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HMRC Technical Consultation on the Transposition of the Fifth Money Laundering Directive

and Trust Registration Service

Response by the Chartered Institute of Taxation

1 Introduction

1.1 The Chartered Institute of Taxation (‘CIOT’) comments on aspects of the HMRC Technical Consultation on the Fifth Money Laundering Directive (‘5MLD’)1 and Trust Registration Service (TRS) published on 24 January 2020 (‘the Consultation’)2. We appreciate the willingness of HMRC to hold discussions on the Consultation.

1.2 We note that ‘The overall objective of the transposition of 5MLD into UK law is to ensure that the UK’s anti-money laundering and counter terrorist financing regime is up to date, effective and proportionate'3. The CIOT fully supports those principles. And in framing legislation to define the scope of what trusts are required by UK law to be entered on the trust register, the UK must adhere to those same principles.

1.3 As an educational charity, our primary purpose is to promote education in taxation. We are also a supervisor of certain tax advising firms under anti-money laundering (AML) legislation.

1.4 Our stated objectives for the tax system which are also pertinent to this consultation:

• A legislative process which translates policy intentions into statute accurately and effectively, without unintended consequences.

• Greater simplicity and clarity, so people can understand how much tax they should be paying and why.

• Greater certainty, so businesses and individuals can plan ahead with confidence. • A fair balance between the powers of tax collectors and the rights of taxpayers (both represented and

unrepresented). • Responsive and competent tax administration, with a minimum of bureaucracy.

1 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN 2 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/860269/Technical_consultation_document_Fifth_Money_Laundering_Directive_and_Trust_Registration_Service.pdf 3 Ibid, page 5

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1.5 It is clear that the draft regulations fail many if not all these objectives.

1.6 References to the anti-money-laundering regime or measures in our response should be taken to mean the UK’s anti-money laundering and counter terrorist financing regime.

2 Executive summary

2.1 In transposing 5MLD into UK law, the principles of proportionality and effectiveness mean that the Directive must be interpreted purposively, that is primarily as an instrument to ensure that trusts and similar arrangements which are recognisably ‘entities’, akin to corporates in that they have stakeholders with a potential to be hidden from view, are subject to comparable levels of disclosure. Its detailed terms should not be imposed on arrangements which might take the form of trusts in common law jurisdictions, but where there is no ‘entity’ as an ordinary person would understand it, as is evidenced by the fact that most EU Member States would deal with the same issues by contractual or statutory arrangements or by using vehicles which are not listed as entities to which the Directive will apply (as developed further below). The Directive recognises the ‘level playing field’ principle because ignoring it implies disproportionality, and reduces effectiveness by allowing trustees and others to ‘shop around’ to jurisdictions with less rigorous interpretations. The scope of arrangements brought within the terms of the Directive should not be wider in the UK than in the EU. Clearly, as well as AML effectiveness and proportionality, the UK’s commercial interest points to this conclusion.

2.2 We remain very concerned that the government appears to have abandoned its earlier commitment to an understanding that the concept of a ‘business relationship’ can only apply once a trust has been identified as being administered in the UK. The alternative interpretation currently proposed by government runs counter to effective anti-money laundering measures by encouraging overseas trusts to seek professional services from other less or non-compliant jurisdictions. This will also lead to a commercial loss of professional business for the UK. We note that the concept of the place where a trust is administered being different from the place where the trustee is resident is well recognised.

2.3 We make the specific suggestions or recommendations which follow on the basis of proportionality – that the areas identified do not pose a heightened risk of money-laundering. Without these exclusions, many more trustees (often lay, and likely to be unaware of their new obligations) will be obliged to collect details from beneficiaries for the revised TRS. We believe that there is a high risk of inadvertent non-compliance, which will be compromising for individual trustees and will bring the TRS (and therefore HMRC) into disrepute. In addition some beneficiaries may have justified (or genuine) concerns over privacy.

2.4 We recommend that crystal clear Guidance is required to ensure that only an express trust (in the Financial Action Task Force (FATF) sense) holding land is required to register and that co-ownership of land is not.

