Disclosure of Tax Avoidance Schemes

Disclosure of Tax Avoidance Schemes

Introduction
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We now come to deal with the final limb of the regime: DOTAS. DOTAS has been with us for at least ten years and during that time has undergone constant and radical change. Before we examine the detail is it worth reminding ourselves of what the DOTAS regime is seeking to achieve.

What is the regime seeking to achieve?
The stated intention of the regime when it was introduced was to give HMRC early warning of tax avoidance schemes. This is to enable HMRC to undertake a risk assessment on schemes with a view to recommending to ministers, in appropriate cases, that the law should be changed. When the disclosure regime was first introduced the use of scheme numbers to identify particular users of a scheme was seen almost as an incidental feature. As the regime has matured, however, the ability to identify users of a scheme has come to be regarded as an absolutely essential aspect of HMRC’s compliance and enquiry work in challenging avoidance schemes. The requirement on promoters to provide HMRC with quarterly lists of users of schemes is further evidence of how central DOTAS now is in HMRC’s attack on avoidance.

The implications of the link between DOTAS and the APN regime
The introduction of the APN regime, given that a DOTAS number is one of the triggers for the issue on an APN, has profoundly changed the nature of DOTAS. Essentially DOTAS has become a quasi-tax collection mechanism. In the past a promoter who was in genuine doubt about disclosure could take a cautious approach and disclose the scheme. Although this would mean that his clients would have to include the reference number on a return this in itself had no effect on liability. Now a promoter has to take into account the fact that the decision on whether or not disclose will bring real economic consequences for his clients. The concern is of course that promoters will no longer give HMRC the benefit of the doubt and not disclose where once they would have done. The proposals to reform DOTAS mentioned throughout this chapter are undoubtedly intended to lessen the scope for promoters to argue that arrangements fall outside the disclosure obligations.

Policing the boundaries
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Ministers and HMRC have repeatedly said that `ordinary’ tax planning is not intended to be within the disclosure regime. However, it has been extremely difficult to define clearly where the boundaries between `ordinary’ tax planning and `unacceptable’ avoidance actually lie. One has some sympathy with HMRC here. There is a continuum between, at one point, simple tax planning such as making a group relief claim and, at the other extreme, reducing income tax liability to nil through the use of an artificial product such as a gilt strip. The disclosure regime has to find a way of identifying the single point in this continuum at which the line is crossed between `acceptable planning’ and `unacceptable avoidance’. There is in reality no such line, or if there is it would be placed at a different point by every adviser. The process of continuous consultation and the series of changes which have been made to the legislation as originally enacted have made some issues clearer and probably moved the line closer towards the `unacceptable’ end of the spectrum but it would be idle to pretend that all of the issues have been resolved.

Because of the history of the introduction of the DOTAS regime it is natural to think of it operating only against mass marketed avoidance schemes. This is of course not the case. It certainly covers such schemes but it also brings some bespoke planning within its grasp. The regulations do however use the term `scheme’ and for convenience that terminology is used throughout this publication. Readers must appreciate that this is merely a shorthand term.

=== Outline of the way in which the regime operates === Before we look in detail at the way in which the regime for direct tax operates it will be useful to give an overview of its main features.

Reporting of schemes
The onus falls on the promoter of the scheme to make a disclosure of a scheme to HMRC. `Promoter’ is a widely defined term, which will be examined in detail, but it can broadly be assumed for the moment that in any case where a person is giving tax advice to a client he or she will be a promoter. There are a small number of situations where the obligation falls on somebody other than the promoter and these will be discussed later.

detailed commentary

Issue of reference number by HMRC
The next stage in the process is that HMRC may issue a reference number for the scheme. HMRC has 90 days from the date of receipt of the disclosure notice to issue a reference number. This time limit was originally 30 days but was extended to 90 days in FA2015 Sch 17.

detailed commentary

Issue of reference number to the user
The next stage in the process falls back on the promoter. The promoter has an obligation to issue all clients who use the scheme with the reference number, within 30 days of the date on which he/she first becomes aware that the client has taken the first step to implement the scheme. Note therefore that although the disclosure by a promoter is not dependent on implementation, the issue of the reference number'' to the user does depend on implementation. In other words, if a'' registered scheme is discussed with a client but the client does not then proceed with implementation there is no requirement for the promoter to issue the client with the reference number.

There are penalties on the promoter for failure to pass the reference number to the client.

Issue of client lists to HMRC
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Promoters are required to provide HMRC periodically with lists of clients who have implemented disclosed schemes. This is discussed below at 25.xx.

User’s tax return
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The final stage in the process is the responsibility of the user. A client who has used a registered scheme must disclose the reference number on his return. He does not then need to make any other specific disclosures about the scheme. The normal due date for the submission of the return is not affected by the fact that the client has used a registered scheme.

There are penalties for users of a registered scheme who have not included the number on their tax return. These are discussed at 25.xx. Failure to include a reference number on a return can also extend the time limits for the issue of an assessment (see 25.xx).

The key questions
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After this a brief overview is it now appropriate to look in some detail at the provisions. This can best be done by asking some key questions, such as follow.

•        Who has to disclose?

•        What has to be disclosed?

•        When do they have to disclose?

•        How do they disclose?

•        What happens if they don’t disclose?

Who has to disclose?
The disclosure requirement falls principally on the promoter, so how the legislation defines who is and, just as importantly, is not a promoter needs to be looked at.

The legal definition
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There are broadly two categories of promoters: those who design schemes and those who make them available for implementation by others. In more detail, a promoter is somebody who in the course of a relevant business:

(a)     is responsible for the design, organisation or management of the proposed or actual arrangements to any extent;

(b)     makes a notifiable proposal available for implementation by others; or

(c)     makes a firm approach to another person with a view to making the scheme available for implementation by that person.

There are several elements to this definition. In the first place we need to know what a relevant business is. This is `any trade, profession or business which involves taxation services or is carried on by a bank or securities house’ (whether or not tax services are provided). Thus lawyers, accountants and specialist tax consultants will be promoters, but other professionals who may give tax advice as part of their broader professional work (perhaps surveyors or valuers) may also be within the scope of this definition. It can be assumed that anybody who is sufficiently interested in this subject having read this chapter up to this point will be carrying on a relevant business.

We will look later at what is meant by the term notifiable proposal. Before we examine the promoter definition in detail it must be noted that there are particular issues regarding the status of lawyers who fall within the definition of promoter. This is because of the interaction between the disclosure rules and legal privilege. As this is such an important topic it is discussed in a separate part of this chapter (see 25.xx), and readers need to be aware of this as they deal with the following parts of the text.

Design v making available
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As we have seen from the definition there are two categories of promoter: those who design and those who make available. In many, if not most, cases a person will fall into both of these categories and therefore the distinction will not be relevant. However, there are cases where the distinction is of importance.

Somebody who markets a scheme will be making the proposal available for implementation and will clearly be a promoter. This will be the case whether he has designed it himself or is implementing a scheme designed by somebody else. There should be no difficulty about this, although it is important to understand the difference between a promoter and an introducer (see 25.xx). The problems are more likely to come within the other limb of the test. What happens for example if a client comes to his adviser with a tax scheme which has been suggested to him by somebody else? If the adviser is merely asked to comment on whether or not the scheme works, that adviser will not be a promoter. He is not responsible for the design, organisation or management of the proposal, but is simply providing a tax analysis of a given set of proposals. Similarly, if the client comes to a firm of accountants with a scheme and asks for accounting advice on the operation of the scheme, that accounting firm will not be a promoter. The accountancy firm will be a relevant business (because its business will include the giving of tax advice) but it will not be providing tax advice in relation to the particular scheme.

Life is, of course, never quite that simple. It would be a rare adviser who would, when faced with a complex scheme, be prepared to give a yes or no answer to the question ‘does it work?’. Quite often the adviser will give a response along the lines of `well I think that most of it works but I am not quite sure about this bit’. Expressing those doubts will not in itself turn the adviser into a promoter, but if he goes on to say ‘but I think that if we tweaked this bit by … it would work better’ he is in danger of become a designer in his own right. This is clearly a matter of degree and as we gain experience in the way that the regime operates we will probably get a clearer idea of where the boundaries lie. HMRC have indicated that what they are trying to do in the definition of promoter is to identify the person(s) who are ‘at the heart of the scheme’. While those words do not appear in the regulations they are a useful guide to the way in which HMRC are likely to interpret the regulations. A minor change to a small detail is unlikely, in the author's opinion, to bring an adviser into the heart of a scheme, but a suggestion which fundamentally affects a significant element of a scheme will probably turn the adviser into a promoter.

There will also be cases where a relevant business is not providing advice on design but is involved in the organisation or management of the arrangements. A firm of lawyers which has a tax department will be a relevant business but if it provides, say, trust services in relation to a scheme which it has not designed then it will be not be a promoter provided that it is not connected with a person who is responsible for the design of the scheme. Thus a law firm could not escape its obligations by, say, arranging for the advice to be given by an offshore branch but organising and managing the arrangements through its UK practice.

One potential problem area is in-house tax departments. If a tax department in head office gives tax advice to a subsidiary company that department would, under the basic definition, be treated as a promoter, which is clearly contrary to the basic thrust of the provisions, because in-house schemes are subject to their own regime. A company which provides tax services to other members of the same group of companies is not treated as a promoter.

Finally, it should be noted that an employee of a firm which is a promoter will not himself or herself be a promoter in his/her own right. When the original regulations were published the position of employees was not clear and, as an employee at the time, I have to say that the subsequent clarification provided a much higher level of comfort.

A lot of work went on during the consultation process to get the definition of promoter onto a sensible basis. Broadly speaking we now have a situation where we have a definition which people can work within, although at the margins there are still issues to be dealt with. In the author’s view HMRC's explanation of the definition of a promoter in the original guidance was not the clearest part of that note, but the material dealing with promoters in the latest guidance is much more clearly laid out. HMRC use three (non-statutory) terms to explain those people who they believe are outside the scope of the regulations. The benign test covers those people who have given tax advice which, although part of a scheme, does not contribute to the tax advantage. The non-adviser test covers the position of somebody who is involved in the design of the scheme but does not contribute tax advice. This would include, for example, a firm which has a tax department but whose involvement in a scheme is limited to giving company law advice on a tax scheme. The ignorance test applies where somebody cannot reasonably be expected to have sufficient information to enable him or her to know whether or not the arrangements fall within the scope of the regime. These three non-statutory expressions certainly help to clarify precisely how HMRC will interpret the term `promoter’.

=
Multiple promoters and intermediaries ===== [25.78]

It is the nature of many tax schemes that more than one firm of advisers may be involved. In many cases there will at least one firm of accountants and one firm of solicitors, but in more complex schemes it is not unknown for half a dozen or so professional firms to be involved at some point in the design, marketing and implementation of a scheme. In addition there may well be other people in the chain between the person who designed the scheme and the taxpayer who actually does the scheme. Some of these people may merely have a marketing function while others may play a part in the actual delivery of the scheme.

This has proved to be a particularly difficult aspect of DOTAS because it has undoubtedly led to confusion about where disclosure obligations lie, and in some cases has been exploited to allow what appears to be a clear disclosure obligation to fall between the cracks and result in a scheme which is clearly disclosable not being disclosed by anybody.

The primary legislation recognises this by providing (FA 2004, s 308(4)) that `where two or more promoters are promoters in respect of the same notifiable proposal or notifiable arrangements, compliance by any one of them with [the notification requirement] discharges the duty [to disclose] by the other or others’. Conceptually this is fine and straightforward: HMRC want to find out about a particular scheme and once they know about it, no purpose is served by their learning about it again from another promoter. However, in practice this provision is not without its problems. How, for example, will one promoter know that the other promoter has disclosed? What happens if there is a dispute between promoters over whether a particular scheme is disclosable? What happens if the second promoter is not happy with the way that the first promoter has disclosed the scheme?

In the original legislation there were no provisions to deal with these situations. As a consequence of this, rules were introduced to put the co-promoter aspects of DOTAS onto a statutory footing.

The main principle remains: a co-promoter does not have to disclosure a scheme which another promoter has disclosed. However, there is now a mechanism for dealing with this. The co-promoter is required to make his own disclosure unless the promoter has provided him with the reference number or has provided the co-promoter's name and address to HRMC; and (in either case) the co-promoter holds a copy of the disclosure which was made to HMRC. This in effect means that the co-promoter must obtain a copy of the disclosure and the reference number from the original promoter. If the original promoter gives details of the name and address of the co-promoter to HMRC, HMRC must provide the scheme reference number to the co-promoter.

A co-promoter must pass the reference number he has received to a client in the normal way.

But in order to be within these rules a person must be a promoter. A person who is only an introducer is not a promoter (he may have other DOTAS obligations and these are discussed below). The difference is essentially this: to be a promoter you are seeking clients for your own firm. So if the designer of the scheme (A) licences a scheme to another firm (B) and firm B promotes the scheme to potential clients who, if they decide to do the scheme, will become a client of firm B then firm B will be a promoter. Firm A and firm B will both be promoters and one of them will have to disclose the scheme. But if firm B operates a referral system under which it provides introductory commission to firm C and firm C goes into the market place to obtain clients for firm B then firm C will not be a promoter and will not have a disclosure obligation. This is at least as the author understands the position, though it has to be said that the drafting of the relevant legislation is not as clear on this key distinction as it ought to be.

