Loss scheme was notifiable under DOTAS

In HMRC v Redbox Tax Associates LLP [2021] TC8235, the First Tier Tribunal (FTT) held that a loss scheme should have been notified under the Disclosure of Tax Avoidance Scheme (DOTAS) rules. There were arrangements, premium fees were charged and it was a standardised tax product.

The DOTAS legislation in Part 7 of Finance Act 2004 provides that certain tax arrangements are notifiable to HMRC. Parties to such arrangements including promoters are liable to Penalties if they fail to notify such arrangements.

Redbox Tax Associates LLP (Redbox) promoted a scheme, ‘Volatility’, involving paired forward contracts to purchase and sell securities and create either capital losses or miscellaneous income losses.

• The scheme did not guarantee that a loss would be made on the transactions undertaken and several users entered into up to five transactions before achieving a loss.
• The implementation documents were generally in a standard format.
• Fees for Volatility were made up of fixed-rate commissions to Redbox and the asset management company facilitating the transactions, a contribution to a fighting fund and a fixed fee of £1,000 to a financial adviser.
• Redbox did not notify the scheme under the DOTAS regulations.
• HMRC opened an enquiry about whether Volatility was notifiable. As the parties could not agree on the position, HMRC referred the matter to the tribunal requesting an order under Part 7 of Finance Act 2004 that the scheme was notifiable.

The FTT found that the scheme was notifiable under DOTAS:

• The sequence of paired forward contracts transacted under the scheme were ‘arrangements’ as defined by s.318 FA 2004.
• Crystallising a loss was a tax advantage. As these arrangements envisaged/anticipated the repeating of the pairs of contracts until a tax loss was realised, there must have been an expectation that the arrangements would enable a user to obtain a tax advantage, as required by s.306(1)(b) FA 2004.
• The economics of the arrangements together with the way in which they were structured and marketed, pointed strongly to a tax advantage being "the main benefit, or one of the main benefits, that might be expected to arise from the arrangements” therefore s.306(1)(c) FA 2004 was also met.
• Based on the nature of the product and the values of the transactions, the users of Volatility would qualify as sophisticated purchasers, the fee they paid was comparable to what a promoter might be able to charge and the fee was attributable to the tax advantage that might be obtained. The premium fee requirement at s.306(1)(a) was therefore also met.
• Volatility was a ‘standardised tax product’ and a ‘loss scheme’ within the DOTAS regulations even though the number of transactions to be entered into was uncertain at the outset. Redbox clearly intended and expected more than one individual to enter into what were essentially the same arrangements.

Useful guides on this topic

DOTAS: Disclosure Of Tax Avoidance Schemes
What are the Disclosure Of Tax Avoidance Schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?

Penalties: DOTAS
What are the penalties for failure to disclose under the Disclosure of Tax Avoidance Schemes (DOTAS) regulations?

Tax avoidance schemes
How do you spot tax avoidance schemes? What are the types of schemes available that should be avoided? What disclosure requirements are there? When are tax clearances needed?

External link

HMRC v Redbox Tax Associates LLP [2021] TC8235