which fall within certain criteria. Firstly, there must actually be a scheme and that scheme must be expected to provide an advantage for NIC purposes – this might be a reduction or deferral of payment of an NI liability. That advantage must be one of the main benefits of using the scheme.

Secondly, a scheme that passes through the above tests is notifiable only if it falls within one of several descriptions (“hallmarks”). The hallmarks most likely to trigger a NICs disclosure are:

• Confidentiality from other promoters. This applies to promoters only. The test focuses on any element within the scheme that delivers the expected NICs advantage. It is a hypothetical test – would any promoter want to keep that element confidential from other promoters in order to facilitate continued or repeated use of that element.
• Confidentiality from HMRC. Again focuses on any element within the scheme that delivers the expected NICs advantage. The test is would the promoter want to keep the element confidential from HMRC in order to facilitate continued or repeated use of that element.
• Premium fee. This is another hypothetical test which focuses on whether it is likely that any promoter would expect to receive a premium fee for the element (or similar) that delivers the NICs advantage.
• Standardised NICs Products. This hallmark is aimed at so-called “plug and play” schemes that use standardised documentation and transactions and whose main purpose is to obtain a NICs advantage. There are exceptions for schemes that consist of certain statutory reliefs and for schemes made available (by any promoter) before 1 August 2006.

The obligation to disclose an NIC scheme normally falls upon the promoter, that is to say someone who either makes the scheme available for implementation or is to any extent involved in the design of the scheme. In practice promoters are often accountants, lawyers or banks, but may include payroll consultants and service providers.

A promoter disclosure does not identify clients. HMRC issues a Scheme Reference Number (SRN) which a promoter must pass on to clients. Clients who use a scheme for which they have a SRN must notify HMRC. For NICs schemes, the client will normally be the employer, who, if they use the scheme, must notify HMRC on form AAG4 by the filing date of the PAYE return affected.

A tough penalty regime exists along side TAD. Failure to disclose a scheme may lead to an initial penalty of up to £5,000, and an additional £600 a day for each day that the failure continues. Failure to notify a SRN may incur an initial penalty of £100, rising to a maximum of £1,000 for subsequent failures.

HMRC have had numerous enquiries from payroll professionals seeking advise on whether they have to disclose schemes involving salary sacrifice arrangements, childcare voucher schemes, holiday pay schemes etc. HMRC confirm that nothing specifically excludes salary sacrifice arrangements, or schemes that use salary sacrifice to provide other tangible benefits, from disclosure. However, in practice, HMRC expect very few such schemes to be notifiable because they will fall out at some stage of the tests described above.

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Disclosure of NICs schemes