Introducers
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As explained above, introducers do not have a disclosure obligation. They are nevertheless within the DOTAS regime as a whole because there is a power to require an introducer to provide HMRC with the name and address of any person who has provided him or her with information about the scheme. The person whose identity must be given under the notice may be the promoter of the scheme but it could be another introducer. If it is the latter then HMRC could then issue a notice on that introducer, and so on until finally the identity of the original promoter has been established. The information must be provided to HMRC within ten days of the issue of a notice requiring such information unless the notice specifies a longer period.

This whole area of dealing with the supply chain in marketed avoidance schemes has been particularly difficult and developments in the way that schemes are marketed has meant that the legislation often lags behind the trends in the market place. In the 2014 consultation `Strengthening the Tax Avoidance Disclosure Regimes’ this problem is addressed and various proposals are suggested, largely to ensure that anybody in any way involved with the process through which the taxpayer comes to implement the scheme is included within the definition of an introducer. Legislation to implement such a change was included in Finance Act 2015. A new s313C applies where HMRC suspect that a person is an introducer in relation to a proposal which HMRC suspects may be notifiable. HMRC is given the power to require, by written notice, the person to provide prescribed information about each person who has provided him with information about the proposal, and also about each person with whom he has made marketing contact about the proposal. In other words, this requirement looks both up and down the chain: up the chain to the person/people who provided the introducer with information about the scheme, and down the chain to those people to whom the introducer himself has provided information.

Obligation of the client
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The client’s primary obligation is to include the scheme reference number on his return. This is covered at 25.XX. However, FA 2008 also imposes another obligation on the client, although in practice it is unlikely that this obligation will be relevant in many circumstances.

Where a client receives a reference number from a promoter, he (i.e. the client) is obliged, within 30 days, to pass the reference number to any person who he might reasonably be expected to know is, or likely to be, a party to the arrangements or proposed arrangements, and who might reasonably be expected to gain an advantage in relation to any relevant tax by reason of the arrangements or proposed arrangements. Relevant taxes here are income tax, corporation tax, capital gains tax and stamp duty land tax. From 2011 there is a similar provision for inheritance tax.

It is difficult to see many circumstances in which this provision will apply. It may be that HMRC have in mind here situations where a tax advantage is shared between companies in the same group or between associated companies.

The most difficult area here is where a company enters into a scheme which creates a tax advantage for itself and also for its employees. But that case is specifically exempted from the new provisions by SI 2008 No 1947, para 7B and there is thus no obligation for employers to pass the scheme reference number to their employees. This undoubtedly has caused problems for HMRC. In many of these arrangements the employee obtains a tax advantage because he receives income which has not suffered PAYE and which, if the scheme works, may not be taxable at all. Yet because he has not implemented the scheme personally and has not received a disclosure number there may be nothing on his return to indicate that he has benefitted from a tax avoidance scheme: indeed in many cases he may not even be required to file a tax return.

This area is under review and in the 2014 consultation document HMRC discusses possible changes. That consultation led to new requirements being placed on employers (FA 2004 s310C introduced by FA 2015 Sch 17 para5-8.

There are two elements to these new requirements. The first puts an obligation on the employer where he receives (or might reasonably be expected to receive) a tax advantage from the arrangements. The employer is required to provide prescribed information to employees in respect of whom the employer might reasonably be expected to receive a tax advantage. Employees in this context included former employees. Thus for example if XYZ implements a remuneration schemes designed to relieve it of the burden of PAYE and NIC on payments to employees A,B and C the employer must now provide those three employees with information about the scheme.

The second obligation relates to information to be provided to HMRC. Three conditions are necessary for this rule to apply.

–       A promoter in relation to arrangements is providing (or has provided) services in connection with those arrangements to a person “the client”.

–       The client received information under FA 2004 s 312(2) or (5) (i.e. a scheme reference number).

–       The client is an employer and one or more of the client’s employees receive (or might reasonably be expected to receive) a tax advantage from the arrangements, or the employer might receive (or might reasonably be expected to receive) a tax advantage in relation to the employment of one or more employees.

–In these circumstances the the client is required to provide prescribed information relating to the employee to HMRC..

The details of exactly what information is to be provided will be provided in statutory instruments in due course.

Non-resident promoters
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There are increasing numbers of offshore advisers giving advice to UK taxpayers. These advisers are outside the jurisdiction of the UK courts and therefore there would be no means of HMRC enforcing any disclosure requirements that might theoretically apply to such promoters. This would potentially create a major issue, in that it could lead to advisers relocating offshore in order to avoid having to make disclosures. The regime has therefore to find a way of dealing with offshore promoters.

The starting point is that such promoters are within the basic definition of a promoter. If, however, the offshore promoter does not meet his statutory obligation to notify the scheme the obligation moves to the client. In these circumstances the client must notify HMRC of the scheme within five days of entering into the scheme. Clearly there are some practical issues here. In particular, how will the client know whether or not the promoter has notified HMRC about the scheme? The promoter has 30 days to notify the client that the scheme that is being implemented has been registered, so you could have a situation where on day five the client does not know whether the promoter has registered the scheme and therefore does not know whether or not he has an obligation to disclose the scheme to HMRC. Clearly any client using an offshore promoter will need to take great care to ensure that reporting obligations do not fall though a gap in the middle.

In-house schemes
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Large companies may well have their own in-house tax departments and those departments may from time to time devise schemes without any external input. In such cases the obligation to disclose the scheme will rest with the company itself. Originally the time limits for disclosure were more generous than those for notification by promoters but in the 2006 reforms these time limits were more closely aligned. This is discussed in more detail later in this chapter (see 25.XX).

Introductory
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This is almost certainly the most difficult area of the regime. There is no doubt that what Ministers and HMRC want is to have early warning of `unacceptable’ avoidance schemes. They don't want to be deluged with information about ordinary planning or schemes which are well known in the market place. One senior HMRC official expressed it informally in the following terms: `we don't want to know about what we already know’. Equally the profession does not want to invest time and money in disclosing tax planning which will not be of any interest to those dealing with avoidance within HMRC. HMRC are on record as saying that ‘we do not intend promoters or employers to have to disclose everyday advice and arrangements’.

The problem is how this clear policy objective is translated into legislation. At one level promoters will want to ensure that they comply with their legal obligations and therefore will take a broad view of the regulations to ensure that they don't run the risk of non-disclosure, with all that that implies in terms of penalties and reputational risk. But on the other hand some promoters may also want to retain a competitive advantage by not disclosing a scheme where there are technical arguments, based on a close reading of the relevant provisions, that their particular scheme falls outside the strict legal requirements for disclosure. This tension remains unresolved, and until the precise meaning of some of the terminology used in the disclosure regime is tested though the courts there will always be some uncertainty in this area.

This becomes an even more difficult area now that, as discussed above, a DOTAS number is a trigger for the issue of an APN. Logically there is no reason why users of one mass marketed avoidance scheme should be subject to APNs simply because their scheme is new, whereas users of another scheme, which may have virtually the same effects, are not subject to APNs simply because the scheme is already known to HMRC. The 2014 consultation recognises this issue and the details will be discussed below. But as a matter of policy it now seems that the ‘we don’t want to know what we already know’ position may no longer be HMRC stance.

Notifiable arrangements
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The legislation uses the term `notifiable arrangements’ to denote schemes which are potentially disclosable. It is therefore necessary to have a very clear understand of what precisely is meant by this term.

The approach that the Government has taken to this is to start with a very broad range of possibilities and gradually narrow them down until only a small fraction of what was potentially included actually has to be disclosed. Originally this was done via a series of filters. It is now done by defining the hallmarks of disclosable schemes.

The starting point is FA 2004, s 306. This defines notifiable arrangements as arrangements which:

(a)     fall within any description prescribed by HMRC in regulations;

(b)     enable, or might be expected to enable, any person to obtain any advantage in relation to any tax that is so prescribed in relation to arrangements of that description; and

(c)     are such that the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage.

To start with we need to understand what is meant here by `arrangements’. Arrangements has a wide definition and includes any `scheme, transaction or series of transactions’. This covers virtually everything that a client is likely to do as a result of advice. The important point to note is that this definition of arrangements extends well beyond packaged schemes. As I have mentioned before, in this chapter I will use the word scheme for convenience but the extended meaning that this word has must always be borne in mind. Advising a client to pay dividends rather than salary will be an arrangement (whether it is a disclosable scheme is a different matter and we will discuss this later (see 25.XX)).

There is probably little to be gained by trying to argue that a particular piece of planning does not involve arrangements. There may well be other reasons to remove the planning from disclosure but it is a reasonable working assumption that any tax planning which is otherwise disclosable will certainly be an arrangement.

It now needs to be discussed in more detail what makes an arrangement a `notifiable’ arrangement. There are a number of very important issues which arise from the definition. In the first place the first part of the definition gives HMRC power to issue regulations. We will look in detail at these regulations below, but it should be appreciated that it is much easier for HMRC to issue amended regulations than it is for Parliament to change the basic statute. Indeed, most of the changes to DOTAS over the years have been carried out through regulations rather than primary legislation.

What is meant by ‘tax’?
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For the purposes of FA 2004, s 306 tax has a very wide definition: it means any of the following:

(a)     income tax;

(b)     capital gains tax;

(c)     corporation tax;

(d)     petroleum revenue tax;

(e)     inheritance tax;

(f)      stamp duty land tax; and

(g)     stamp duty reserve tax.

All of the direct taxes are included. This is not, to say, of course that schemes seeking to avoid any of these taxes are disclosable. As we shall see the regulation specify which taxes are actually within the regime. But because all of the taxes are listed within the primary legislation it is a relatively simple matter to bring another tax into the regime. For example stamp duty land tax schemes were not originally disclosable but were brought into the regime in 2005 by SI 2005 No 1868. Similarly when inheritance tax was brought within DOTAS the change did not require changes to the primary legislation and was achieved through regulations.

We might pause here to note that National Insurance is not included in the list (presumably because of the legal fiction that it is not a tax). However, NIC was brought into DOTAS under separate legislation in 2006. For most practical purposes the NIC disclosure regime closely mirrors the regime for direct taxes. Importantly, it does not impose duplication on the promoter. In most cases a scheme which is notifiable under the NIC rules will also be notifiable under the direct tax rules. Where this is the case there is no requirement to make two separate notifications: the notification for income tax automatically satisfies the requirement to notify under the NIC regime.

FA 2013, Sch 35, para 2 brings the new annual tax on enveloped dwellings (`ATED’) into the scope of DOTAS. The regulations effecting this change are discussed at 25.XX.

Tax advantage
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The next key point is that the arrangements must be linked to the obtaining of a tax advantage. The test is whether the promoter might expect to obtain a tax advantage rather than whether he will actually obtain an advantage. Since no promoter would promote a tax scheme which he did not have at least some expectation of working there should be no difficulty with `expect’ part of the definition. However the same cannot be said of the rest of the definition.

The problem is knowing what is meant by a tax advantage. This is defined as:

(a)     relief, or increased relief from, or repayment or increased repayment of, tax or the avoidance of reduction of a charge to tax or an assessment to that tax or the avoidance of a possible assessment to that tax;

(b)     deferral of any payment of tax or the advancement of any repayment of tax; or

(c)     avoidance of any obligation to deduct or account for any tax.

This is broadly based on the definition in the ITA 2007, ss 682–713 provisions (transactions in securities) although it is notable that the definition is extended to the avoidance of an obligation to deduct or account for any tax. This is presumably because one of the areas of avoidance which the Government is particularly concerned about is employment products, where taking bonuses out of PAYE, even if they are ultimately taxable, is a significant feature of many schemes.

Finally, the definition requires the obtaining of the tax advantage to be the main benefit or one of the main benefits which would be expected to arise from the arrangements. This is not the place for a complete analysis of what is meant by a tax advantage or whether the obtaining of that advantage is the main benefit. There has been much discussion of this point and some counsel are known to take the view that the way in which tax advantage has been defined does not necessarily capture all of the situations which Parliament presumably intended when it drafted the relevant provisions. It may again be that these issues will have to be tested through litigation.

Not surprisingly perhaps, HMRC’s guidance takes a wide view of the definition of tax advantage. That guidance points to the view set out by Lord Wilberforce in CIR v Parker (1986 AC 141) that the test is a comparative one, and it reinforces this by quoting Lord Justice Parker's comment in IRC v Trustees of Sema Group Pension Scheme [2002] EWCA Civ 1857, [2003] STC 95:

‘tax advantage … was to cover every situation in which the position of the taxpayer vis a vis the Revenue is improved in consequence of the particular transaction or transactions.’

Of course that is only HMRC’s view and there are contrary arguments. There is very little in the public domain about how such arguments are resolved but there is anecdotal evidence that many of the disputes about whether or not a scheme is disclosable come down to whether or not there is a tax advantage rather than whether or not the hallmarks apply. Although the definition of tax advantage is not discussed in the 2014 consultation document it is known to be an area of concern and it would not be surprising to find that the issue resurfaces at some point.

HMRC's starting point is generally to find the existence of a tax advantage in most examples of tax planning and to use the hallmarks to eliminate planning arrangements which are not disclosable, rather than to accept that there is no tax advantage at all. A promoter who relies on the definition of tax advantage to remove the disclosure requirement can expect HMRC strongly to challenge the position.

