Nichola Ross Martin's Tax Consultancy

Disclosure of tax avoidance schemes (DOTAS)

What's updated in this guide?
Aug 2011: new guidance from HMRC

At a glance

The DOTAS regime allows HMRC to keep up to date with what types of tax avoidance schemes are in circulation. This provides the opportunity to review and if necessary, amend legislation to block any scheme which the government considers aggressive and unfair.

• Under DOTAS a scheme promoter is required to disclose the main elements of the scheme to HMRC.
• Special rules apply where disclosure is not made by a promoter, in those cases a scheme user must make disclosure.
• HMRC will then issue the scheme with a DOTAS number.
• A scheme user will have to notify HMRC that it is using the scheme by inserting the number in its tax return.
• HMRC will monitor the scheme’s use and if necessary legislate to terminate it.
• Financial penalties are levied on those who fail to comply with the regime.

What's new?

• From April 2011 the DOTAS regime has been strengthened by many new measures. HMRC released new guidance to the regime in August 2011. These include earlier trigger points for disclosure and the requirement to provide client lists.
• A consultation on a new listing requirement, penalties and requesting scheme users to pay tax up front ended in August 2011: further changes are expected to be announced in the Autumn of 2011/Spring 2012.

What taxes fall into the DOTAS regime?

The regime covers the main taxes, these have been added in over a number of years, as follows:

• From 1 August 2006 it is necessary to consider whether an income tax, corporation tax, or capital gains tax scheme or product should be disclosed to HMRC under the DOTAS rules.
• From 1 August 2007 National Insurance schemes are disclosable.
• The rules are slightly different for SDLT schemes, disclosure is only required when the market value is £5 million (non-residential schemes) and £1 million (residential schemes).
• There are separate rules which apply to VAT, these have been operative since 1 August 2004.
• From April 2011 transfers of property into a trust will be disclosable under the regime. The usual hallmarks will not apply but "grandfathering provisions" will try to ensure that certain transfers will not require repeat notification.  

When does DOTAS apply?

The DOTAS rules are long and complex: we indicate here some of the highlights, however, HMRC's latest guidance should be consulted.

A tax arrangement must be disclosed to HMRC when:

• It will, or might be expected to, enable any person to obtain a tax advantage.
• That tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement, and,
• it is a tax arrangement that falls within any description ('hallmarks') prescribed in the relevant regulations

Disclosure is generally required to made by the scheme 'promoter'.

Who is a promoter?

A promoter is (in summary) someone who in the course of providing tax services, or is a bank or securities house:

• Is to any extent responsible for the design of a tax scheme
• Approaches others with a view to making a scheme available to them.
• Makes a scheme available for implementation to others.
• Organises or manages the implementation of a scheme.

A scheme designer is not treated as a promoter if does not make a scheme available for implementation and he passes three tests, broadly these are:

• The benign test: the advice he gives in relation to scheme is of a general compliance nature.
• The non-adviser test: the designer does not contribute any tax advice (this test does not apply to banks).
• The ignorance test: the designer does not have sufficient knowledge about the scheme to be able to appraise whether he has obligaitons under the DOTAS regime.

The scheme user (client) will need to make the disclosure where:

• The promoter is based outside the UK.
• The promoter is a lawyer and legal privilege applies.
• There is no promoter (where a scheme is designed in-house).

A scheme introducer such as an IFA or professional firm, may also be asked to supply details of the scheme promoter as part of a pre-disclosure enquiry by HMRC.

The hallmarks

The hallmarks (for direct tax and NICs schemes, the rules are different for SDLT and VAT) include the presence of any arrangements to ensure:

• Confidentiality: from a competitor and HMRC
• A premium fee
• Standardised ("shrink wrapped") tax products
• Loss schemes
• Leasing schemes
• Pension benefit schemes

Upon disclosure, HMRC issue the promotor with an eight-digit scheme reference number for the disclosed scheme.

Other recent changes

Schedule 17 of the 2010 Finance Act strengthened DOTAS, it introduced:

• Measure 1: a change to the trigger point for disclosure of marketed schemes to ensure early disclosure of schemes.
• Measure 2: an information power to allow HM Revenue & Customs to require intermediaries or introducers in the marketing of schemes to provide information leading to the identification of the promoter.
• Measure 3: enhanced penalties for failure to comply with a disclosure obligation.
• Measure 4; a requirement for promoters to provide periodic lists of clients who have implemented schemes.
• Measure 5 revised hallmarks (the descriptions of schemes requiring disclosure).

Problems with DOTAS

• The DOTAS regime can seem confusing to the end-user.
• The rules are complicated. Ironically, a scheme number can be a red herring: it does not signify HMRC approval. Yet it is often in a tax planner’s financial interest to obtain a DOTAS number as it looks impressive to some types of client (and so provides a good reason, if ever one was needed, for charging a higher fee).
• Conversely, legal opinion may also be divided as to whether a product is so well known and standardised that no disclosure is required. A mass marketed scheme may carry no number.
• The de-minimis on SDLT schemes seems to have created a culture whereby many scheme users feel that it is "OK" to avoid the tax on lower value properties.

Small print and links

HMRC: Anti-avoidance pages: you can download the latest DOTAS guidance here.

Our guides contain summaries:

DOTAS: are you an introducer? ...and why does it matter?

Tax penalties: DOTAS

Tax Avoidance Schemes

Anti-avoidance: we look at HMRC's spotlights