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?

A guide for subscribers.

At a glance

At a glance

The Disclosure of Tax Avoidance Schemes (DOTAS) regime was originally designed to enable HMRC to keep up to date with what types of tax avoidance schemes are in circulation. By requesting that promoters make a disclosure, HMRC has the opportunity to review and if necessary amend legislation to block any scheme which the government considers aggressive and unfair.

Changes to regulations from February 2016 have significantly broadened the DOTAS rules, which could conceivably capture more standard tax planning strategies.

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 and in those cases, a scheme user must make the disclosure.
HMRC will then issue the scheme with a DOTAS reference number (SRN).
A scheme user will have to notify HMRC that it is using the scheme by inserting the DOTAS 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.
If an obligation to disclose exists, the notification must be made within five days of the arrangements first being made available.

What's new?

In October 2022 STEP published a response from HMRC in respect of their views on several more common Inheritance Tax planning scenarios.

HMRC published a consultation 'Draft regulations: DOTAS, DASVOIT and POTAS regimes', requesting industry views on proposed rule changes in the then Finance Bill 2021 which would enable HMRC to act decisively where promoters fail to disclose avoidance schemes at an early stage. The changes would allow HMRC to allocate a reference number to an arrangement or a proposal that has not been disclosed but where HMRC reasonably suspects them to be notifiable.

Finance Act 2021 provides, from the date of Royal Assent on 10 June 2021:

For HMRC to issue a new information notice to Promoters Of Tax Avoidance Schemes and require them to supply the information HMRC needs to determine whether an avoidance scheme is being promoted that has not been disclosed under DOTAS.
- If the information is forthcoming HMRC can use that information as normal within the DOTAS regime.
- If the information is not forthcoming or insufficient HMRC can issue a DOTAS Scheme Reference Number (SRN) and publish information from the notice along with the SRN to ensure taxpayers are sufficiently informed of HMRC’s interest in the scheme.

The European Council has adopted new rules requiring tax advisors, accountants and lawyers who design or promote tax planning schemes which could be potentially aggressive, to report them. The EC Directive applies from 1 July 2020. The rules are built around a set of hallmarks which determine whether a scheme should be reported. The draft directive can be found here.

Overview

What taxes fall into the DOTAS regime?

The regime covers the main taxes, which have been added 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 Stamp Duty Land Tax (SDLT) schemes, and until 1 November 2012 disclosure was only required when the market value was £5 million for non-residential schemes and £1 million for residential schemes. These de-minimus limits were removed in 2012.
DOTAS does not apply to the devolved tax SDLT equivalents of Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales.
There are separate rules which apply to VAT, these have been operative since 1 August 2004.
From April 2011, some settlements will require disclosure where chargeable lifetime Inheritance Tax (IHT) is avoided. The usual hallmarks will not apply but 'grandfathering provisions' will try to ensure that certain transfers will not require repeat notification.
The Apprenticeship Levy is subject to the DOTAS regime from 21 December 2017.
A new IHT hallmark is in place from 1 April 2018.

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.
It is a tax arrangement that falls within any description (hallmarks) prescribed in the relevant regulations.

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

Who is a promoter?

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

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 they do not make a scheme available for implementation and they pass three tests, broadly these are:

The benign test: the advice they give in relation to a 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 could not reasonably be expected to have sufficient knowledge about the scheme to be able to appraise whether they have obligations 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 i.e. where a scheme is designed in-house.

A scheme Introducer such as an Independent Financial Advisor (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 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.
Employment income provided through third parties.
Financial products.

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

The rules are different for SDLT and VAT.

Penalties

Non-compliance with the DOTAS regime can result in penalties being issued. See: Penalties: DOTAS

In certain circumstances, individuals connected with a company which is subject to penalties under the DOTAS regime can be made jointly and severally liable for those penalties. See: Joint and Several Liability Notices

Other changes

With effect from 23 February 2016, regulations introduced new hallmarks.

In particular, they introduced a financial products hallmark, which could be very wide-reaching. Any tax advantage obtained where a share, loan or other prescribed financial product with unusual terms or abnormal steps is used, should at least consider whether this hallmark is met.

Following consultation, The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2017 were signed on 30 November 2017. The regulations came into force on 1 April 2018 and replace the previous regulations (SI 2011/170).