==== Anti-forestalling measures and DOTAS ==== [25.87]

An unexpected problem emerged on publication of the draft 2011 Finance Bill in December 2010. That Bill included the first draft of the disguised remuneration legislation, which eventually became FA 2011, Sch 2. The substantive measures within Sch 2 took effect from 6 April 2011, but certain anti-forestalling rules came into effect from 9 December 2010. Those anti-forestalling measures did not, however, actually become law until Royal Assent to FA 2011 in July 2011 and so, at least on some level, could be thought of as having retrospective effect. A number of schemes were devised which were intended to create a tax advantage in relation to the anti-forestalling measures. The question then arose as to whether (assuming that all of the other tests were met) those schemes were disclosable by reference to the normal trigger dates, such as making the scheme available for implementation.

Many advisers took the view – and this was supported by leading counsel – that there could be no disclosure obligation in such circumstances for the simple reason that the arrangements could not be expected to obtain a tax advantage because the legislation in respect of which the advantage was sought was not law and indeed might never become law. Given that the disguised remuneration legislation as eventually enacted differed in many material aspects from the version that was published in December 2011 it may well have been the case that there was no tax advantage to certain schemes by reference to the regime which ultimately became law, because the tax charge which they were intended to avoid never came into being. Given that the Government is committed to publishing the Finance Bill in draft at least three months before Budget day this could be a major problem for HMRC. HMRC have made it clear in communications with promoters (principally in the `Disclosure of Tax Avoidance Schemes (DOTAS) Update No. 5’, 15 April 2011) that in their view DOTAS obligations to apply to legislation which has not been enacted, but the point remains controversial and in this author’s view the issue is too important to be left to HMRC interpretation. The law should be clarified to put beyond doubt whether or not DOTAS does apply to draft legislation

The regulations
[25.88]

We have seen that the primary legislation potentially covers all schemes where there is a direct tax advantage, but we have also seen that HMRC have to specify in regulations those schemes which are actually disclosable. We therefore need to consider the regulations in some detail. Originally the draftsman attempted to set down what was disclosable in a series of prescriptive rules. This was quickly seen as unworkable and now we have a system which brings all schemes relating to certain taxes potentially within the disclosure regimes and then applies a series of hallmarks to determine whether or not they are actually to be disclosed. This is similar to the regime which has applied for VAT since the original introduction of the disclosure regime.

Taxes affected

[25.89]

The 2006 regime covers:

(a)     income tax;

(b)     capital gains tax; and

(c)     corporation tax.

There are separate regimes for value added tax and stamp duty land tax, and mention was made earlier of the extension of the regime to cover NIC. Inheritance tax was originally outside the disclosure regime, but was brought into DOTAS from April 2011. The bank levy has also been brought into the regime as has ATED.

The hallmarks
[25.90]

The hallmarks are the key to understanding the way in which the disclosure regime now operates. There are basically six different hallmarks (although as we shall see some of these hallmarks themselves contain more than one element). The current hallmarks as they apply to the main taxes are:

(a)     confidentiality;

(b)     premium fee;

(c)     standardised tax products;

(d)     loss schemes;

(e)     leasing arrangements; and

(f)      employment income.

Other hallmarks have been introduced and withdrawn during the currency of DOTAS and various other hallmarks have been proposed but not then implemented. Information about these matters is not included in this chapter but can be found in previous editions of this publication. It should be noted that a draft statutory instrument has been published for consultation. This will significantly widen the scope of some of the hallmarks. This statutory instrument has not yet become law and is therefore only referred to briefly in the text below.

=
The difference between hallmarks for promoted schemes and in-house schemes ===== [25.91]

There is a major difference of approach between the way that the hallmarks operate for schemes with a promoter and for in-house schemes. For schemes with promoters, a scheme which falls within any one of the hallmarks will be disclosable. However, for an in-house scheme the only hallmarks which are relevant are confidentiality (with some restrictions which are not discussed here), premium fee, leasing arrangements and employment income. In additional any business which is a SME is not within the scope of the in-house scheme rules at all in respect of any of the hallmarks, other than the employment income hallmark.

There has been some confusion about the SME exemption and therefore it is worth stressing here a fundamental point. The exemption only applies to in-house schemes. If a SME implements a scheme promoted by another person, it still has an obligation to disclose the use of that scheme on its relevant tax return.

Confidentiality
[25.92]

Confidentiality has been a hallmark (and before that a filter) since the beginning of DOTAS but the way that it has been defined has been amended several times.

There are two limbs to the test. The first relates to confidentiality in relation to other promoters: the second relates to confidentiality in relation to HMRC.

The promoter limb of the test is as follows:

‘it might reasonably be expected that a promoter would wish the way in which [the element which gives rise to the tax advantage] secures a tax advantage to be kept confidential from any other promoter.’

The test applies if the confidentiality requirement is in place at any time after the trigger point for the disclosure.

The definition refers to `a’ promoter rather than `the’ promoter. HMRC interpret this to mean `any’ promoter. In other words the test is whether any promoter would want to keep the arrangements (or an element of them) confidential. The attitude to confidentiality of the particular promoter of the scheme is not therefore the defining factor.

Confidentiality of advice is often part of the contractual terms under which firms give advice to clients, and HMRC's guidance makes it clear that the hallmark does not automatically include all advice given under such contractual terms. Essentially HMRC are expecting promoters to ask themselves:

‘do I want the details of this scheme to remain secret in order to obtain competitive advantage and retain my ability to earn fees from the scheme’.

So, for example, if the scheme is already well known in the tax community then the confidentiality hallmark will not be present.

The HMRC limb of the test is:

‘a promoter would, but for the requirements of these regulations, wish to keep the way in which that element secures that advantage confidential from HMRC … and a reason for doing so is to facilitate repeated or continuous use of the same element, or substantially the same element, in the future.’

There is a further extension to this to cases where a promoter does not provide – or does not allow the user to retain – promotional material, data or written professional advice relating to the arrangements and it might reasonably be expected that the reason for doing so is to keep the arrangements confidential from HMRC.

HMRC do not regard these confidentiality questions as being purely hypothetical. The guidance does not, for example, require promoters to consider what HMRC's reaction would be if the scheme were disclosed, or whether the Government would block the scheme by amending legislation. It simply asks whether a promoter would wish to keep the scheme (or elements of it) confidential from HMRC. This is not an easy concept. Given that HMRC will eventually know about any scheme through the normal tax return process, if not before, the only reason why anybody would in fact be concerned about HMRC knowing about the scheme early would be precisely because he or she thought that HMRC might indeed move to challenge or block the scheme once they knew about it. So to an extent, by asking the question the promoter is forced into a particular answer. It is hard to see how this particular limb of the confidentiality test could ever be tested in practice. The 2010 Regulations deal with this point to some extent by extending the test to cover circumstances where a user may wish not to disclose in order to prevent HMRC obtaining information that might lead to an enquiry or inhibit a tax repayment.

In HMRC’s guidance there are some useful pointers to the way in which HMRC will deal with this confidentially test in cases where they discover a scheme which has not been disclosed. In particular they state that they would regard the confidentiality hallmark as being present where there are:

‘explicit warnings in marketing material or other communications to a client to the effect that the scheme may have a limited shelf life because Parliament may act to close it once it became known’.

‘When applying [the] test the promoter should first consider its own position and if it concludes that it would want to keep the arrangement confidential from HMRC then the arrangement is within the hallmark. If the promoter concludes that it does not want to keep the arrangement confidential from HMRC then it needs to consider if it might reasonably be expected that another promoter would wish to keep the arrangement confidential. This part of the test replicates the existing wording in regulation 6(1)(b) and so a promoter should be used to putting itself in the position of another promoter. On this basis for the majority of promoters this phrase should not present a challenge, as they already consider the position of another promoter.’

It goes on to say that:

‘This will be more of a challenge for promoters who have routinely not disclosed under the current hallmark on the basis that they have concluded that they do not want to keep an element of the arrangement confidential from HMRC. They will need to take into account whether or not another promoter would “reasonably be expected” to take the same view.’

Factors not taken into account

[25.93]

In 2012 it was proposed that a scheme would automatically be treated as falling within the confidentiality hallmark where it contains features which indicate that the promoter considers that HMRC are likely to challenge the scheme. The proposal was that these features might be:

(1)     a fighting fund to fund litigation in the event of a challenge;

(2)     a commitment by the promoter to fund litigation in the event of HMRC challenge;

(3)     fees that will be earned if HMRC challenges the scheme and it is eventually settled or decided in the client’s favour; and

(4)     the promoter indemnifying users’ costs in the event that the scheme fails to achieve any tax advantage.

These proposals were in the end not proceeded with, although it is worth noting that some of these ideas eventually found their way into the high risk promoters legislation in FA 2014.

Confidentiality where there is no promoter

[25.94]

In the event that there is no promoter for the purposes of the regulations (i.e. because the promoter is offshore or has asserted privilege) then the user of the scheme must himself apply the confidentiality test in respect of HMRC.

Premium fee
[25.95]

A premium fee is one which is chargeable by virtue of any element of the arrangements (including the way in which they are structured) from which the tax advantage expected to be obtained arises and which is:

(a)     to a significant extent attributable to that tax advantage; or

(b)     to any extent contingent on the obtaining, as a matter of law, of that tax advantage.

Where there is a premium fee, the arrangements will be within the hallmark if it might reasonably be expected that a promoter (or a person connected with a promoter) of arrangements which are the same as (or substantially the same as) the arrangements in question, would (but for the requirements to disclose information under these regulations) be able to obtain a premium fee from a person experienced in receiving services of the type being provided.

There are several important considerations here. In the first place it is the amount of the fee which is attributable to the tax advantage, not the fee itself. Tax professionals are in the business of giving tax advice, so in a sense all advisory fees are in respect of the client obtaining a tax advantage. What the emphasis on the amount of fee is seeking to do, therefore, is to catch only those fees where there is a link between the amount of the fee and the tax advantage. So a normal basis of fee by reference to hours worked is highly likely to be a premium fee. However, that leaves open the very wide question of when a fee which is not linked to the hours worked will be a premium fee.

HMRC have given some useful examples in their guidance and firms are developing their own experience here, but there is still a long way to go before there will be a consistent view of what is or is not a premium fee.

A flat fee for a piece of work will not automatically be a premium fee. In quoting a flat fee for a project one is often simply trying to estimate how long a piece of work is likely to take, and what staff will be needed to carry out that project. The flat fee is therefore in effect an estimate of what the total costs would be based on normal charge out rates. If the work takes longer, the adviser loses out, and if it is done more efficiently, the adviser gains. That does not make it a premium fee. Similarly, there is no premium fee if the adviser increases his charge out rates because of the complexity of the advice or the need to turn round a project in a limited time frame. Those might be premium fees in terms of the way that the office relates billings to time sheets, but the fee is not attributable to the any tax advantage.

Charge out rates vary from region to region. As a practitioner based in Nottingham my normal charge out rate is likely to be less than that of an equivalent professional based in London. However, if in a particular project I’m in competition with a London firm I charge myself out at Big Four London partner rates, because that is the rate that the client is prepared to pay. I am not charging a premium fee within the definition. This must be the case. Were it not, different tests would apply in different parts of the country and this is manifestly not what this regime is about.

At the other end of the spectrum, if I devise a remuneration scheme and charge a fee equivalent to 20% of the amount of income tax saved, then I am clearly charging a premium fee. The amount of the fee is clearly attributable to the tax advantage. If the client decides to double the amount of the bonus put through the scheme, my fee also doubles, even though I am likely to do exactly the same amount of work for the bonus as I would for one half the size.

The area of difficulty is where the line is drawn in cases where there is no explicit link between the size of the fee and the amount of tax at stake. HMRC's guidance gives an example of an adviser who charges a flat fee of £5,000 for a project which would take him ten hours at a rate of £100 per hour. Here the fee is out of all proportion to the charge out rate and is likely to be a premium fee. Things are often not as simple as this. In a free market advisers will charge whatever they can for a piece of advice. Often the mind set will be, ‘this is a complicated high-value with a lot of tax at stake: I should be able to charge a good fee for this’.

The fee that is quoted will probably not be based on charge out rates, but neither will it be directly linked to the amount of tax at stake. The amount of tax at stake will be one of the many factors which ultimately determines the fee that is quoted.

It is important to appreciate that not all premium fees are attributable to the tax advantage.

What might be thought of as `negotiation’ fees are not premium fees even if they are directly related to a tax saving. For example many advisers will charge a tax-related fee for a capital allowances or research and development project. The client will build a new factory and the adviser will charge a fee of x% for every pound of expenditure which he is able to identify, to HMRC's satisfaction, as plant. The premium here is not attributable to the tax advantage: it is a tribute to his skill and knowledge in being able to identify which items of expenditure can be treated as falling within the definition of plant. Similarly, an adviser dealing with investigation work who charges a fee which is a percentage of the amount by which he can reduce HMRC’s proposed investigation settlement is not within the definition. Again, there may be a premium fee, but it is not attributable to any tax avoidance arrangements.

In the context of a corporate finance transaction, it will often be the case that the overall size of the fee depends on the size of the deal. So for example, the lead adviser may charge a fee which is 5% of the deal price and he may agree with his tax colleagues that 20% of his fee will be attributable to the tax advice. In the opinion of this writer this is not a premium fee within the context of the DOTAS regime. The amount of the fee relates to the size of the deal, not the tax advantage.

When one talks to HMRC staff about this, they generally indicate that they are looking to use the premium fee test to cover two situations:

(a)     where there is a direct link between the tax at stake and the fee; and

(b)     where a firm has developed a piece of intellectual property and is charging the client for the use of that property.

HMRC believe that the person who has devised a tax scheme knows when he has devised something which will command a premium fee in the market place, and thus using a supply side measure such as the fee is probably the best way of being able to differentiate between normal planning and the sorts of schemes which they want to use the new rules to get information about. It remains to be seen how successful the test will actually be. The premium fee test remains one of the most controversial aspects of the disclosure regime. While it can generally be made to work in a sensible manner, there is no doubt that if it were to be seriously tested in the courts it is by no means clear precisely what the true effect of the test would actually be. The 2010 Regulations made a small amendment to the premium fee test. This prevents taxpayers making the (somewhat circular) argument that as a scheme is notifiable it cannot, ipso facto, command a premium fee and that therefore the scheme cannot be disclosable.

The second limb of the premium fee test relates to contingent fee. A scheme is not excluded if the fee chargeable for any element of the arrangements is to any extent contingent on the obtaining of that tax advantage.

Again some caution is necessary here. Contingent fees may be charged for reasons other than a tax advantage. For example I might be retained to provide tax advice to a management buy-out (`MBO’) team. If the MBO does not go ahead the MBO team will not have been able to raise any money and thus would be unable to pay any fees. So typically I might structure my fee arrangement to include a small element of fixed fee to cover some of my basic costs and a contingent fee which would only be payable if the transaction actually went ahead. This may be a contingent fee in commercial terms, but it is not a contingent fee within the definition. The contingency is not related to the obtaining of a tax advantage: it is related to whether or not the transaction actually takes place. The 2010 Regulations put this beyond doubt by making it a requirement that the contingency must relate to whether a scheme works as a matter or law rather than for some other reason – the example used in the explanatory notes accompanying the 2010 regulations is of an employment scheme where the fee is contingent upon the scheme being taken up by a certain number of employees.

By contrast, if I devise a tax avoidance scheme for my client and agree to charge him my normal time costs up front and a further success fee at the point at which HMRC accept that the scheme works, my fee would be a contingent fee within the definition. The success fee is directly contingent on the obtaining of that tax advantage.

The premium fee test has not been easy to deal with in practice. Taken broadly, it is a reasonable proxy for the type of complex planning which HMRC want to be disclosed, but if the definition is taken literally it does create problems, because it imposes a test which requires a perfect knowledge of the market place. Some commentators have taken the view that the test is, in reality, almost meaningless. If the market says that the rate for a particular planning scheme is x% of the tax saving and everybody in the market charges the same rates then there is an argument that even though the fee is much higher than normal charge out rates for tax advice it can’t be a premium fee because it is simply reflecting the market rate. That argument is likely to be resisted by HMRC.

Standardised tax products
[25.96]

This is a category is intended to catch what HMRC call `shrink wrapped’ or `plug and play’ schemes, i.e. situations where the client purchases a pre-prepared tax product which requires little if any modification to suit his circumstances.

There are five elements to this hallmark and all five have to be present before the hallmark is satisfied.

=
Are the arrangements a product? ===== [25.97]

The test here is whether or not what is offered to the client is in essence a finished product rather than a bespoke planning arrangement. A product will have standardised documentation which has been prepared by the promoter and which does not need to be substantially modified in order to be used by the client. A standard product would typically also require the client to enter into a specific transaction or series of transactions, such as entering into a specific partnership or taking out a loan from a specific provider.

Is the product a tax product?
[25.98]

The test here is whether the client would buy the product in the absence of the tax advantage. Is it reasonable for an informed observer (having studied the arrangements) to conclude that the main purpose of the arrangements was to enable a client to obtain a tax advantage?

=
Is the tax product made available generally? ===== [25.99]

The test here is whether or not the product is made available for implementation by more than one person. This is not dependent on the way in which the product is marketed, it is simply an objective test of whether the product is available to more than one person. So a product which is made available to two clients will be made available generally even if there was no marketing of the product.

=
Was the arrangement first made available on or after 1 August 2006? ===== [25.100]

This test looks at whether the same arrangements (or substantially the same arrangements) were made available for implementation before 1 August 2006. If they were then the product does not fall within the hallmark. Note that this test is not looked at by reference to any individual promoter. If promoter A made the product available before 1 August 2006, then even if promoter B only made the product available after 1 August 2006, the scheme is still not within the hallmark and promoter B has no disclosure obligations. (Promoter B may, however, have a disclosure obligation under one of the other hallmarks.)

Whether or not a particular product was being promoted before 1 August 2006 is clearly a matter of fact, and any promoter seeking to rely on this grandfathering provision will need to ensure that proper evidence to support reliance on this provision is collected and retained in the event of a future challenge.

=
Does the product fall under the excluded list? ===== [25.101]

Finally, there are a number of standard tax incentives which fall outside the hallmark. These include straightforward tax shelters such as EIS and VCT schemes. A full list of these excluded items is found at the end of this chapter (see Appendix 2, 25.XX).

==== The future of the standardised products hallmark ==== [25.102]

The 2014 consultation looks in detail at this hallmark and proposes several changes. First of all it suggests that the grandfathering rule should be abolished. This, as discussed above, is recognition that the evolution of DOTAS into a quasi-charging provision means that an exemption for older products may no longer be appropriate. Secondly, there is a proposal to change the tax advantage test into a much wider man or woman on the Clapham omnibus test by making the test a consideration of whether an informed observer could reasonably conclude that the arrangements are a tax avoidance scheme or product aimed at more than one person, even though the circumstances of the client will inevitably need to be taken into account in formalising details of implementation''. Matters which might lead'' the informed observer to that conclusion is the existence of a fighting fund or a requirement that clients cannot act independently in dealing with HMRC in respect of enquiries into their participation in the scheme.

Such a test essentially would get round the problem of defining a tax avoidance scheme: if an informed observer thought that it looked liked a scheme it would be a scheme for the purposes of DOTAS

These matters are addressed in the draft statutory instrument referred to above (The Tax Avoidance (Prescibed Descriptions of Arrangements)(Amendment) Regulations 2015. These will (if enacted) introduce as a condition a test of whether an informed observer (having studied the arrangements and having regard to all relevant circumstances) could reasonably be expected to conclude the arrangements have standardised documentation; that a person implementing the arrangements must enter into a specific transaction or series of transactions; that the transaction(s) are standardised and the main purpose of the arrangements is to enable a person to obtain a tax advantage or that the arrangements would be unlikely to be entered into but for the expectation of obtaining a tax advantage.

As was suggested in the consultation document grandfathering protection for pre-2006 arrangements will be removed from the hallmark.

Loss schemes
[25.103]

This hallmark applies where the promoter expects more than one individual to implement the same, or substantially the same, arrangements and the arrangements are such that an informed observer (having studied them) could reasonably conclude that the main benefit of those arrangements which could be expected to accrue to some or all of the individuals participating in them is the provision of losses and those individuals would be expected to reduce their liability to income tax or capital gains tax.

The first point to note is that this is only concerned with losses accruing to individuals – corporate losses are not within this hallmark (they might of course be caught by other hallmarks). Secondly, it applies only where the main benefit of the arrangements is the availability of the loss. Clearly the draftsman is looking for situations where a tax loss is created without an underlying economic loss, or where the economic loss is much smaller than the tax loss. The guidance notes are at pains to stress that losses which arise from normal economic activity – such as start up losses from a new business venture – will not be caught.

Again there is a requirement that more than one individual is expected to implement the arrangements.

HMRC are known to be concerned that not all loss schemes are being disclosed under this hallmark and are keeping the position under review. Currently the test operates by reference to the tax advantage being the main benefit of the scheme. In the Government’s view many arrangements which it considers to be tax avoidance schemes are not being disclosed because the promoter argues that the investment product which generates the loss also has a genuine investment benefit – even if the investment return is speculative and very long-term.

In the 2014 consultation HMRC return again to the definition of losses and proposes that the main benefit test should be widened to a `one of the main benefits test’. But this will also be accompanied by a safeguard to protect genuine investment schemes and start ups. The regulations published in draft in 2015 referred to above are written by reference to the informed observer (as for the standardised tax product hallmark dealt with above)  The test will be whether that observer would be expected to conclude that the benefit (or one of the main benefits) which could be expected to accrue is the provision of losses; the arrangement contain and element which are unlikely to have been entered into were it not for the provision of those losses and the individuals would be expected to use those losses to reduce their liability to income tax or capital gains tax.

Leasing arrangements

[25.104]

The draftsman clearly had great difficult in defining which particular leasing arrangements were to be caught, because the definition of this hallmark is almost as long as the definitions of all of the other hallmarks put together. In this chapter we can only deal with the main aspects of this hallmark and readers who require a more detailed explanation of the precise way in which leasing arrangements can be caught by the disclosure regime are referred to HMRC guidance notes.

There are three fundamental tests which have to be met for all leases and then three further conditions, only one of which has to be met. The three fundamental tests are as follow.

(a)     The arrangement must include a plant or machinery lease. There is an extensive definition of this term, which covers normal leases as well as arrangements treated under GAAP as leases.

(b)     The lease must be of high value. This means an individual asset with a cost/market value to the lessor of at least £10 million or a group of assets with a total cost/market value of at least £25 million.

(c)     The lease must be a long lease, that is to say a lease for a period of at least two years, or for a shorter period where there is an option or other arrangements in place to extend the lease beyond two years.

If all of these fundamental tests are met there are three additional conditions. Only one of these additional conditions has to be met. They are that:

(a)     the lease involves both a party who is entitled to claim capital allowances on the leased assets and a party who is not within the charge to corporation tax;

(b)     there is an arrangement under which the whole or the greater part of the risk that would otherwise fall directly or indirectly on the lessor if payments due under the lease were not made in accordance with its terms and that arrangement involves money or a money debt; or

(c)     the arrangement involves a sale and leaseback or a lease and leaseback. There are, however, exceptions for assets which are new (i.e. less than four months old) or which are fixtures in buildings, unless the assets are used for storage and production. Even then however, there is an exception if the plant and machinery does not exceed half of the value of the total leased assets and the rent payable under the lease is not directly or indirectly dependent on the availability of capital allowances.

These leasing rules were discussed widely with the leasing industry and are thought to have achieved a reasonable balance between protecting normal commercial arrangements from disclosure and ensuring that HMRC are informed of arrangements which are significantly tax driven. But again, only time will tell whether or not the definition will stand detailed scrutiny.

Employment products
[25.105]

A specific hallmark relating to employment products was introduced in response to the disguised remuneration legislation in ITEPA 2003, Pt 7A. The hallmark is specifically linked to Part 7A and cannot be properly understood without at least a working knowledge of those provisions. What follows therefore assumes that the reader is familiar with the broad outlines of Part 7A.

First of all, two basic conditions have to be met.

The first is that the arrangement involve at least one of the following:

•        A relevant third person taking a relevant step under ITEPA 2003, s 554B.

•        Any person taking a relevant step under s 554C or 554D.

•        Taking a step under s 554Z18 or 554Z19.

Section 554C deals broadly with payments of money and transfers of assets. Section 554D deals with the making of assets available without a transfer of ownership. For the purposes of the hallmark it is sufficient that any person takes the relevant step s 554B, concerned with earmarking. This is only relevant for DOTAS where the earmarking is made by a relevant third person, i.e. not the employer. The only time that earmarking by the employer is relevant for DOTAS purposes are under s 554Z18, which relates specifically to certain pension arrangements. Section 554Z19 relates to the provision by the employer of security.

The second basic condition is that the main benefit of the arrangement is that an amount which would otherwise count as employment income under s 554Z2(1) is reduced or eliminated.

The next step is to test whether condition 3 is met. Condition 3 is that there is no Part 7A charge under ss 554E–554Y and their associated regulations. These are the main sections that set out the exemptions for charge under Part 7A. Therefore something which is a relevant step under, say, s 554C but is within the exemption in, say, s 55E will not give rise to a Part 7A charge.

If conditions A and B are met but condition C is not met then the arrangements fall within the hallmark. As condition C is itself expressed in the negative it is not immediately clear what the test is trying to do. Essentially it seems to be saying that if there are arrangements involving relevant steps and those arrangements would not fall within any of the exemptions then, if the benefit of the arrangements is that a charge under Part 7A is reduced or eliminated, the arrangements are within the hallmark.

But what happens if condition C is met – in other words one of the reliefs within Part 7A applies? In that case there are two further tests. If either of them is satisfied the arrangement falls within the hallmarks.

The first is that the arrangements involve one or more contrived or abnormal steps without which the main benefit would not be obtained. The second is that a relevant step is treated as taking place and Chapter 2 of Part 7A applies as a consequence.

The first of these is relatively straightforward to understand. It is designed to identify schemes under which a taxpayer seeks to come within the terms of one of the exemptions by taking contrived or abnormal steps. `Contrived or abnormal’ takes the same meaning as it does in the GAAR.

The second requires a deeper understanding of the way in which Part 7A works. Some of the exemptions within Part 7A are contingent or provisional, i.e the relief is given at the time that the relevant step is taken but if something later happens the relief is withdrawn. One example of this is car loans. A loan by a third party to an employee is normally a relevant step. But if the loan is for the purposes of acquiring a car then provided certain conditions are met the loan does not give rise to a Part 7A charge. If those conditions are breached, for example the loan is not repaid within the permitted period of four years, there is a deemed relevant step at the time that the condition fails, i.e. the relevant step is not retrospectively reinstated at the time that the original loan was taken out. Schemes which seek to exploit this contingent or provision exemption are also within the hallmark.

Employment schemes have been one of the most difficult areas within DOTAS from the beginning and it is hard to believe that all of the problems which HMRC believe exist in this area will be solved by this this hallmark. As ever there is a delicate balance to be achieved between ensuring that aggressive schemes are identified and stopping the entire system being clogged up by a huge volume of disclosures of straightforward remuneration planning.

Proposed additional hallmark
[25.106]

Financial products have always been a difficult area for DOTAS. There is no doubt that some financial products have been designed as tax-avoidance vehicles but is it very difficult to draw the line between such products and the board range of investment products, some of which may have benign tax advantages. The 2014 consultation proposes the introduction of a specific hallmark to bring in financial products. As this is still subject to consultation there is little merit in discussing the details of the proposal. Essentially the hallmark will define a wide range of financial products (e.g. such things as a share, a loan or a derivative contract) and then require disclosure where there is a direct link between the financial product and the gaining of the tax advantage. Specifically, in order to be within the hallmark, the tax advantage would not arise `but for’ the inclusion of the financial product. Draft regulations were published for this hallmark in 2014 but were not adopted and revised regulations have been published for consultation. Essential this hallmark, which will also apply the same informed observer test discussed above where the arrangements include a financial product and the benefit, or one of the main benefits, of the inclusion of that financial product is to give rise to a tax advantage. There is then a two part test. The arrangement are caught either if the financial product contains at least one term which would not have been entered into were it not for the tax advantage or the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not have been obtained. There will be exceptions for arrangements which are accepted as coming within the code of conduct for banks.

These provisions, assuming that they become law, will be discussed in more detail in the next edition of this publication.

Inheritance tax
[25.107]

Mention has already been made of inheritance tax being brought into DOTAS. In a previous edition of this book I wrote:

‘[The fact that inheritance tax is not within DOTAS] is probably recognition of the fact that most inheritance tax planning is done to protect against future liabilities rather than to shelter immediate liabilities. I may carry out some inheritance tax planning now to minimise my inheritance tax exposure on death, but while I remain alive no inheritance tax liability is actually triggered, so I have not actually saved any tax. Also the very different reporting requirements for inheritance tax would make it impossible for a system of scheme reference numbers to operate in anything like the same way as it does for income and corporation tax.’

HMRC acknowledged some of these concerns but after a further consultation decided that it was appropriate for inheritance tax to be brought into DOTAS from 6 April 2011.

The DOTAS regime for inheritance tax is restrictive. It only applies to arrangements under which assets become relevant property (i.e. are placed into trust) as a result of a lifetime transfer in circumstances where a tax advantage is obtained in respect of a relevant property entry charge. In broad terms this would cover lifetime transfers into trust which would, in the absence of any planning arrangements, give rise to an immediate inheritance tax charge.

One of the key aspects of the DOTAS regime as it applies to inheritance tax is that it applies only to wholly new schemes. This is achieved through Reg 3 of the Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011 (SI 2011 No 170), which exempts arrangements which are the same (or substantially the same) as arrangements that were first made available for implementation before 6 April 2011. The exemption also applies where the date of any transaction forming part of the arrangements fell before 6 April 2011 or in respect of which a promoter first made a firm approach to another person before 6 April 2011.

Broadly speaking, the rules for scheme reference numbers which apply for direct tax purposes also apply for inheritance tax schemes. There are, however, some differences, which are discussed at 25.XX.

As at 31 March 2012 only one inheritance tax scheme had been disclosed. The tables for 2013 indicate that fewer than five inheritance tax schemes were disclosed in the year to March 2013 and March 2014.

The 2014 consultation document proposes a significant widening of the inheritance tax hallmarks. Again, because the proposals are currently in draft they are not discussed in detail here. Essentially HMRC are looking to extend the hallmark to a wider range of lifetime arrangements, and also to arrangements intended to reduce or avoid liabilities on death. It is also proposed that some of the general hallmarks, such as confidentiality and premium fee will also apply to inheritance tax.

Draft regulations have been published for consultation which will put these proposals into law.

Essentially they widen the scope to cover all inheritance tax arrangements, whether during a person’s lifetime or on death. They take the same “informed observer” approach as the other draft regulations discussed above. There are then carve outs for the making or amending of wills, certain insurance policies written in trust and certain interest free loans made to trustees. In addition the confidentiality and premium fee hallmarks will be extended to IHT – at the moment these do not apply.

As these regulations are still in draft and are subject to change they are not discussed further here. On the assumption that they are enacted they will be reviewed in detail in next year’s edition of this publication.

ATED
[25.108]

There are three prescribed circumstances relating to the ATED hallmark.

(a)     A company, partnership or collective investment scheme ceases to meet the ownership conditions in respect to the chargeable interest.

(b)     The taxable value of the chargeable interest is reduced to £2 million or less.

(c)     The taxable value of the chargeable interest is reduced with the consequence that the chargeable interest falls within a lower tax band than it otherwise would.

Certain arrangements are excluded. These are essentially where there are arm’s length transfers with unconnected persons, transfers within a group, certain distributions and transfers into settlement.

Notification for such schemes will normally fall within the five-day rule, but there is a transitional rule. Where the relevant date falls within the period 13 December 2012 and 30 September 2013 the date for notification is extended to 30 November 2013.

=== When is a scheme to be disclosed? === [25.109]

Once it has been decided that a scheme needs to be disclosed, the next question is to determine the point at which the report is due. This is likely to be almost as difficult an issue as deciding what needs to be reported in the first place.

The legislation specifies a number of trigger points. The earliest of these is the one which will set the disclosure clock running.

Available for implementation
[25.110]

The first trigger point is the date on which the promoter makes the scheme `available for implementation by any other person’. This is clearly intended to cover marketed avoidance schemes. The first thing to notice here is that `available for implementation’ does not mean that the scheme is actually implemented. There will therefore be instances of notifiable proposals which are never actually implemented by anybody.

In the view of HMRC a scheme is available for implementation when:

‘the scheme has been developed to such a stage that the promoter has a high degree of confidence in the tax analysis applying to it and it is communicated to a potential user in sufficient detail that he could be expected to understand:

(1)     the way in which the scheme works, including its key elements;

(2)     the expected tax advantages; and

(3)     decide whether or not to enter into it.’

This is clearly a matter of degree. If a firm sends out a marketing letter that says `we have schemes will enable you to pay tax at only 25% on a bonus’ that will not, in this author's view, be making a proposal available for implementation. There is not enough in the mailshot to make an informed decision on whether or not to proceed. And it may be, of course, that the firm does not actually have a fully worked out scheme to achieve that result. At the other extreme, a detailed presentation to a potential client who has indicated that he wants to implement an efficient bonus scheme, which gives step diagrams of how the planning works, would almost certainly be making a proposal available for implementation.

There has been little discussion to date of precisely what `the way in which the scheme works, including its key elements’ actually means. The author has seen many situations in which clients have entered into avoidance schemes without any real understanding of how the scheme works. Indeed, the complication of many schemes is such that it is likely to be only a very few experienced professionals who actually understand how the scheme works. The client may well understand the end result and the inherent risks, and can make an informed decision on this basis, without having any proper comprehension of how the scheme works. At some point HMRC are likely to be challenged on this point by a promoter who argues that a proposal is not available for implementation because the client does not understand how the scheme works. Again, any promoter who wants to rely on this defence will have to be prepared to argue his point at the tribunal.

Actual implementation
[25.111]

The second trigger point is the actual implementation: in technical terms, the date on which the promoter first becomes aware of any transaction forming part of notifiable arrangements implementing the notifiable proposal. This is broadly intended to cover bespoke arrangements. So where the scheme is not `made available’ the notification period will commence when actual implementation starts.

This sounds straightforward, but the author confesses that he does not find this an easy area on which to advise (and he knows that others share this problem). For example, is the act of drawing up a set of documents a transaction or does implementation only occur when the documents are actually executed? Note also the reference to the promoter `becoming aware’. If the client or other advisor takes steps which the promoter does not know about it does not trigger an obligation under the test; it is only when the promoter becomes aware of them that the obligation clock is triggered. (Care is needed here of course because the disclosure clock may have already been triggered under the first limb of the test.) In practice it is not always clear precisely when actual implementation has started. HMRC have indicated that they will police this aspect of the regime sympathetically and that firms who make a genuine attempt to comply with the rules will not be penalised. It is hoped that this will indeed be their policy.

A scheme must be notified to HMRC within five days of making a `marketing contact’ in respect of a scheme which has been `substantially designed’. A marketing contact is made where a person communicates to another person information about a scheme, including an explanation of the tax advantage, with a view to that person or any other person implementing the scheme. This definition is intended to cover communications of a general nature both to persons who may wish to use the scheme, and to intermediaries or introducers who may in turn communicate it to a potential user. This requirement came into effect on 1 January 2011 (Finance Act 2010, Schedule 17 (Appointed Day) Order 2010 (SI 2010 No 3019)).

==== When must notification be made? ==== [25.112]

A promoter must make a disclosure of a notifiable proposal within five working days of the trigger point. During the consultation process strenuous attempts were made to persuade the Government to extend the deadline, but Ministers were not prepared to shift on this fundamental point. The five-day limit effectively means that the promoter must prepare a disclosure form as part of his planning for a particular scheme: there will no be time to prepare the form after the scheme has been launched.

Finance Act 2015 introduced a new s310C duty on promoters to provide certain updated information once a scheme had been disclosed. That information is a change of the name by which a scheme is known or a change of address of a promoter. The information has to be provided to HMRC within 30 days of the relevant change.

=== What happens once a scheme has been disclosed? ===

==== Issue of reference number by HMRC ==== [25.113]

Disclosure of a scheme is the first stage in a multi-step process. During that process obligations then pass to HMRC, back to the promoter and then to finally to the taxpayer.

The next stage in the process following the making of the disclosure is that HMRC may issue a reference number for the scheme. They are not obliged to issue a reference number: if they do not do so all further obligations are removed. HMRC have 90 days from the date of receipt of the disclosure notice to issue a reference number. As discussed above the original time limit was 30 days. In the author's experience a reference number is almost always issued immediately on receipt of the notification by the promoter. .The reference numbers themselves do not give any indication of the nature of the scheme or the identity promoter; they are generated at random.

It is important to understand that the issuing of a reference number is not approval by HMRC of the scheme; it is simply a record of the fact that the scheme has been disclosed. The normal process of enquiry into tax returns is unaffected by this new regime. HMRC are known to be concerned that some promoters and introducers are either deliberately or through misunderstanding suggesting to clients that the issue of a reference number means that the scheme has been approved by HMRC. HMRC are at pains to stress that this is not the case.

One of the issues which emerged from the early days of the regime was the lack of any legal basis for any queries about the contents of a disclosure form. HMRC simply had the power to register a scheme. If they were not satisfied with the contents of a particular disclosure, their only option was to return the form to the promoter, on the basis that the disclosure did not meet the legal requirements and that it therefore was not a valid disclosure. This caused a number of problems in practice and it was no great surprise that a comprehensive enquiry regime was introduced in FA 2007. This is discussed in detail below.

In the 2014 consultation consideration was given to the possibility of extending this 30-day period to 90 days. The thinking here is that a promoter would be able to make a disclosure in a marginal case and then would be able to discuss with HMRC over a 90-day period whether or not disclosure was actually required or, even if disclosure is required, that the scheme should be one for which an APN would not be relevant. This is a recognition by HMRC of the fact that DOTAS now occupies a very different place in the tax regime. As noted above, that change has now been made and is effective from Royal Assent to FA 2015.

Finance Act 2015 also introduced a further change in relation to HMRC powers once a disclosure has been made. 316C and D now allow HMRC to publish information about arrangement to which a reference number has been allocated and information about promoters of those arrangements. The information which can be published is

·  Information which is prescribed information in respect of the arrangements

·  Information relating to any ruling of a court or tribunal in relation to those arrangements or in relation to a person in his capacity as promoter of those arrangements

·  The number of persons who have entered into those arrangements

·  Whether the arrangements are APN relevant (see X above)

·  Any other information which HMRC considers appropriate for the purpose of identifying the arrangements or the promoter

There is an important safeguard. HMRC may not publish any information which identifies the user of the arrangements. Where a promoter him or herself enters into the arrangements personally HMRC is still able to publish the name of the promoter in his/capacity as promoter. Where HRMC intends to publish the name of a promoter it must inform that person in advance and give him/her a reasonable opportunity to make representations about whether his/her name should be published.

HMRC is also obliged to publish information about final judicial rulings concerning arrangements which a court/tribunal has found to be effective. This bring an element of balance to the publication rules. If HMRC have previously published information about a DOTAS arrangement it is only right that HMRC will be required to publish information that the arrangement does in fact work. The concept of a final judicial ruling is taken over from the Follower Notice legislation and is discussed above at XXXX

==== Issue of reference number to user by promoter ====

[25.114]
The next stage in the process falls back on the promoter. The promoter has an obligation to issue all clients who use the scheme with the reference number provided to him by HMRC, within 30 days of the date on which he first becomes aware that the client has taken the first step to implement the scheme. Note therefore that although the disclosure by a promoter is not dependent on implementation, the issue of the reference number to the client is linked to implementation. In other words, if a registered scheme is discussed with a client but the client does not then proceed with implementation, there is no requirement for the promoter to issue the client with the reference number. The legislation is not absolutely clear on this point and there is a reading which suggests that there is an obligation to pass the reference number to the client even if the client does not actually implement the scheme (see FA 2004, s 312(2)(b)), but HMRC's guidance does not appear to take this point.

It is mandatory for promoters to pass the scheme reference number to the client using form AAG6. The form makes it clear to the client what his/her obligations are in respect of the scheme number, but the client does not use the AAG6 form to notify HMRC of the use of the scheme, that is still done on the tax return or form AAG4.

There are penalties on the promoter for failure to pass the reference number to the client.

