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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.

What's new?

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:

The European Council has adopted new rules requiring tax advisors, accountants, and lawyers that 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 in over a number of years, as follows:

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:

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:

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

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 include the presence of any arrangements to ensure:

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 recent changes

With effect from 23 February 2016, 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).

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:

Notifiable arrangements in relation to any indirect tax include:

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

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 their 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 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 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: