DOTAS. The frequently used anagram of HM Revenue and Customs. The use of the phrase however still remains one of the more complex and confusing to understand. If you were to ask someone what DOTAS meant, you would probably get the confident response "Disclosure of tax avoidance schemes" and then a long pause. It seems that although the term is widely known, the details in why and how it is put into practice would 9 times out of 10 fall in HMRC's favour.
Rather than taking a similar approach to HMRC with the bombardment of puzzling information where you finish reading and have more questions than the start, it seems the logical approach should be past, present, and future of DOTAS.
Casting minds back to 2004.. yes, that was the year of the Athens Olympics. A memorable year for all but it was also the birth of DOTAS. Incorporated in the (1)Finance Act 2004, the ideology behind the regulations were to implement a platform in which HMRC could monitor the different types of tax avoidance schemes which were currently in circulation. They only covered arrangements that were connected to employment or financial products which were deemed to enable a tax advantage for the individual in respect of income tax, corporation tax, or capital gains.
The emphasis for disclosure when DOTAS was introduced was on the scheme promoters. The promoter must explain to HMRC how the scheme is intended to work and must do so within 5 days of the schemes availability to prospective clients. It is at that moment HMRC have the ability to review the scheme and amend or block legislation should they deem the scheme to be too aggressive.
One of the biggest confusions when a client is enquiring about a scheme is that the promoters will quote "DOTAS compliant".This is a clever play on words which no doubt will have misconstrued many into believing HMRC have approved the scheme. Yet DOTAS compliant merely means the scheme promoters have notified HMRC about the scheme not that it is deemed to work. HMRC have 90 days to issue a scheme reference number.
Since 2004 and present day HMRC have made subtle changes to the legislation to created a holistic approach in the disclosure of tax avoidance schemes. FA 2010 made legislative changes to include a new category of person, defined as an 'introducer' for information power purposes(2). Previously a clever trick by scheme promoters to have a marketing intermediary who pre 2010 would not have not been required to disclose the scheme to HMRC.
The scheme user will be required to make the disclosure if the promoter is outside the UK, if the promoter is a lawyer where legal privilege applies, or when the scheme has no promoter due to it being designed in house. Blurred lines fall when a client is employed, and therefore would not personally file a tax return.
The way in which HMRC regulate a scheme is through Hallmarks. If a scheme does not satisfy the criteria set out in the hallmarks then there is no obligation for the promoter to disclose to HMRC. When DOTAS was first introduced in 2004 there were only two hallmarks which related to Financial Products yet now there are 7 which relate to income tax, corporation tax, and capital gains.
The 'Standardised Tax Product' hallmark is intended to catch what are usually referred to as marketed tax avoidance schemes. The main objective of this hallmark is to identify scemes were the client effectively purchases a prepared avoidance product that requires little modification to suit their personal circumstances. This will indicate the use of the avoidance scheme to gain a tax advantage.
The adaptation of the 'Standardise Tax Products' hallmark eliminated the need for 'grandfathering' where provisions which exempt arrangements from disclosure if they are substantially the same. Previously mass marketed schemes could fall under a single SRN if they had similar structures.
The 'Losses Hallmark' targets schemes designed to intentionally create tax losses for individuals to set against other personal income or gains. This hallmark is intended to catch schemes where it would be reasonable to expect that the tax relief for those using the scheme is greater than the amount the individual has, in economic substance, contributed.
The 'Financial Products Hallmark' main focus it to catch schemes using financial products where there is a direct link between the financial product and a tax advantage. These include shares, stocks loans, loans and alternative finance.
The 'Inheritance Tax (IHT)' hallmark was introduced in 2011. It was designed specifically to detect a specific type of IHT avoidance which involves the use of trusts.
The 'Confidentiality' hallmark applies when the promoter would wish the workings of the scheme to be kept confidential between the two prescribed dates.
The 'Premium Fee' hallmark relates to xxxxxx
Penalties for failure to comply with a DOTAS obligation(3) without reasonable excuse can be excessive. They fall into three categories; Disclosure penalties, Information penalties, and user penalties. In all cases apart from user penalties the initial penalty is determined by Tribunal.