[25.115]
As DOTAS originally stood a promoter's obligations were satisfied when he or she had disclosed a scheme to HMRC and had provided users with the reference number. HMRC, however, formed the view that this did not provide them with the information which they needed. Firstly, they had evidence that significant numbers of clients were not including scheme reference numbers on relevant returns. Secondly, the original system gave HMRC no immediate idea of the extent to which a particular scheme had been used. The disclosure return makes no reference to the number of people who have implemented a scheme – indeed, there are circumstances in which disclosures are made where no person has actually implemented a scheme.

Promoters (and the obligation applies also to co-promoters) are now obliged to make quarterly returns to HMRC supplying:

•        the promoter’s full name and address;

•        the scheme reference number issued by HMRC in respect of the scheme;

•        the client’s full name and address – this is the address which the promoter used to send the scheme reference number to the client;

•        the end date of the calendar quarter for which the information is being supplied; and

•        the client’s UTR or NINO. Alternatively the promoter can confirm that the client does not have either number or that the client has refused to provide that information.

The obligation to provide client lists came into force on 1 January 2011, but there is no exclusion for schemes first registered before that date. What matters is the date on which the obligation to pass the scheme reference number to the client arose. A client who implements a scheme in 2014 will need to be included on the relevant list even if the scheme was registered under DOTAS in 2010.

There may be circumstances in which the obligation to make a return of client lists arises before the client has provided his UTR/NINO to the promoter (see below). In such cases the promoter has a further 30 days from the normal filing date for the quarterly return in which to provide this additional information.

Details are to be provided for all clients to whom the promoter was obliged to provide the scheme reference number during that quarter. In most circumstances this will be the quarter in which the promoter first became aware of the transaction forming part of the notifiable arrangements, but in certain cases (for example where a disclosure is made very close to the end of the previous quarter) it will be the quarter in which the promoter actually receives the reference number from HMRC. Nil returns are not required.

HMRC have set up a shared workspace area for the secure transmission of user lists to HMRC. All promoters have been sent details of how to register to use the shared workspace. As an alternative returns may be made by post to the Anti-Avoidance Group (`AAG’).

Returns are due for calendar quarters and the return must be made within 30 days of the end of calendar quarter. There are penalties for failure to make a return.

Early experience with the client list rules is that the mechanism which has been set up via the shared workspace is working well. There are, however, some issues – which HMRC acknowledge – in relation to the timing of including client names on lists, particularly where a transaction straddles a return quarter or a tax year end. There is also a significant issue where clients take an initial step to implement a transaction but do not follow through to complete the scheme. In such cases the client detail will appear on the quarterly list but there will be no DOTAS number on his or her return because the scheme will not have been implemented. In some cases promoters routinely issue numbers to all clients to whom a scheme has been introduced, even if those clients do not go on to implement the scheme. Where quarterly returns are based on such lists HMRC may be concerned about the apparent discrepancy between the names on the promoter’s quarterly return and the absence of information about a scheme on that client’s tax return.

==== Intermediary information requirements ==== [25.116]

In some cases a name on a client list will not be of an end client but of an intermediary. HMRC have the power, if it suspects that the client on a client list is not a user of the arrangement but an intermediary, to require the promoter to provide further information. That information, which is limited to information that is the possession of the promoter at the time that the request for further information is made, is:

•        the name and address of any person other than the client on the client list who is likely to sell the arrangements to another person or achieve a tax advantage by implementing the arrangements;

•        the UTR of that person; and

•        sufficient information to enable an officer of HMRC to understand the way in which that person is involved in the arrangements.

User’s tax return
[25.117]

The final stage in the process is the responsibility of the user. A client who has used a registered scheme must disclose the reference number on the appropriate return. He does not then need to make any other specific disclosures about the scheme. The normal date for the submission of the return is not affected by the fact that the client has used a registered scheme.

One important change to note is that under the revised time limits for assessments introduced in FA 2008, a failure by a scheme user to include a scheme reference number on a return will allow HMRC to issue assessments to recover any loss of tax which is attributable to that failure for a period up to 20 years from the end of the year of assessment to which the return relates. It will as a consequence be even more important that advisers have proper procedures in place to ensure that clients have indeed included the reference number on their returns (FA 2008, Sch 39, para 9(2)). The interaction between DOTAS and discovery assessments is discussed below at (see 25.xx).

Which client return does the reference number go on?

[25.118]

In the normal course of events the reference number will go on the income tax return or corporate return. However, where the scheme is a remuneration scheme which is implemented by the employer the employer should include the scheme reference number on form AAG4 (it was originally intended that the reference number would be included on form P35, but this was never proceeded with and the AAG4 form is now well established). There is no requirement for the employees who have benefited from an employment product to include any reference to the scheme number on their personal tax returns.

In the past employees may have been advised to include supplementary details of remuneration schemes in which they participated on the white space on their return. This will no longer be necessary. The disclosure of the reference number on the AAG4 will be sufficient. It is up HMRC to link the AAG4 entries with the tax return. (Of course the relevant figures relating to the scheme will need to be disclosed in the normal boxes on the self-assessment return in the usual way – the scheme isn’t omitted from the return entirely!). There is no requirement for a corporate client who has implemented a remuneration planning arrangement to include the reference number of the scheme on its corporation tax return. See however the additional requirement for employment schemes introduced in FA 2015  (see XXX above).

In addition, form AAG4 is now to be used in a number of other circumstances. These are where:

(a)     the scheme gives rise to a claim for relief made separately from the return (those claims would include claims under TCGA 1992, s 261B or under ITA 2007, Part 4);

(b)     the person to whom the tax advantage arises is not required to submit a tax return (this would cover, for example, cases where a person only has income taxed under PAYE but enters into a loss scheme to reduce his income);

(c)     the return on which the reference number is to be included is submitted late; and

(d)     the user has used several schemes in the same year and there is no space on the return to include all of the scheme reference numbers.

Which year's return?
[25.119]

It has proved surprisingly difficult to frame a satisfactory regime to determine the timing of disclosures by users of registered schemes. When the regime was first introduced the default requirement was that the scheme reference number was to be disclosed by the user on his return for the year in which the reference number was received. Where the tax advantage arose in an earlier year the reference number was to be disclosed in that earlier year. In previously editions of this book I discussed some of the practical difficulties that this rule created, particular in respect of loss carry back claims and employment arrangements. In some cases a literal interpretation of the rules meant that the tax return disclosure was due before the taxpayer had implemented the planning which give rise to the disclosure requirement. These difficulties were recognised by HMRC and following consultation a revised regime was introduced by SI 2009 No 612, which has effect where the scheme reference number is provided to the user on order after 1 April 2009.

The default proposition under this regulation is that the scheme reference number is to be entered on the return that relates to the year of assessment or accounting period (or in the case of an NIC scheme, the earnings period) in which the user first enters into a transaction which forms part of the scheme. When including the number on the return, the user must state the last day of the year of assessment/accounting period/earnings period in which he expects the advantage to be obtained.

The requirement to include the reference number on the tax return or form AAG4 is not a one-off requirement. The reference number must be included on the return for every year in which the client enjoys the benefit of the tax advantage. This is something that can only be reviewed on a case-by-case basis. Anybody who is implementing arrangements which have a long-term benefit will have to ensure that their procedures will capture the relevant information.

Form AAG4 must be sent to the AAG. The due date depends on the nature of the tax advantage. For PAYE and NIC this will be 19 May following the end of the tax year (unless the advantage relates purely to Class 1A NIC, in which case the due date is 6 July). For income and corporation tax advantages, the due date for form AAG4 will be the normal due date for the return for that period.

Reporting requirement for IHT
[25.120]

The reporting requirements for inheritance tax purposes are broadly similar to those for direct taxes but there are some differences. The promoter must use form AAG6 (IHT) to pass the scheme reference to the client. This is the person to whom the promoter has provided services in connection with the disclosed scheme (or any scheme which is substantially the same as the disclosed scheme). The normal 30-day time limit applies. If the client is not the end user the client then has an obligation to report the scheme number (again on form AAG6 (IHT)) to any other person who he reasonably expects to be a party to, and might reasonably be expected to gain a tax advantage from, the scheme.

The scheme user has an obligation to report the use of the scheme to HMRC. The way in which this is done depends on whether or not the user has an obligation to submit an inheritance tax account form IHT100.

Where there is a requirement to submit an IHT100 the DOTAS number is to be included on that form, provided that the statutory time limit for submitting the IHT100 is not later than the date by which the scheme reference number is to be notified (see below) and the IHT100 is submitted timeously.

In all other circumstances the notification is to be made on form AAG4 (IHT). The time limit is 12 months from the end of the month in which the end user first entered into a transaction forming part of the notifiable arrangements. The normal time limit for submission of the IHT100 is 12 months after a chargeable event, so there may be circumstances – for example where a DOTAS transaction takes a period of time to complete – where the time limit for reporting use of the scheme expires before the time limit for the completion of the IHT100.

==== What happens if there is no promoter with an obligation to disclose? ====

Non-resident promoters
[25.121]

Non-resident promoters may, if they wish, make a disclosure under the regime in which the normal rules apply. However, if the non-resident promoter decides not to make a disclosure, HMRC have no power to force him to disclose. As was explained above, where the non-resident promoter does not make a disclosure, the obligation is transferred to the client. The trigger point for the client is the date on which he enters into the first transaction forming part of the notifiable arrangements. This is sensible. It would be unreasonable to expect a client to have to make a disclosure of a scheme which a non-resident promoter unsuccessfully failed to sell to him. The same trigger point applies where the promoter of the scheme is a UK lawyer in circumstances where the client has not waived privilege. This is discussed in more detail below (see 25.XX).

In-house schemes
[25.122]

Where there is no promoter (i.e. for in-house schemes), the obligation also falls on the client. The time limit here was originally more generous. The disclosure had to be made on the date on which the client would have had to make a disclosure on his tax return had there been a promoter. That date would have been the normal due date for the submission of the relevant return, as discussed above.

However, the rules were changed as part of the 2006 reforms and the scheme must be disclosed, on form AAG4, within 30 days of the date of the user entering into the first transaction forming part of the scheme.

=== How should a disclosure be made? ===

What forms should be used?
[25.123]

HMRC have published a number of forms on which disclosures are to be made. The regulations stipulate the information which is required to be submitted and that use of the relevant HMRC forms is mandatory. The form relevant to promoters is AAG1, which is designed for scheme promoters. Copies of the form are available from the HMRC website at www.hmrc.gov.uk/aiu/forms-tax-schemes.htm.

The other forms are AAG2, for completion by users where there is an offshore promoter and AAG3, for use where legal privilege applies or the scheme is devised in house. AAG5 is a continuation sheet.

Notifications can now be made online as well as by using the official forms. HMRC are no longer making word versions of the forms available online – a promoter wishing to make a disclosure using a word version of the form must obtain a form directly from HMRC.

There are separate inheritance tax versions of some forms, and a new form has been published for disclosures relating to the ATED.

The relevant forms were all updated in 2015.

==== What information is required to be disclosed on the form? ==== [25.124]

It is worth setting out in full the statutory basis on which the information is required. This is now found in para 6 of the Tax Avoidance Schemes (Information) Regulations 2012 (SI 2012 No 1836).

The information which must be provided to the Board by a promoter in respect of a notifiable proposal is sufficient information as might reasonably be expected to enable an officer of the Board to comprehend the manner in which the proposal is intended to operate, including:

(a)     the promoter's name and address;

(b)     details of the provision of the Arrangements Regulations by virtue of which the proposal is notifiable;

(c)     a summary of the proposal and the name (if any) by which it is known;

(d)     information explaining each element of the proposed arrangements (including the way in which they are structured) from which the tax advantage expected to be obtained under those arrangements arises; and

(e)     the statutory provisions, relating to any of the prescribed taxes, on which that tax advantage is based.

There are a number of very important issues – some of which are still to be resolved – which flow from this. In the first place it is clearly very difficult to make a judgement of what is sufficient information to enable an officer to comprehend the manner in which the scheme is intended to operate. What level of expertise can be assumed? How much time does the officer have to spend in trying to understand how the scheme operates? Can it be assumed that the officer will take specialist advice? Many of the schemes that are likely to be reported will be very complex and even many tax professionals (inside and outside HMRC) are unlikely to be fully familiar with all of the nuances which make a particular scheme work.

During the course of the consultation period there was much discussion about this key issue, with professionals having very varied views on how much detail was actually required. HMRC’s position appears to be that they do not want pages of detailed technical analysis; instead they want a straightforward description highlighting:

(a)     the aims of the scheme;

(b)     the steps involved; and

(c)     the tax law on which the scheme relies.

There are many commentators who believe that this is unrealistic as most avoidance schemes are very far from straightforward, and it is likely that trying to shoehorn a scheme into a straightforward description will risk that some of the subtleties on which the scheme may depend will be lost.

When the draft forms were first issued there was general surprise at how compact they were. There seemed to be very little space on which to make disclosures of complicated arrangements (though continuation sheets are available). The CIOT produced a specimen disclosure of the gilt strip scheme (by that time of course this scheme was no longer effective) in order to stimulate debate on what might be an appropriate form of disclosure. This pro forma is included at the end of this chapter, slightly updated to take account of the new layout of the form following the introduction of the 2006 regulations (see Appendix 3 at 25.XX). This proposed model disclosure has not been formally endorsed by HMRC, but neither has it been rejected. HMRC’s position appears to be that this particular style of disclosure gives broadly the level of detail that they are looking for. No further comment on the precise format to be used by promoters has been issued and experience suggests that disclosures using this level of detail will be acceptable.

