Avoidance: Getting to Know All About You

HMRC want to strengthen DOTAS rules

Last week HMRC launched its consultation, ‘Strengthening the Tax Avoidance Disclosure (DOTAS) Regimes’, which will run until 23rd October. This latest consultation was promised in this year’s Budget announcement and follows other recent consultations, ‘Lifting the Lid on Tax Avoidance Schemes’, ‘Raising the Stakes on tax avoidance’ and ‘Tackling marketed tax avoidance.’

DOTAS was introduced 10 years ago with the aim of providing HMRC with an early warning system about certain tax avoidance schemes and works by requiring certain persons to tell the Revenue about the design and/or use of schemes intended to avoid tax. Since its implementation the rules have been revised at various times.

Since the scheme was introduced in 2004, there have been nearly 2,500 disclosures.

The legislation imposes a number of tests to determine if disclosure is required. Briefly these are:

• Are there arrangements (i.e. a scheme) or proposals for arrangements?
• If there are is that scheme expected to provide a tax advantage?
• Is getting a tax advantage expected to be one of the main benefits?
• Does the scheme fall within one of a number of descriptions (called ‘hallmarks’)?

One of the hallmarks is the ‘Standardised Tax Products Hallmark’, that is particularly relevant to those schemes out there aimed at contractors with promises of high percentages of take home pay. This hallmark was designed to capture what are often referred to as ‘mass market’ schemes. The fundamental characteristic of these schemes is the ease with which the scheme can be replicated rather than the volume of take-up and how they are made available or how they are dressed up to appear bespoke to a particular client.

Currently there are 5 steps in determining whether this hallmark applies:

1. Are the arrangements a product? – this would be typically demonstrated by the existence of broadly standardised documentation which does not require much doing to it to enable the client to implement the arrangements.
2. Is it a tax product?
3. It is made available generally
4. Was it available before 1st August 2006?
5. Is it exempted by the regulations?

According to HMRC, some promoters adopt a very narrow interpretation of what needs to be disclosed under this hallmark suggesting that schemes require an extremely high degree of similarity such that virtually any change to any aspect of the documentation or arrangements to suit a client’s circumstances means that the arrangements are not caught by the hallmark.

For example, although a promoter devises a scheme to enable clients to retain 90% of their income, available to a wide audience by advertising it on the internet, they may argue that it does not need to be disclosed because its implementation is tailored to each client’s circumstances. Fundamentally however such a scheme is offering clients a method to retain more of their post tax

income than would be the case if they did not participate in it and tailoring to meet a client’s requirements is not likely to involve substantial effort.

Other promoters apparently argue that that their avoidance schemes are neither new nor innovative as they rely on building blocks or arrangements that are well known, pre-dating 1st August 2006, and therefore do not need to be disclosed.

The Government is therefore concerned that the existing wording of this hallmark leaves itself too open to interpretation, leading to too few disclosures of schemes which are, in reality, products aimed at more than one user.  

This latest consultation will consider options to improve the information available to HMRC through DOTAS, in particular:

• proposed changes to the description of schemes required to be disclosed
• proposed changes to continued compliance with the rules by non-UK resident promoters
• proposed changes to the penalties applicable to users of schemes who fail to notify their use of a scheme
• consider the introduction of protection for those who wish to ‘whistle-blow’ to HMRC about potential avoidance