2.5 We note that bare trusts and nomineeships would commonly be structured on a contractual basis in other EU jurisdictions. This reflects the fact that these are not in an obvious sense ‘entities’ or comparable with corporates in having potentially unknown stakeholders or beneficiaries standing behind them. An important component of implementation is to ensure a level playing field with other member states where such arrangements are typically contractual. In the EU context we note that no member state notified nominee or bare trust arrangements to the Commission in the list published in the Official Journal of 24 October 2019 at

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2019/C 360/054. In most cases it would be disproportionate to the ML risk for the UK to require them to be registered and will lead to multiple entries on the register potentially obscuring the real target. We suggest a mechanism for screening out low risk bare trusts.

2.6 We recommend that ‘Quistclose’ type bare trust arrangements designed to safeguard the deposits and payments of millions of ordinary consumers are removed from scope.

2.7 We suggest that common types of low risk IHT-defined trusts be taken out of scope, including an Immediate Post-Death Interest in a dwelling where no income or gains arise.

2.8 We also suggest improvements to the categorisation of low-risk insurance policies to be taken out of scope, and an alternative approach based on the definition of a non-qualifying life policy (typically an investment bond).

2.9 We point out where the laudable proposals to exclude charities from registration could be improved.

2.10 We suggest there is merit in taking out of scope, on the basis of their low money laundering risk, trusts where the value of the property is de minimis.

2.11 We maintain that a trust should not be regarded as ‘set up’ until the time when substantive assets are held by trustees. A 30 day time limit from that date may be impractical; we suggest 6 months as a reasonable alternative.

3 Business Relationship [Consultation 3.6 and 3.7]

3.1 The concept enunciated by government in para 9.19 of the original April 2019 Consultation on Transposition5 seems to have been lost ie:

‘9.19 The government’s view is that this means a non-EU resident express trust receiving services such as banking, accountancy or legal advice on an ongoing basis from an obliged entity based in the UK will be required to register on the TRS. In this context only, the government envisages this will apply to non-EU resident express trusts that are deemed to be administered in the UK by virtue of having one UK trustee, [emphasis added] even if there is a non-UK settlor and there is no other connection with the UK. The government proposes to define ‘an element of duration’ to encompass working interactions of 12 months or more.’

3.2 The latest draft regulation at 45ZA(1)(b) on type B trusts makes no reference to administration nor residence of any trustee but simply requires registration if any trust wherever administered ‘enters into a business relationship in the UK with a relevant person or acquires an interest in land in the UK’. This omission of reference to administration as a relevant prior connecting factor does not seem to us to be in accordance with the legal requirements of Article 31.1.

4 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:C:2019:360:FULL&from=EN at page 28 5 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/795670/20190415_Consultation_on_the_Transposition_of_5MLD__web.pdf

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We continue to believe (as stated in our June 2019 Response, section 116) that the correct interpretation of Article 31 in line with the purpose of the Directive is that the registration requirements under Article 31.3a apply only to trusts within the scope of Article 31.1, ie those trusts which are administered in the Member State. If the trust is not ‘administered’ in the Member State, we maintain that it cannot be required to be registered, even though it may receive the services of a UK obliged entity.

3.3 If that nexus is ignored, the consequence is that an overseas trust whose beneficiaries have no connection with the UK will be required to register details of the beneficiaries, trustees and protector whenever the trustees use UK professionals or investment advisers on a regular basis. We anticipate trustees of such trusts will not wish to register particularly as the information registered will be disclosable on demand if (as normal) the trust owns underlying companies.

3.4 We accept that others have taken a different view of the construction of Article 31 and that its meaning is far from clear. However at a minimum our construction is a tenable construction and so, for the reasons outlined above, should be adopted.

3.5 Our main concern is that trustees are likely to obtain the services or advice elsewhere, either outside the EU, or inside it in a State which has adopted a tighter interpretation of Article 31. Our concern is that the defences against money laundering in that third state may be less effective than would have been the case in the UK, where an overseas trust client of a UK adviser will in any event have to be identified, along with beneficial owners, by the adviser who will also be in scope of requirements to make Suspicious Activity Reports.

3.6 Even if offshore trustees continue to use UK service providers, we would see no difference in AML outcomes as between the various constructions of Article 31 since in terms of AML processes UK professionals and investment advisers in any event carry out KYC (Know Your Customer) procedures when taking on overseas trusts as clients. Additional compliance required by inclusion of beneficial ownership details on the trust register is clearly disproportionate as offshore corporate entities are not considered to have nexus in a state merely by receiving services provided from that state. In addition it represents a competitive disadvantage rather than the required ‘level playing field’.

3.7 In addition, by ignoring a legitimate interpretation of the Article, when business goes elsewhere to third countries with potentially less effective AML regimes there will be a consequent loss of business to the UK economy. We doubt that this is the message that the UK intends to give to internationally mobile trustees.

3.8 We would further add that it is not necessary to have a UK resident trustee for a trust to be administered here. It is not therefore a justifiable concern that to circumvent the rules for being treated as administered in the UK an overseas trust could simply avoid appointing a UK trustee. The concept of the place where a trust is administered is different from the place where the trustee is resident. Many trusts are administered in Switzerland on that basis, and in the UK the CGT legislation at one time drew a distinction between the place of general administration and the place where the trustees were resident (TCGA 1992 s 69(1) as originally enacted). Therefore it is perfectly possible to go back to the original wording and refer to administration of trust in the EU and a business relationship as the prior connecting conditions before registration is necessary for an overseas trust.

3.9 Another concern over ‘business relationship’ lies in defining its duration when ‘there is an ongoing and repetitive nature to the relationship, which at the outset is expected to last more than 12 months’

6 https://www.tax.org.uk/sites/default/files/190610%20Transposition%20of%20the%20Fifth%20Money%20Laundering%20Directive%20-%20CIOT%20comments.pdf

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[Consultation 3.7]. The difficulty arises where an adviser may not reasonably expect an engagement to last 12 months but in the event it extends beyond 12 months.

In our view, it should not include regular tax reporting services which, while they might be renewed annually, are generally one-off relationships for that year’s tax compliance. Indeed, if merely preparing a tax return were to be seen as constituting a business relationship, this will assuredly be counter-productive as trustees will be driven away from UK providers (whom we believe to be generally compliant) towards offshore providers who may not have the requisite skills and knowledge to meet the compliance requirements, or even towards no compliance at all.

4 Question 1 – Are there other express trusts that should be out of scope? Please provide examples and evidence of why they meet the criteria of being low risk for money laundering and terrorist financing purposes or supervised elsewhere.

4.1 The Consultation [at 3.3] helpfully refers to the FATF7 definition of an ‘express trust’ which is: ‘Express trust refers to a trust clearly created by the settlor, usually in the form of a document eg a written deed of trust. They are to be contrasted with trusts which come into being through the operation of the law and which do not result from the clear intent or decision of a settlor to create a trust or similar legal arrangements (eg constructive trust).’ The Consultation does not assist clarity by substituting, within the final brackets, the words ‘for example, an implied trust’, and then stating ‘Therefore, implied trusts do not meet this definition and so they are outside of the scope of the register.’ We take it that both constructive and implied trusts are to be out of scope; if so, that should be clearly stated in the Guidance.

4.2 Consultation 3.10 refers to statutory trusts being out of scope, such as arrangements to hold tenants’ service charge contributions. Similar in concept are Client Accounts operated by, for example, Solicitors and Accountants. Financial Advisors, Auctioneers, and Estate Agents may similarly hold monies or deposits on behalf of their clients. These sorts of arrangement highlight the problems that would result from bringing bare trusts within scope. These funds effectively belong to specific clients and are held in a Client Account to segregate the funds from the service provider’s business risks. The Client Account is not a type of ‘entity’ reflecting (while concealing) the interests of unknown stakeholders or beneficiaries. It is also common to have funeral plans and ABTA travel arrangements as well as other commercial payments held in some form of bare trust. Requiring such trusts to register would affect many millions of consumers. If all accounts of this nature are not expressly taken out of scope by Regulation (which is always, for reasons of certainty, our preference) then they should be referred to in Guidance: see also 5.2 below.

