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School fees dividend diversion scheme doesn’t work

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HMRC has condemned the school fees tax avoidance scheme, warning promoters that they must disclose a scheme within five days of it being available.

6th Jun 2023
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Last month I interviewed Dan Neidle about the school fees tax avoidance scheme promoted by Signature Tax. 

This month HMRC issued Spotlight 62: Dividend diversion scheme used to fund education fees, and the six-point structure of the scheme described by HMRC is pretty much exactly as I discussed with Neidle. 

HMRC warns promoters in Spotlight 62 about their obligations under the disclosure of tax avoidance schemes (DOTAS) rules. 

This legislation requires a scheme to be disclosed where the following apply:

  • it has one or more defined “hallmarks” 
  • it is expected to provide a tax advantage
  • that advantage is one of the main benefits for the users of the scheme.

The key point of the school fees scheme is to take advantage of the children’s lower tax rate and personal allowances to set against income that would otherwise be taxed in their parents’ hands, so there is a tax advantage, and that advantage is why the scheme is used.

Hallmark 9: financial products is the one relevant to the school fees scheme. The B shares issued by the parents’ company, which are put into trust for the children, are the financial product. 

What should promoters do?

Where a firm has promoted this scheme they need to disclose that fact to HMRC using form AAG1. It is irrelevant whether the firm has successfully sold the scheme to a client, where it has been promoted it must be disclosed to HMRC. 

This disclosure should be made within five days of the scheme being made available or implemented. There are limited exceptions to this requirement, such as where there is no external promoter, or the promoter is not in the UK.

If a client has taken up the scheme, the promoter needs to provide that client with a DOTAS scheme reference number (SRN) on form AAG6. HMRC issue the SRN to the promoter when the form AAG1 has been filed. Form AAG6 makes it quite clear to the taxpayer that a tax avoidance scheme has been used and HMRC has not approved the scheme. 

The taxpayer who has used the scheme must declare the SRN on their tax return for the periods for which the tax advantage is gained from using the scheme. 

Penalties for promoters

Where the promoter fails to disclose the scheme to HMRC within five days, they can be hit with an initial penalty of up to £600 per day, for every day of delay. If HMRC feels that the daily penalty is not enough to discourage the promoter from selling the scheme it can levy a penalty of up to £1m. 

Where an abusive tax avoidance scheme has been shown to fail, HMRC has another penalty up its sleeve for enablers of defeated tax avoidance schemes. This penalty is equal to the total fees the promoter has earned from selling the tax avoidance scheme.

Don’t go there 

After the initial coverage of the Signature Tax school fees scheme, Tax Policy Associates has received reports of several other firms promoting similar schemes. Neidle has reported those firms who are actively promoting such schemes to their regulators, and to HMRC.

Replies (8)

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By Justin Bryant
06th Jun 2023 13:40

No mention of tenuous links to SNP this time I see for some reason.

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By ricktay
07th Jun 2023 09:55

Quite see why this won't work for minors, though might it still work for University / college Fees where the beneficiaries of the trust are not minor children of the settlors and are over 18 (& quite possibly having some taxable income from part-time jobs or side-hustles)?

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Replying to ricktay:
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By Robberto
12th Jun 2023 09:45

Not sure whether a Trust scheme would really be needed for 18+ yr children? Just award them dividends (e.g. via an ABC scheme) and get them to fund their Uni education. They're adults and old enough at that age to make their own decisions. Or, am I missing something on how HMRC would view this situation?

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By Beef curtains
07th Jun 2023 09:56

The po faces strike back!!

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Replying to Beef curtains:
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By Justin Bryant
07th Jun 2023 12:53

Agreed. There's far too much hypocritical, self-righteous indignation from DN here (when let's po-face it, there are much more serious tax problems to address, not to mention excessive/wasteful HMG spending problems and general inefficiency that should be fixed). It's almost as bad as RM.

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By Chris.Smith
07th Jun 2023 11:26

Seen this 'planning' in tax magazines for years.
HMRC have not mentioned why they think this doesn't work...

EDIT yes they did.
"HMRC’s view is that this scheme does not work as the arrangements are caught by specific anti-avoidance legislation contained in Income Tax (Trading and Other Income) Act 2005, from S619 onwards that prevents this type of arrangement providing the tax advantage that is sought."

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By tedbuck
08th Jun 2023 10:25

It's an interesting thought that the beneficiaries of such a scheme are those who are saving HMG a small fortune by paying for their children's education rather than using the state system So how does HMG reward this? Instead of being grateful they are trying to attack the system, as would Labour. Last time Labour tried to screw the private system they looked at the cost and forgot about it. Speaks volumes.
Why do they hate private schools - because they show up the inadequacies of the state system.

The same, of course, applies to private health assurance and the grotesque inadequacies of the NHS which all politicians are too scared to address.

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