Tax avoidance schemes: DOTAS extends its reach

Donald-Drysdale By Donald Drysdale for ICAS

4 November 2016

HMRC have published revised guidance on DOTAS, reports Donald Drysdale, and changes to the corresponding VAT disclosure rules are expected soon. 

Following consultation in 2014, the government introduced changes in Finance Act 2015 to strengthen aspects of the disclosure of tax avoidance schemes (DOTAS) regime.  Since then, further changes have been made by secondary legislation.

On 17 October HMRC published an updated version of their guidance on DOTAS.  This covers income tax, corporation tax, capital gains tax (CGT), national insurance contributions (NICs), stamp duty land tax (SDLT), annual tax on enveloped dwellings (ATED) and inheritance tax (IHT).

There is a separate VAT disclosure regime (VADR) for arrangements or transactions intended to give the trader or any other person a VAT advantage when compared to adopting a different course of action.  Details of this regime are explained in VAT Notice 700/8 published in October 2013.

Recent changes to DOTAS

The DOTAS guidance was previously updated in January 2016 to reflect the introduction of a new consolidated form AAG6 which promoters must use to report details of tax avoidance schemes to their clients.  This form applies in relation to all relevant taxes covered by DOTAS and replaces the previous individual forms – AAG6, AAG6(SDLT), AAG6(IHT) and AAG6(ATED).

The guidance has also been updated to reflect the introduction by Finance Act 2015 of a new form AAG7.  Employers receiving a scheme reference number (SRN) allocated to a scheme on or after 26 March 2015 must use this form to report the SRN to an employee where a tax advantage is expected to arise relating to their employment as a result of a scheme notified to HMRC under DOTAS.

The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) (Amendment) Regulations 2016 (SI 2016/99) came into force on 23 February 2016, amending the descriptions of tax avoidance arrangements (the ‘hallmarks’) and their scope.  These regulations modified the standardised tax product hallmark and the loss schemes hallmark, and created a new financial products hallmark.

Changes to the standardised tax products hallmark have significantly widened the role of the ‘hypothetical informed observer’ when testing whether or not the hallmark applies.  The exemption from the requirement to disclose schemes the same or substantially the same as schemes that were being marketed before 1 August 2006 has also been removed.

Changes to the loss schemes hallmark aim to prevent promoters from arguing that the projection of a theoretical profit at some point in the distant future means they are not required to disclose the scheme.

The new financial products hallmark covers arrangements including a financial product where (a) the product includes terms unlikely to have been entered into were it not for the tax advantage or (b) the arrangements include contrived or abnormal steps without which the tax advantage could not be obtained.

In other changes, the confidentiality hallmark (where a promoter is involved) and the premium fee hallmark have been extended to include arrangements that might be expected to enable a person to obtain an advantage in relation to inheritance tax (IHT). Since 2011 an IHT hallmark had already applied to certain IHT arrangements seeking to avoid or reduce the IHT entry charge when transferring property into trust.

Information about the government’s rationale for these changes to DOTAS is set out in HMRC’s February 2016 summary of responses to the hallmarks consultation.

In 2014 HMRC had proposed changes to the IHT hallmark but respondents were consistent in their views that the drafting of these went too wide and risked catching ordinary non-abusive IHT planning. In a consultation paper published in July 2016, HMRC have proposed to change the IHT hallmark in ways that are more tightly targeted to avoid catching ordinary tax planning.

VAT disclosure regime

VADR is aimed at traders who are or should be registered for VAT and either (a) enter into one of ten listed schemes that HM Treasury have designated as potentially abusive or (b) knowingly engage in any other arrangements or transactions associated with one of eight defined hallmarks of tax avoidance.

In their April 2016 consultation paper, HMRC have brought forward proposals to strengthen VADR by transferring the obligation to disclose schemes from users to scheme promoters.  They also propose to extend the scope of VADR to include other indirect taxes.

Professional Conduct in Relation to Taxation

The guidance on Professional Conduct in Relation to Taxation (PCRT), prepared jointly by ICAS and certain other professional bodies and updated this month with effect from 1 March 2017, contains information on DOTAS and related topics – including follower notices, accelerated payment of tax and promoters of tax avoidance schemes (POTAS) – and on VADR.

PCRT should be adhered to not only by practitioners who are members of ICAS or the other bodies subscribing to this guidance.  It should also be followed by all other tax agents and advisers (whether external or in-house) to demonstrate that they have applied appropriate professional standards.  Failure to do so could expose them to potential professional indemnity claims.

Who is affected by DOTAS and VADR?

Large companies and groups, and major professional firms, are accustomed to complying with the stringent disclosure requirements and generally have sophisticated systems in place to cope with them. In most situations where disclosure is required under DOTAS, it must be made by the scheme promoter within five days of one of three defined trigger events.

The need for disclosure can present more serious difficulties for taxpayers or advisers not habitually dealing with schemes and arrangements caught by the provisions.  Practitioners and in-house tax personnel need to be alert to the possibility of such circumstances arising.

Non-compliance can attract severe repercussions.  Failure to disclose an arrangement under DOTAS within the relevant time limit can incur penalties of up to £1m, as well as reputational damage.  Practitioners should also advise their clients of the consequences, including penalties, of failure to comply with their DOTAS obligations.

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