4.3 Consultation 3.11 refers to ‘a joint ownership trust [that] exists solely for the purposes of jointly owning a home with a partner, relation or friend. …. Any other trust set up to hold property will need to be registered.’ It appears that regulation 45ZA(2)(a), which excludes from registration trusts imposed or required by an Act or subordinate legislation, is intended to cover this.

However there is a discrepancy between the narrow categorisation at [3.11] – only a ‘home’ and ‘partner, relation or friend’ is out of scope - and the broad wording of the regulation. In our view it is clear that under a purposive reading of 5MLD joint ownership per se is not in scope. Accordingly, we seek HMRC’s assurance that the intention of regulation 45ZA(2)(a) is that all forms of joint ownership of land arising from the statutory mechanisms of the Trusts of Land and Appointment of Trustees Act 1996 (regardless of the nature of the land,

7 http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf at p.118

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the legal personality of the beneficial owners or whether the co-ownership is as joint-tenants or tenants-in-common) are out of scope of registration. A trust holding land would therefore require registration only when it is an express trust (in the FATF sense). As co-ownership of land is very common, it is essential that the Guidance is crystal clear on these issues. Particular problems may arise where, for example, a jointly owned house is initially occupied and then let.

We believe that where a number of people buy property (as either tenants in common or joint tenants) and subsequently there is an express declaration of trust to alter the beneficial ownership shares of the original co-owners, such arrangement remains out of scope. This analysis stems from the Trusts of Land and Appointment of Trustees Act 1996 (TLATA 1996) which imposes the trust for sale; the proportions in which ownership is held do not affect the ‘non-entity-like’ nature of that trust, so changing them at a later date as between the original co-owners (with no discretionary element) remains within the exclusion. We seek HMRC’s agreement to this analysis, and ask that this example (which is common in inter-spouse situations and where young adults club together to be able to afford a property together) be cited in the Guidance.

4.4 In relation to other assets (for example, a bank account) the Consultation [at 3.12] suggests that co-ownership without successive interests would be out of scope. But this would leave within scope of registration, arrangements such as an elderly parent setting up an account where the name of a son or daughter is added, purely to facilitate the management of the account, with the parent retaining full beneficial ownership of the account and there being no intention of conferring any beneficial entitlement to the son or daughter. Such arrangements could also be characterised as bare trusts – see below. Given the normal banking KYC requirements and that everything belongs to specific individuals, it would seem disproportionate to the risk to require an additional TRS registration in such circumstances. To require registration of what are relatively common ‘non-entity’ arrangements could obscure the true targets

4.5 We recognise that bare trusts [Consultation 3.13] are initially within scope by virtue of the FATF definition of an express trust but note that the transposition of 5MLD demands proportionality based on risk. The level of risk varies eg acting as bare trustee for an elderly relative (low risk) to a bare trust for an undisclosed individual in high risk jurisdiction (high risk).

An important component of transposition is to ensure a level playing field with other member states where such arrangements are typically contractual. In the EU context we note that no member state notified nominee or bare trust type arrangements to the Commission in the list published in the Official Journal of 24 October 2019 at 2019/C 360/058. Were UK bare trusts or nominee arrangements not to be taken out of scope, then those who use them are burdened with TRS compliance and the consequent threat to their privacy under the disclosure provisions, compared to users of similar arrangements in the EU.

In the wider context, we suggest that if the international community identify some nominee/bare trust arrangements as carrying a ML risk, those discussions should be pursued separately by the government through the relevant international fora. We do not believe that, on a purposive reading of 5MLD, the TRS should encompass nominee arrangements.

We note that although the purpose of the TRS is to record quite complex information about beneficiaries, in the case of a bare trust that information is quite straightforward (a legal and a beneficial owner). That the TRS is not intended to record that kind of simple information is a further indicator for excluding bare trusts from scope.

8 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:C:2019:360:FULL&from=EN

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If it is decided not to exclude bare trusts altogether, and also bearing in mind privacy concerns relating to many beneficiaries of bare trusts, we suggest that the markers for delineating those that fall out of scope should be:

First, comparability with similar EU contractual arrangements and absence of ‘entity-like’ characteristics; and

Second, having low ML risk. These could be listed (in Guidance – to allow for flexibility in adding new categories) to include bare trusts that are justifiably excluded on one or other ground eg:

• for minors or other vulnerable/elderly/incapacitated persons

• for a trust that is itself registered

• relating to debt instruments

• for assets on a regulated trading platform eg CREST

• where HMRC already knows about the bare trust (because the beneficiary reports the income, eg for a minor or elderly person).