Part of the problem with the form is that it separates out the statutory provisions from the description of the elements of the scheme. Although this is the way that the regulations are laid out, it does create problems. For example there is no requirement to cross reference the statutory references to the description. Neither is there any requirement to list the references in the same order as the transactions. For example a disclosure which simply listed the relevant sections of ICTA 1988 in number order, followed by similar lists for TCGA 1992 and ITEPA 2003, would appear to comply with the requirements of the form.

HMRC are known to be considering this issue as part of their review of the way in which the disclosure regime is operating and it may be that, over time, a more appropriate form will be issued. In the meantime the author's personal recommendation, and it must be understood that this is only an opinion and is not necessarily endorsed by HMRC, is that the approach followed in the CIOT pro forma should be adopted. Again, in cases of difficulty, HMRC have been known to review draft disclosures before they are made to ensure that they contain an acceptable level of detail, so that when the disclosure is formally submitted the promoter will have the comfort of knowing that it will be accepted.

Given all of the changes to DOTAS since it was first introduced it is perhaps surprising that there has been very little comment, either from HMRC or the profession, about the extent and detail of the information which is to be disclosed on form AAG1. Certainly HMRC have not given any indication that the pro forma above is inadequate or that a greater level of detail is required. However, in the 12 August 2013 consultation document `Raising the stakes on tax avoidance’ HMRC invited comments on the proposal that a disclosure should in future contain:

`all material provided to prospective users of the arrangement, sample copies of all documents signed by the users as part of the arrangement, a full analysis of the tax advantage that the arrangement is designed to obtain and an explanation of how the arrangement produces the tax advantage. If this information changes then the promoter would be able to provide a revised version’.

This proposal, if enacted, would radically change the whole way in which disclosures will be made in future. As yet there is no indication of if and when such a change will be made.

==== Interaction with clearance applications ==== [25.125]

One of the odder parts of the disclosure rules (and the associated guidance) is the interaction with statutory clearances. This is odd, not because the guidance is difficult to follow, but because it is not easy to envisage situations in which it may be relevant.

The guidance in question concerns situations where the scheme is disclosable but is also covered by a statutory clearance. Given that the purpose of making a clearance application is to demonstrate to the Board’s satisfaction that the proposed transaction is not one where there is, using non-specific language, a tax avoidance motive, it is hard to see how at the same time the scheme is disclosable on the basis that it is intended to give rise to a tax advantage. The tests are not worded in precisely the same way and in theory there could be cases where a statutory clearance could be given to a scheme which is disclosable under the new regime. However, the author has not yet found anybody who has been able to articulate clearly what such a scheme might look like!

Because it is unlikely that the adviser will be called upon to deal with the interaction very often, this chapter does not cover the practical implications in detail. Broadly speaking it is possible to submit a joint clearance/disclosure application and, where this is done, the normal clearance timetable takes precedence over the notification timetable. Anybody who is called upon to deal with the interaction between statutory clearances and the disclosure rules is advised to consult the HMRC guidance.

Legal professional privilege
[25.126]

This was a very controversial issue during the initial consultation on the original introduction of DOTAS and at one point this threatened to derail the whole regime. A `fix’ emerged just before the regime was due to become live and seems generally to work satisfactorily although there may still be some underlying problems.

The author is not a lawyer and what follows is an attempt to reduce some very complex issues to a few straightforward paragraphs.

What the primary legislation says

[25.127]

The primary legislation states:

‘Nothing in this Part requires any person to disclose to the Board any privileged information’.

Privileged information is defined as:

‘information with respect to which a claim to legal professional privilege could be maintained in legal proceedings.’

(The definition also goes on to deal with the equivalent concept in Scots law.)

This is a very simple proposition but there has been complete disagreement over how it applies. HMRC’s original guidance made it clear that there was nothing in the disclosure rules which was in conflict with legal professional privilege and that `Solicitors and Barristers should be able to meet the disclosure requirements through normal redactive processes’. It appears that HMRC's view was that, provided that the disclosure did not include client names, the regime was not incompatible with privilege.

The Law Society view
[25.128]

It became clear that this view was not shared by the Law Society and there were a series of meetings between HMRC and the Law Society in an attempt to resolve the issue before the first disclosures were due (which was 1 October 2004). These came to nothing and in late September 2004 the Law Society issued a statement which effectively said that any lawyer making a disclosure under the regime without his client's permission could be breaching privilege. (I have said above, this is only a very brief summary of this issue and the Law Society statement needs to be read in full by those who are likely to be affected by it.)

At this point the whole regime was in serious danger of collapse. Legal professional privilege does not apply to accountants and Chartered Tax Advisers and therefore the effect of the Law Society's view would have been that a scheme promoted by an accountant would have been disclosable, but an identical scheme promoted by a solicitor would not have been disclosable. This was clearly an impossible state of affairs as far as HMRC were concerned (to say nothing of the very real fears within the accountancy profession that all high level tax advice would be moved across to lawyers) and clearly something had to be done.

=
The revision to the regulations ===== [25.129]

The way that this problem was resolved was by neatly sidestepping the issue. Where a lawyer who would otherwise be a promoter asserts privilege, the obligation to notify shifts to the client. In other words, the client is put in the same position as if he had implemented a scheme promoted by a non-resident promoter. The client must then make a disclosure of the scheme within five days of the first steps he has taken to implement the scheme.

If, however, he agrees to waive privilege (and of course the privilege rests with him and not with his lawyer), then the obligation falls back on his lawyer and the lawyer must make the disclosure in the normal way.

In practice it is likely that many clients will waive privilege in order to pass the responsibility for disclosure back to their lawyers. There are still some practical issues to solve here (what happens if the same scheme is sold to two clients, one of whom agrees to waive privilege and the other does not?) and I suspect that we have not yet had the final word on this important issue of principle.

This is not intended as a comprehensive analysis of the privilege issue and those who are likely to be affected will need to seek more comprehensive advice on how to comply with their obligations under the new regime while at the same time not breaching their obligations under the doctrine of Legal Professional Privilege.

Protected disclosures
FA 2015 introduced a new FA 2004 s 316B, which is intended to offer protection to whistle-blowers who draw HMRC’s attention to potential breaches of the DOTAS regime. It states that No duty of confidentiality or other restriction on disclosure (however imposed) prevents the voluntary disclosure by any person to HMRC of information or documents which the person has reasonable grounds for suspecting will assist HMRC in determining whether there has been a breach of any requirement imposed by or under this Part.

While the intention of this change is laudable it is difficult to see quite how it can operate in practice. What protection will it really give, say, to an employee of a company participating in a scheme which the employee believes should have been notified under DOTAS but was not? Does it offer him protection if his employer attempts to dismiss him for breaching the company’s confidentiality rules? Protection may be available under other legislation (for example the Employment Rights Act 1996 s 43B) but viewed in isolation this new rules does not appear to achieve very much

=== The way that HMRC handles disclosures ===

HMRC practice
[25.130]

Matters relating to DOTAS are handled by HMRC’s Anti-Avoidance Group (`AAG’) within the counter avoidance directorate.

Now that the AAG has been operating for a several years, some of its working practices are already emerging. It is clear that the group intends to operate by consensus with those advisers who are making proper attempts to fulfil their obligations under the disclosure regime, but will take a very hard line with advisers who play only lip service to their responsibilities, or fail to comply at all. The AAG has a policy of active dialogue with representatives of the major professional firms who are likely to promote schemes and have been willing to speak at internal conferences and seminars and the like.

Enquiry powers
[25.131]

As has been explained above, the original rules did not include any provision for enquiries into disclosures or powers to force disclosure. However, these were introduced in FA 2007.

There are actually five new powers but in practice it is easier to see them as grouped into two main categories. The first group deals with information and the second provides a mechanism to force disclosure.

Information
[25.132]

The first power applies where the promoter has notified the scheme but HMRC are not satisfied that the notification passes the relevant statutory tests. FA 2004, s 308A now allows HMRC to apply to the First-tier Tribunal for an order which requires the promoter to provide further information or documents. Where the tribunal is satisfied that HMRC have reasonable grounds for suspecting that the specified information or documents will form part of, or will support or explain, the information required by the disclosure rules, they can make an order. Where an order is made by the tribunal the promoter has ten days to provide the necessary information.

The second enquiry power is in s 313A. This is used where a scheme has not been disclosed but HMRC believe that the scheme is disclosable. HMRC now have the power to require the promoter to give reasons why in his opinion the scheme is not notifiable. It is specifically set out in statute (s 313A(3)(a)) that it is not acceptable for the promoter simply to say that he has taken legal opinion on the notifiability of the scheme and has relied on counsel's view that the scheme is not notifiable. The promoter is obliged to give substantive reasons for non-disclosure. This power is backed up by s 313B, which gives HMRC power to apply to the Tribunal for an order to require the promoter to provide further supplementary information or documents. In FA 2010 this scope of this power was extended to enable HMRC to make enquiries of introducers similar to the existing powers they have to make enquiries of promoters.

Enforcing disclosure
[25.133]

The second group of powers is concerned with enforcing disclosure. There are two of these.

(a)     The first is FA 2004, s 314A, which allows HMRC to apply to the First-tier Tribunal for an order stating that a scheme is disclosable. If the tribunal satisfied on the evidence that scheme is indeed disclosable they can make an order stating that the scheme is and always was disclosable.

(b)     The second of these powers is s 306A, under which HMRC can apply to the Special Commissioners for an order that a scheme is to be treated as disclosable. Such an order can be given only when the tribunal is satisfied that HMRC have reasonable grounds for suspecting that a scheme is disclosable and that they have taken all reasonable steps to establish whether it is disclosable.

These two powers appear very similar but there is a crucial difference. Under s 314A the effect of an order is that the scheme has always been disclosable. This means that the promoter will (subject to any reasonable excuse defence) be subject to a late notification penalty. Under s 306A, by contrast, the scheme is only disclosable from the date on which the tribunal makes the order, and the promoter has ten days to comply with the order. It is only if there is failure to comply with the order that there can be any question of penalties for late notification.

These new powers, which came into effect on 1 September 2007 (other than the penalties, which came into effect on 20 November 2007), undoubtedly go some way towards putting a sensible framework round enquiries into disclosures. HMRC have made it clear that they will still want to deal with matters by informal discussion wherever possible and that they will only use these powers where they have not been able to make any progress by any other route.

There is an interesting contradiction here, however. Given that the disclosure regime is all about HMRC getting early warning of schemes, the s 313A power might seem to be superfluous: if HMRC already know enough about the scheme to use their s 313A power what extra will they gain by forcing the promoter to notify? In terms of extra information probably very little. But of course there is more to the disclosure regime that this. The initial thinking may well have been to get real time information about schemes, but the fact that returns now include disclosure reference numbers means that HMRC can adopt a much more centralised approach to the investigation of disclosed schemes. So in practice, the main purpose of the s 313A power will be to force the promoter to obtain a disclosure number so that it can be used on the returns of clients who have used the scheme, and thus ensure that HMRC can identify all of the users of the scheme and manage its enquiry work accordingly. This is of course highly relevant in the context of APNs, because the existence of a disclosure number will enable HMRC to issue an APN. It is therefore expected that HMRC will use these powers much more extensively than they have previously done.

HMRC remained concerned that there are still issues relating to their ability to enquire into schemes. In their 23 July 2011 consultative document there is reference to the fact that once a disclosure has been made and accepted HMRC does not have a firm statutory basis on which to make further enquiries into the disclosure. Promoters were able to argue that once the scheme has been registered they have complied with all of their obligations under the scheme, on the basis that if they had not complied with their obligations HMRC would not have been able to register the scheme.

The problem was resolved in Finance Act 2014, which introduced a new FA 2004, s 310A. This applies where a person has made a DOTAS disclosure or a disclosure which purports to be complete but which HMRC views as incomplete. HMRC may require the person who made the disclosure to provide further specified information about the notifiable proposals or arrangements (in addition to the prescribed information under s 308, 309 or 310) or documents relating to the notifiable proposals or arrangements. Where such a requirement is imposed the person has ten days in which to comply unless HMRC directs a longer period.

Where a person fails to provide the information HMRC may apply to the First-tier tribunal for an order to require the person to provide that information. The tribunal can only make such an order if it is satisfied that HMRC have reasonable grounds for suspecting that the information or documents will assist HMRC in considering the notifiable proposals or arrangements. Again there is a ten-day deadline for compliance with an order from a tribunal, unless HMRC directs a longer period is to apply.

Part of the problems in this area arise from the way in which HMRC deal operationally with disclosures. In most cases HMRC operate on a `process now, check later’ basis in the same way as they do for self-assessment. But the way that the legislation is drafted assumes that HMRC will take 30 days in which to consider whether or not to register the scheme or not. In the view of this author the whole operational basis under which HMRC initially deals with DOTAS disclosures should be reviewed. The proposal to extend the period to 90 days, as discussed above, may well enable HMRC to look again at whether or not a `process now, check later’ basis is still appropriate.

Sources of further information
[25.134]

Regardless of what one may think about particular aspects of the regime, it must be acknowledged that HMRC have made serious attempts to enable advisers to understand their obligations under the regime. The AAG section of HMRC’s website brings together all of the relevant material in one convenient place. In particular it includes the current HMRC guidance. This is not without its problems, as has been mentioned several times in this chapter, but is still remains an essential source of information about HMRC’s view of the way that the provisions operate.