User penalties apply when the scheme user has failed to report a Scheme Reference Number (SRN) to HMRC although if a person does have a reasonable excuse they can appeal the penalties. HMRC takes into consideration the level of knowledge and experience a person can be reasonably expected to have of DOTAS.
They also look at the adequacy of the systems the person has put in place to ensure compliance with DOTAS, the nature in which failure occurred such as carelessness or deliberation and also whether HMRC had been notified to the failure before being prompted. Although user penalties in comparison to promoter penalties are not high - currently set at Â£100 per scheme for a first occasion, Â£500 per scheme on the second occasion within 3 years, and Â£1,000 per scheme on the third and subsequent occasions, if the scheme adapts and changes over time requiring disclosure of a new SRN then the penalties can quickly accumulate.
For example John Smith is an IT Consultant who was working under his own Limited Company "JS Ltd". He was currently contracted at HSBC where he had been working for the past year. He was approached by a scheme promoter who would employ John and pay him through PAYE. All of Johns tax affairs and admin was done for by his employers. The scheme however developed and changed which required a new SRN for each tax year which was not disclosed. John did not know that this was something he had to check. The scheme changed SRN's 4 times throughout the duration of his employment and therefore now runs the risk of being fined Â£2,600(Â£100+Â£500+Â£1,000) for failure to disclose under DOTAS.
Under 312a 'the duty of clients to notify parties of number' the emphasis is on the employer to disclose the SRN. This section of legislation applies to a person who is a promoter in relation to notifiable arrangements. The legislation states that a promoter must provide the prescribed information relating to the reference number allocated by HMRC. However, the interesting part of this section is it continues to state, where the client is an employer the client must provide to each of the client's relevant employees prescribed information relating to the reference number. Due to the promoters of schemes also being deem the employer, HMRC should be able to find the SRN through the PAYE system. Failure to provide an SRN should in theory fall on the employer rather than the employee.
HMRC have the power to re-open a year after the SATR (self assessment tax return) file date or raise a discovery assessment if they deem there has been an incomplete disclosure which has lead to a loss of tax. Under DOTAS rules HMRC have a time limit up to 20 years if they deem a loss of tax due to deliberate action, failure to notify liability, or attributable to a notifiable tax avoidance scheme, a hallmarked scheme or a listed scheme.
There is however a life line for individuals who may have not personally disclosed their SRN. HMRC have a 'ignorance test'(5). The ignorance test applies when an individual could not have reasonably be expected to have known of the requirement to disclose. This may be due to not having sufficient information to enable them to know whether or not the arrangements are disclosable schemes or sufficient information so as to enable that person to comply. The test continues to state that where having the 'relevant information' depends not merely ups factual knowledge, but upon the application of some particular expertise, persons will not normally be expected to have such an expertise if it falls outside their own area of professional expertise. For many individuals who used schemes where the promoter has not provided sufficient information this could be the best approach.
The biggest problem when disclosing SRNs is that HMRC fail to stop the majority of schemes they deem to be ineffective. HMRC appear to abuse the power of Discovery such as in the case "Burgess & Anor v HMRC" the Upper Tribunal (UT) found that HMRC had failed to discharge its burden of proof in making assessments. HMRC had established that the taxpayer had undeclared income, but not addressed whether the conditions for making a discovery were met. HMRC continue to abuse their power of discovery when it appears to suit. If an individual has disclosed an SRN the entire duration of using the scheme it questions why HMRC rely on discovery when the information was readily available throughout. If an individual has not disclosed their SRN under DOTAS legislation HMRC should be pointing their fingers towards the employers, yet their misuse of discovery is yet again showing how HMRC are targeting the users of schemes who have been mislead, rather than the promoters. DOTAS was created to tackle attempts to avoid tax, yet HMRC appear to use it as a monitoring system to exploit individuals with limited knowledge over an extended period of time to maximise tax liability and penalties.
Should I talk about APNs and their financial implications?
(1)Finance Act 2004
(2)section 307 FA 2004 - introducer
(3) 98C Taxes Management Act 1970, as amended by FA 2010
(4) Burgess & Anor v HMRC 2015
(5) S1 2004/1865, reg 4
...(download the rest of the essay above)