To some extent the risk for higher risk bare trusts is already dealt with via the obliged entities’ checks.

4.6 Consultation [3.14] gives examples of some express trusts which are established in a specific form to meet the conditions of legislation, but are not imposed by legislation, for example to meet the qualifying conditions for beneficial tax treatment. Government recognises that ‘the inclusion of these trusts in TRS would therefore be disproportionate to the risk of them being used for ML or terrorist financing activity’. Such trusts could be identified by reference to the appropriate tax legislation.

In addition to the trusts listed in the Consultation for exclusion we would add, as worthy for consideration on the basis of proportionality / low-risk, the following:

• Trusts for the disabled or other vulnerable beneficiaries • IHT 18-25 trusts • IHT bereaved minors trusts (BMT) • Bare trust in a Will for a bereaved minor

We note that the statutory trust for a minor which arises on intestacy is out of scope [Consultation 3.9]. It would be anomalous that an express Will trust framed in identical terms for children at 18 were to be in scope. In policy terms making a will is the responsible course of action and should not be discouraged.

4.7 It is common practice for provision to be made by Will for the testator’s surviving spouse or partner. In many cases this is by means of a life interest over the family home. This is recognised as an Immediate Post-Death Interest (‘IPDI’) in the IHT code. There will be no income arising as the home is occupied by the survivor. In these circumstances there is, we suggest, minimal ML risk. Accordingly, it would be proportionate to exclude from scope interest in possession trusts for the benefit of the survivor where the only substantive property is a dwelling (or share of a dwelling) occupied by the survivor with perhaps a small cash balance (of no more than, say £5,000) for fees and expenses This exclusion would also have the merit of avoiding many existing trusts being inadvertently non-compliant with the TRS, which itself would result in unfavourable publicity for the UK.

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4.8 We welcome the recognition [Consultation 3.15] that trusts over many types of life and protection policy are low-risk. We think that the policy intention may not have been fully reflected in draft Regulation 45ZA(2)(d). For example, it does not seem to exclude a with-profits policy, or any policy that acquires any form of surrender value, that can be cashed in during lifetime; a critical illness policy (such cover is not normally simply for terminal illness); a trust where benefits are split - life insurance paying out on death, and critical illness cover.

Rather than (as currently drafted) take out of scope a somewhat eclectic (and probably incomplete) list of insurance products we suggest that the problem might be turned on its head. Instead, the regulation might be drafted so as to exclude a trust of all forms of insurance policy other than a non-qualifying life policy. In other words, the ‘all’ would take out policies such as term, critical illness, disablement and care fee payments but the main mischief, a trust (typically on a discretionary or a flexible life-interest basis) containing an investment bond, would remain within scope.

Thus trusts that are low risk where the requirement to register would be disproportionate would be removed from scope. Furthermore, if these types of policy were to remain in scope, there is the likelihood of mass, inadvertent non-compliance, bringing the TRS and the UK into disrepute. This applies particularly to trusts of policies made in the past, where often there is uncertainty as to the existence of a trust and its terms, with confusion often added by the many changes of life assurance companies over many years.

If it proves too difficult to define an exclusion by reference to the nature of the policy, an alternative could be to define by reference to a financial limit on the basis that where, ignoring fragmentation, there is a low capital (ie surrender) value the ML risk will invariably be lower. Furthermore, the arrangements for these type of policies are likely to be contractual in other EU states, or else dealt with differently in tax legislation.

4.9 We agree with Consultation 3.16 that pensions are already subject to effective regulation, are low-risk and should not be in scope to register. See also our comment at 5.4 below.

4.10 We welcome the recognition [Consultation 3.17] that charitable trusts are low-risk and should not be in scope to register.

We note the anomaly that under 4MLD registration of a charity is triggered by a liability to Stamp Duty Reserve Tax (SDRT); we suggest that the 4MLD regulations be amended to remove this and that 5MLD should follow the same pattern.