The wording has been changed to ensure the new hallmark is appropriately targeted to catch IHT avoidance schemes but not the straightforward use of reliefs and exemptions or ordinary tax planning arrangements.
There are new descriptions of disclosable arrangements which are designed to reduce the value of an estate on death or those which seek to avoid certain other IHT charges in addition to ‘entry charges’ on relevant property trusts.
The hallmark also ensures that established retail products, which accord with established practice that HMRC has previously accepted, do not have to be disclosed if they were first made available and entered into before 1 April 2018.
New guidance has been published here to explain how the new DOTAS hallmark works, the conditions to be met for arrangements to be notifiable, and the circumstances for certain arrangements to be excepted from disclosure.

There are two sets of regulations setting out the hallmarks and information requirements on promoters for the DOTAS regime for VAT and other indirect taxes, which came into force on 1 January 2018.

The Indirect Taxes (Notifiable Arrangements) Regulations, SI 2017/1216, set out the hallmark tests for notifiable arrangements. Notifiable arrangements in relation to VAT include:

Retail supplies in respect of splitting and value shifting.
Offshore supplies of insurance and finance.
Offshore supplies to relevant business persons outside the EU.
Options to tax.

Notifiable arrangements in relation to any indirect tax include:

Confidentiality involving promoters.
Confidentiality involving other persons.
Premium fees.
Standardised tax products.

The Indirect Taxes (Disclosure of Avoidance Schemes) Regulations, SI 2017/1215, prescribe the information promoters must disclose to HMRC under the new rules.

Problems with DOTAS

The DOTAS regime can seem confusing to the end user.
The rules are complicated. A scheme number can be a red herring as 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.

DOTAS cases

There have so far been few cases taken regarding DOTAS notification.

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.

In HMRC v Root2 Tax Ltd [2017] TC 06115, Root2 claimed that their scheme involving an employee entering into almost simultaneous spread bets and hedging transactions, ‘Alchemy,’ did not meet the criteria for disclosure under DOTAS. In sorting through Root2’s various arguments the First Tier Tribunal based its decision on their main claim which was that the tax advantage was not, or might not be expected to be, the main benefit or one of the main benefits of the arrangement, because the spread bet could go either way; the employee could achieve a profit or suffer a loss, with taxes being paid when there was a profit.

The tribunal disagreed and found that the arrangements were notifiable:

The scheme amounted to ‘arrangements’.
The scheme enabled, or might be expected to enable, a person to obtain a tax advantage.
The main benefit, or one of the main benefits, of the scheme (if it works) is the obtaining of that advantage.
It was a standard product.
Root2 were the ‘promoters’ of the scheme in the statutory sense.

The effect of this is twofold; it enables HMRC not only to penalise Root2 for failing to notify the scheme under the DOTAS regulation, but also to issue Accelerated Payment Notices (APNs) on all taxpayers who took part in the scheme. It is quite possible that Root2 will look to appeal the decision.

In HMRC v Root2 Tax Limited [2022] UKUT 00353 the Upper Tribunal (UT) found that a promoter is only required to notify HMRC under the DOTAS rules on the occasion that it becomes aware of the first transaction implementing the notifiable arrangements. A duty to notify does not arise on each implementation of notifiable arrangements.

The significance of this point is that HMRC have six years to raise a penalty for non-disclosure. The penalty HMRC had sought to charge Root2 Tax Limited was more than six years from first implementation, but within six years of the final implementation. As the UT found that the notification obligation arose on the first implementation, HMRC’s penalty application was out of time.

In HMRC v Hyrax Resourcing Limited & Bosley Park Limited & Peak Performance Head Office Services Limited [2019] TC07025 the First Tier Tribunal (FTT) found that a contractor loan scheme should have been notified under the Disclosure of Tax Avoidance Schemes (DOTAS) regulations as:

The scheme gave or was expected to give, rise to a tax advantage.
The main benefit, which was expected to arise from the arrangement was the obtaining of a tax advantage.
The fees paid to use the scheme were premium and it was a standardised tax product.

Professional bodies clarifications

In October 2022 HMRC provided some clarification in respect of certain Inheritance Tax arrangements presented to them by STEP:

Deeds of variation were unlikely to form part of a notifiable arrangement.
The circumstances surrounding the gift of an undivided share of property in which the donor continues to reside will determine whether that gift is notifiable.
While the transfer of shares to a trust shortly before a sale was not considered standard practice, that does not mean such a step is necessarily notifiable, this will depend on the circumstances.
HMRC are of the view that an occupant granting a reversionary lease over the property in which they reside would represent a contrived or abnormal step.
Whether or not the creation of multiple trusts is for the obtaining of a tax advantage would depend on the circumstances.

Small print and links

DOTAS: Disclosure of Tax Avoidance Schemes

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