In the author's experience, the staff of the AAG are prepared to discuss areas of concern and difficulty and are open to suggestion to how the regime might be improved. Anybody who is likely regularly to find themselves in the position of a promoter is, I would suggest, advised to form a working relationship with the staff of the AAG.

The major professional bodies have all published guidance on the operation of aspects of the disclosure regime and their websites should be regularly reviewed for the latest developments in what is still a developing agenda.

=== What happens if obligations are not met: the penalty regime === [25.135]

The legislation includes a number of separate penalty provisions. The original penalty provision were thought by many to be relatively benign but FA 2010 significantly strengthened the regime. This chapter only deals with the current penalty provisions; the older provisions are dealt with in earlier editions of this publication. A much harsher penalty regime than the original one applies from 1 January 2011.

The penalty provisions can be grouped into three categories:

•        penalties for failure to disclose;

•        penalties for failure to comply with information requirements; and

•        penalties applying to scheme users.

Disclosure penalties
[25.136]

For failure to disclose a scheme by a promoter there is a daily penalty not exceeding £600 for each day during the `initial period’. The initial period begins with the day on which the notification obligation expired and ends on the day the penalty is determined by the Tribunal, or the day before the person complies with the disclosure obligation in question, whichever is earlier. The tribunal is obliged to take account of all relevant matters, including the need for the penalty to be an adequate deterrent (TMA 1970, s 98C(2ZB)). In the case of a promoter's failure to make a disclosure within the prescribed period, the tribunal is to have regard in particular to the fees received, or likely to have been received, in connection with the scheme. In the case of a taxpayer's failure to make a disclosure within the prescribed period, the tribunal must have regard to the tax advantage obtained or sought from the scheme.

Where the daily penalty determined under TMA 1970, s 98C(1)(a)(i) appears inappropriately low, the tribunal may increase the penalty to an amount not exceeding £1 million (TMA 1970, s 98C(2ZC)).

Where a promoter is subject to an order under FA 2004, s 314A or 306A, requiring the disclosure of a scheme, and fails to comply within ten days, there is daily penalty of up to £5,000 for each day that the failure continues after the expiry of the ten-day period.

Information penalties
[25.137]

The initial penalty for failure to comply any of the other information obligations imposed by the disclosure regime (i.e. other than for not disclosing the scheme) has a two-step structure. A tribunal may impose an initial penalty of up to £5,000 and HMRC may then impose daily penalty not exceeding £600 per day if the failure continues.

A taxpayer may make a reasonable excuse defence.

HMRC are also given a power to commence proceedings before the First-tier Tribunal for re-determination of a penalty where it appears that the `relevant day’ from which a penalty has been determined is incorrect (TMA 1970, s 98C(2ZD), inserted by FA 1020, Sch 17, para 10(4)). HMRC have said that this may be relevant in cases in cases where the tribunal has made an order under FA 2004, s 306A that a scheme be treated as notifiable. This provision will apply if evidence subsequently comes to light, possibly from a belated notification, that the scheme was indeed notifiable from the beginning, and that the `initial period’ should start from an earlier date. HMRC may then apply to the Tribunal for the daily penalty to be backdated accordingly.

The Treasury is also give power to vary by secondary legislation the amounts of both the proposed initial daily penalty in TMA 1970, ss 98C(1) and 2ZC. Such regulations are subject to an affirmative resolution of the House of Commons.

Penalties applying to scheme users
The third category of penalties applies to scheme users who do not include scheme reference numbers on the relevant returns. Those penalties were originally set at £100 for a first failure, rising to £500 for a second failure within three years and £1,000 for each further failure. These amounts were increased in FA 2015 to amounts up to £5,000, £7,500 and £10,000 respectively.

HMRC’s approach to penalties
[25.138]

HMRC have indicated that they will use these new penalty powers only in appropriate cases. In their response to the November 2009 consultation document, which was published on 24 March 2010, they said `a penalty would not be appropriate if there is genuine doubt and the promoter has acted on sound legal advice’. They also stated that they `will publish and invite comments on the criteria that [they] will adopt to select those instances in which [they] will seek a penalty and the criteria which [they] will apply to settling a dispute without recourse to formal proceedings in Tribunal’.

Reasonable excuse
[25.139]

There is a reasonable excuse defence against the imposition of a penalty. The first, and so far the only, contested penalty case was reported in 2009. In Revenue and Customs Comrs v Mercury Tax Group Ltd (Sp C 737) [2009] SWTI 628 HMRC took the view that Mercury Tax Group Ltd, the promoter, had failed to notify a particular income tax avoidance scheme involving a Jersey Limited Partnership. The Special Commissioner had to determine first of all whether or not the scheme was notifiable and secondly, if it was, was the appropriate penalty for the failure to notify.

The scheme was first promoted in early 2006 at a time when disclosure was governed by the old rules that specified the disclosure of certain financial and employment products. The promoter took the view that the scheme was not within the definition of financial products as it applied at the time and therefore did not disclose the scheme. He did, however, make a voluntary disclosure of the scheme in September 2006 following the coming into force of the new regime, on the basis that the scheme was then caught under the loss hallmark regulation. HMRC’s argument was however that the scheme should have been disclosed under the old rules.

The Special Commissioner, John Avery Jones, confessed that the regulations were not easy to interpret and that the list of financial products was `somewhat strange’, but came to the conclusion that on the facts the scheme did not fall within the regulations. That decision is specific to the facts of the Mercury case and is in any case no longer relevant because of the change to the hallmark approach. What continued to be relevant however is the second part of Avery Jones’s judgement in which he considered whether or not, if he was wrong on the issue of disclosure, there should be a penalty and if so what it should be.

Mercury had sought counsel’s opinion on the question of whether the scheme was disclosable and in particular whether the tax advantage derived from the financial product. Counsel took the view that it was not disclosable and Mercury acted on this basis. This was sufficient for Avery Jones to conclude that if, contrary to his conclusion that the scheme was not disclosable, the scheme was in fact disclosable, then he would set the penalty at nil. The key part of his decision reads as follows:

‘I consider that it would be wrong to penalise Mercury if [counsel’s opinion] was wrong. Other than to take advice there is nothing else they could do; they could hardly ask HMRC whether they agreed without disclosing the scheme in the process. In my view Mercury acted properly in relying on counsel’s opinion and arguing the case as a matter of principle rather than taking a view themselves and paying the penalty if they were found to be wrong, which I suspect would have been cheaper. If therefore I am wrong in deciding the scheme is not notifable and a penalty is payable I would fix the amount as nil.’

This has left the law in some confusion. If there is an enquiry into the non disclosure of a scheme, the promoter cannot simply refer to the fact that he has taken counsel’s opinion on the matter and that counsel has opined that it is not disclosable (SI 2004 No 1864, reg 8A1(1)) he must, in HMRC’s words, `engage with the relevant legal tests’. Yet if penalty proceedings are taken for non disclosure of a scheme, the decision in Mercury seems to suggest that reliance on counsel’s opinion would mean that even if the scheme were found to be disclosable the penalty would be nil because a reasonable excuse defence would be available.

It may well take some time for the full implication of the Mercury decision to become apparent.

Perhaps in response to the Mercury case, HMRC have considerably expanded their guidance on penalties and in particular given more details of the circumstances in which they will take penalty cases to the tribunal.

The penalty burden
[25.140]

It is clear that the penalty regime is much more severe for failures by promoters than it is for failures by end users. This is entirely consistent with the overall thrust of the regime. DOTAS is a supply side measure intended to make it more difficult for promoters to continue to sell avoidance schemes, by ensuring that HMRC find out how schemes operate much earlier than they otherwise would do. To that extent a failure by a promoter to disclose a scheme will mean that a scheme remains in the market place for much longer.

By contrast, if an end user omits the reference number from his return, HMRC have not lost out in terms of information about new schemes. They may not spot the use of the scheme on that client’s tax return (although of course the entries on the return itself may lead them to realise that a scheme has been used), but there has been no failure to disclosure information about a potentially damaging scheme. In their public pronouncements on the matter HMRC have made it clear that they will differentiate between deliberate non-compliance and cases where there are genuine doubts over whether there is a disclosure obligation, or where the promoter has made a genuine but unsuccessful attempt to comply with his obligations. HMRC are on record as saying that they will not apply a penalty where there is a reasonable excuse for non-compliance.

==== Interaction with discovery assessments ==== [25.141]

The recently reported decision of the First-tier Tribunal in the case of Charlton v Revenue and Customs Comrs (TC01317) [2011] UKFTT 467 (TC) has an important discussion of the relationship between a DOTAS disclosure on a tax return and the ability of HMRC to raise a discovery assessment under TMA 1970, s 29 in situations where no enquiry has been raised within the normal time limit. The decision of the First-tier Tribunal in favour of the taxpayer was upheld in the Upper Tribunal (2012 UK UTKUT 770). In particular the following comment should be noted:

‘In our view the form AAG1 is just the sort of information the availability and relevance of which might reasonable be inferred from the inclusion of the scheme reference number in a return which also discloses tax effects consistent with the tax planning.’

Note that this does not say that in all circumstances inclusion of the DOTAS reference number on a return will always protect a taxpayer from a subsequent discovery assessment. But is does demonstrate that where a DOTAS number has been included on the return, particularly when accompanied by meaningful white space disclosure, HMRC will have an uphill struggle to establish that the grounds for making a discovery assessment are met.

In a case where a DOTAS number has been issued to the taxpayer and it has not been included on the relevant return the time limit for HMRC to raise an assessment will be 20 years – the same as for deliberate conduct. The discovery provisions will still apply, but it is very difficult to imagine that a tribunal would strike down the issue of a discovery assessment in such circumstances.

Future developments
[25.142]

The disclosure regime does not stand still – almost every year has brought changes and the regime is now significantly tougher than it was when first introduced. To a large extent this is because HMRC and the Government have taken a long-term view of the regime and have wanted to allow each new element to bed down before introducing further changes. There has been extensive consultation at each stage of the process, and it has been generally accepted that the only way in which DOTAS can work is with the cooperation of the profession. In the author’s opinion it is unlikely that the regime as it now stands would have been acceptable if introduced as a single package in 2004 but, because of the cautious way in which changes have been made over the years, there is a generally high level of acceptance from the profession that DOTAS broadly achieves what it sets out to do and does not impose unacceptable burdens on taxpayers or their advisers.

However, matters are now at a crossroads. The link between DOTAS and APNs has significantly changed the emphasis of DOTAS. It is no longer a matter of information. The difference between a scheme having a DOTAS reference and not having one will now have a direct impact on the payment of tax by a scheme user. For the promoter therefore, the decision on whether to disclose has huge significance. Experience to date has shown that if a promoter does not want to disclose he can often come up with an argument to show that the scheme is non-disclosable. That is of course not to say that those arguments will succeed, but it will inevitably take a considerable time for them to be tested at a tribunal or through the courts. Thus, even if it is ultimately decided that disclosure is necessary, the APN can only be issued once there is a scheme reference number. Until there is a APN therefore, the taxpayer retains the cash flow advantage. Promoters who comply with their disclosure obligations and who engage with HMRC in cases of genuine doubt will want to be sure that the market place is not distorted by promoters who deliberately decide not to comply with their obligations. We have discussed several times in this chapter the significant changes to DOTAS suggested in the 2014 consultation document. Those are clearly made in response to the linkage of APNs with DOTAS registrations. I would expect that there will be further changes to come as we start to see how the APN regime is operating in practice.

There are at the time of writing consultations on further measures to combat avoidance, including a regime for serial avoiders which will include possible naming and shaming and a penalty regime specifically tailored to failed avoidance schemes. These will, assuming that they are implemented, be deal with in the next edition of this publication.

Final thoughts
[25.143]

The tax planner must now, every time he or she undertakes planning on behalf of a client, consider very carefully whether or not a disclosure obligation arises. Failure to take proper account of this can lead to penalties and, probably more importantly, an unwelcome reputation within HMRC.

Yet at the other extreme an over-cautious approach to DOTAS could lead to taxpayers having to make accelerated payments of tax in circumstances where it may not be necessary. Yet matters should not be blown out of proportion. In the author’s opinion, the vast majority of the planning that is undertaken day in and day out in tax departments around the country will not be disclosable. Most planning is not likely to fall foul of the premium fee or confidentiality tests, and at least if the adviser is providing a standardised tax product or a loss scheme he is likely to recognise the fact.

The early fears that the DOTAS regime would collapse under the weight of disclosures of perfectly straightforward planning did not come to pass and most people believe that the balance is working about right. Certainly the total number of disclosures that have been received to date by HMRC does not suggest that the disclosure regime has been too onerous in practice.

There are still many issues to be resolved within the regime. The Mercury case has clarified to some extent the way that the penalty regime operates, but at some point some of the other issues of concern will have to be tested before the tribunals.

Common sense is still probably the best guide. If an innovative avoidance scheme is being designed which does something wholly new, it should be assumed that there will be a disclosure obligation. But if you are going through the normal process of advising your client on the various planning options open to him, you can probably be confident that you don't have such an obligation.

There have been profound changes in the market place for avoidance schemes in the years since DOTAS was first introduced. At the time many of the major accountancy and law firms were still active, at least to some degree, in the design and promotion of avoidance schemes and there was little public interest in tax avoidance. Nowadays the promotion of tax avoidance schemes is the province of a small number of niche players and there is unprecedented public and press interest in avoidance and those who engage in it. Tax avoidance will never disappear but it has been squeezed into the margins in a way that few people, even within HMRC, would have thought possible. None of this would have happened without DOTAS.