The policy intention [3.17] is to exclude all charitable trusts from the TRS. However, we are not convinced that the draft regulations achieve this.

The exclusion at Regulation 45ZA(2)(e), relates to a trust for charitable purposes which is either:

• Registered, exempt or excepted from the requirement to register as a charity in England and Wales.

• Registered as a charity in Scotland or Northern Ireland.

This wording appears to be too narrow to achieve the government’s stated aim:

• It omits charitable trusts pending registration with the Charity Commission. These are likely to be dormant until registered and so present little ML risk.

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• The wording in our first bullet point does not exclude small unregistered charitable trusts. These are charitable trusts in England and Wales (that are not exempt or excepted charities) that are not required to register with the Charity Commission (Commission) because they have a gross annual income of £5,000 or less in any financial year (section 30, Charities Act 2011). The Commission will only consider an application to voluntarily register such a charity in ‘exceptional circumstances’.

• While it is compulsory for all charities operating in Northern Ireland to apply to register with the Charity Commission for Northern Ireland (CCNI), CCNI is currently managing registration in stages and organisations can only apply to register when called forward by CCNI. As the draft regulations only exclude trusts registered as charities in Northern Ireland from TRS registration, on the face of it, Northern Irish charitable trusts that are waiting to register with CCNI will be required to register with the TRS in the interim.

4.11 We welcome the recognition [Consultation 3.18] that trusts should not be in scope to register in the UK when they are registered in an EU member state. There are practical difficulties in that some member states may not be advanced as the UK in implementing 5MLD. We wonder how trustees would demonstrate compliance when a trust should be registered in another state (but 5MLD is not yet implemented there)? What evidence should an obliged entity require to meet their obligations and demonstrate compliance to the AML supervisor? AML supervisors will need to be clear how this should operate. We recommend that these aspects be addressed in Guidance.

5 Question 2 – Do the proposed definitions and descriptions give enough clarity on those trusts not required to register? What additional areas would you expect to see covered in guidance?

5.1 Many of the issues raised by this question have been addressed in the previous section. Here, we will address three outstanding points.

5.2 A trust structure is often used in the UK to facilitate commercial transactions. The exclusions given by draft Regulations 45ZA(2)(f) and (g) are designed to cover two specific areas. We wonder whether the exclusions may be too narrowly drawn so that they are insufficient to cover other trusts that are used as part of securitisation arrangements or loan structuring.

We note that there is no provision for, by way of example, a ‘Quistclose’9 trust which arises where a lender makes a loan for a specific and exclusive purpose. The loan funds remain the property of the lender unless the borrower applies them for the specified purpose. If the borrower becomes insolvent, any remaining funds are held on a resulting trust for the lender and are not available to creditors.

Such trusts are used to regulate commercial arrangements between identified, usually corporate, parties, in particular as regards the relative priority of different entitlements to funds and cash flows. They do not hold funds on behalf of otherwise unknown beneficiaries or stakeholders. In civil law countries including most EU jurisdictions it is likely that contractual arrangements would be used instead, insofar as comparable arrangements could be achieved at all. There is also no reason to suppose heightened money laundering risk with such arrangements and normal CDD (customer due diligence) by obliged entities would seem the proportionate response.

9 http://www.bailii.org/uk/cases/UKHL/1968/4.html

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Quistclose type arrangements also operate in the commercial sector to safeguard the payments of millions of ordinary consumers. Travel arrangements, funeral plans, energy supplies, gambling obligations and provision of certain types of healthcare are typical. These often involve cash sums held under a type of bare trust provided by the customer to the service provider but kept in a ring fenced ‘trust’ account to satisfy certain obligations. They are wholly commercial arrangements. We doubt that the intention is for every such arrangement must be put on the trusts register? We suggest that HMRC liaise urgently with the Co-operative Societies, the Gambling Commission, ABTA and other bodies involved in such plans: see also 4.2 above.

5.3 We have touched on the question of nominees at 4.5 above in relation to Consultation [3.13]. It is regrettable that the Consultation tends incorrectly to conflate a nominee and a bare trustee; they are not the same. A nominee can only do what the principal requires, whereas a bare trustee does what the beneficiary says but must also act as a fiduciary in the interests of the beneficiary in administering the trust property. The term nominee is sometimes used to refer to an agent (clearly out of scope as purely contractual) and in other cases to mean a trustee (prima facie in scope as an express trust). A nominee such as a regulated wealth manager holding investments may be described in the documentation as a trustee: we would not expect such arrangements to be in scope.

5.4 We suggest that there is considerable merit in taking trusts out of scope on the basis of their low ML risk where the value of the property is de minimis (coupled with the safeguard of an anti-fragmentation provision). This would preserve the integrity of the register (ensuring its efficacy is not undermined by multiple entries). In addition it would remove the need for trustees to become burdened with the obligation to collect the relevant details where the ML risk is low. Both are consequences which should not be under-estimated. Furthermore, the privacy of trustees and beneficiaries is jeopardised by the risk of a disclosure request.

Many lay trustees (for example of a low-value insurance policy) are unlikely to be aware that there is in fact a trust, never mind their responsibilities as trustees. We anticipate that, particularly in respect of older trusts which do not generate income and have no other tax reporting obligations, there will be widespread inadvertent non-compliance. And when a ‘bureaucratic’ requirement to register does become apparent, coupled with legitimate privacy concerns, resentment against HMRC is likely. In all these cases the relevant ‘trust’ is not readily recognisable to an ordinary person as an ‘entity’ at all.

A de minimis exception would also be appropriate for existing and new pilot trusts, both of which are typically dormant until death. Commonly, this might be a spousal bypass trust, set up as a pilot trust to hold the death benefits under a pension scheme. The initial value is low (say no more than £100). The trust would become registerable on death in the normal way as a reportable tax paying trust. A de minimis limit would exclude such trusts from registration until the settlor’s death. Given that death is the point at which the trust is funded, the ML risk for use of such trusts appears to be low.

6 Question 3 – Do the proposed registration deadlines and penalty regime have any unintended consequences that would lead to unfair outcomes for specific groups?

6.1 There may be good personal reasons for a trust to be established quickly (for example, the prospect of imminent loss of capacity or death). But although the formalities to declare the trust may have been completed rapidly, to collate details of all the beneficiaries may take considerably longer than 30 days. We continue to suggest 6 months as a more appropriate period.

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6.2 The crucial issue is the date on which a trust is treated as being ‘set up’. For the trust created by a deceased’s Will or intestacy, it should not be the date of death, as the trust assets are not normally ascertained or become vested in the trustees on completion of the administration of the estate until a long time after that date. If it were a trust created by a deed of variation, the date of the deed would also present problems, and would be premature in most cases. And for a lifetime trust, although the deed may be executed, there will often be a considerable delay before substantive assets are transferred to the trustees, or a bank account opened.

6.3 For all cases therefore, we continue to suggest the trigger should be the date the trust is brought into operation, by funding of the trust through a transfer of substantive assets to the trustees. Funding for this purpose would not include the initial transfer of a small amount of cash (up to a maximum of, say, £100) to trustees on signature of the trust deed to ensure that the trust is properly constituted. Substantive funding is the logical and workable event in practice. That will then affect the time requirement, as mentioned above, but in any event 30 days is too short and 6 months would be more manageable in practice.

6.4 We note that ‘set up’ is not necessarily relevant for an offshore trust registrable as a result of the ‘business relationship’ or land test.

6.5 We welcome the ‘low key’ approach [Consultation 3.28] to inadvertent non-compliance; it is, in our view, entirely appropriate and consistent with the objectives of 5MLD.

6.6 We find the lack of clarity on the design of the deliberate non-compliance regime disconcerting. The current penalty regime announced by HMRC for failure to register under 4MLD is:

• Registration made up to three months from the due date – £100 penalty

• Registration made three to six months after the due date – £200 penalty

• Registration more than six months late – either 5% of the tax liability or £300 penalty, whichever is the greater sum

• Reasonable excuse may be claimed.

6.7 We maintain that a tax geared penalty can be disproportionate to a mere administrative failure. As the 5MLD registration relates purely to beneficial ownership details, a tax geared penalty is clearly inappropriate. In our June 2019 Response [Section 19] we largely agreed with the broad principles for a good penalty regime set out by HMRC in recent consultation documents10 such that it should be:

• Fair (and therefore proportionate)

• Effective in supporting good compliance

10 https://www.gov.uk/government/consultations/hmrc-penalties-a-discussion-document https://www.gov.uk/government/consultations/making-tax-digital-sanctions-for-late-submission-and-late-payment 1. The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues. 2. Penalties should be proportionate to the offence and may take into account past behaviour. 3. Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant. 4. Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner. 5. Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.

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• Simple to understand and operate

The difficulty lies with setting an appropriate benchmark in the context of deliberate 5MLD non-compliance. The value of the trust might superficially appear to be attractive – but since that is not required to be disclosed under 5MLD any linkage to estimated value would be arbitrary. So one seems to be left with fixed penalties. It may be that a daily penalty might encourage compliance after, say, 6 months. We do wonder how, in practice, HMRC will be able to enforce any penalty against an offshore trust without assets in the UK.

The need for adequate safeguards is fundamental to these principles, such as a transparent appeals process and a recognition of genuine error or oversight in terms of reasonable excuse or reasonable steps taken to comply that nullifies a penalty.

6.8 Given that a new regime will embrace a wider cohort of trustees, the importance of good communication in advance of implementation is essential. HMRC will need to explain how it works clearly in order that trustees understand what they need to do to minimise their exposure to penalties and the consequences of not meeting their registration obligations.

7 Question 4 – Do you consider that the revised definitions and application process for legitimate interest and third country entity requests set the right boundaries for access to the register? If not, please provide specific examples of where you would consider this not to be the case.

7.1 We consider that the approach set out is broadly appropriate. We seek reassurance from HMRC that requests by an individual seeking to find out whether he/she is a potential beneficiary of a particular trust will not be entertained. The legitimate interest must be tied to the prevention of money-laundering.

7.2 In our view it would be appropriate for the detail of the application process to be set out in Guidance, but the appeal process (against a rejected legitimate interest request) should appear in the Regulations.

8 Question 5 - Does the proposed handling of exemptions for legitimate interest and third country entity requests provide the right access to the beneficial ownership data whilst protecting beneficial owners from potential risk of harm?

8.1 The process, as set out in 5MLD and the draft Regulations, is focussed on the applicant. What appears lacking is how the Commissioners will, under draft 45ZB(6), acquire the knowledge to decide that information about a particular beneficial owner should be regarded as exempt (and therefore not be disclosed in cases such as a minor, or a person who is vulnerable by reason of lack of capacity or at risk of eg kidnapping or attack).

8.2 An approach may be to have a ‘voluntary disclosure box’ in the registration box, whereby such persons could indicate their wish to be treated as ‘at risk’, with brief reasoning. Such additional disclosure would be made outside of the mandatory 5MLD details and would therefore never be disclosed to enquirers or as part of the common exchange of information process with other EU states.

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9 Question 6 - Are there any instances where the above proposals would not give investigators access to the information they require to follow a specific lead in suspected money laundering or terrorist financing? Please be specific and provide examples.

9.1 We have not identified any such examples.

10 Obliged entities [Consultation 4.28]

10.1 The mandatory wording ‘must collect’ proof of registration or an excerpt of the register before an obliged entity may act will pose difficulties in practice. Does this mean an adviser cannot help a trust to register? The circularity of this leads to potential adverse consequences: it may hinder registration and due diligence and therefore be contrary to the overall objective of the Directive.

10.2 Type B trusts have to register first in order to enter into a business relationship with an obliged entity which again seems circular, the registration pre-dating the entering into of the business relationship. We foresee practical difficulties which need to be addressed in Guidance.

11 Potential duplication of registration under draft Registration of Overseas Entities Bill

11.1 We note that there is the potential duplication of registration under draft Registration of Overseas Entities Bill and the TRS.

11.2 We suggest that consideration be given to excluding those Type B trusts from the TRS that will be required to register under this measure.

12 Acknowledgement of submission

12.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published.

13 The Chartered Institute of Taxation

13.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other

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countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

The Chartered Institute of Taxation 21 February 2020