Disclosure of Tax Avoidance Schemes (DOTAS)

20 January 2016

Disclosure of Tax Avoidance Schemes (DOTAS) – FACTSHEET

Introduction

The DOTAS rules were introduced by HM Revenue & Customs (HMRC) in 2004 with the objectives of obtaining early information about tax arrangements, how they worked, and who was using them.

The disclosure of an arrangement has no effect of the tax position of the person using it, however it gives HMRC the opportunity, through parliament, to render it ineffective, possibly in a retrospective manner.

The rules give HMRC information powers and the power to implement penalties for failure to comply with the rules.

There are a number of important definitions within the rules:

Promotor – someone who in the course of providing taxation services:

Is responsible to any extend for the design of a scheme;
Makes a firm approach to another person making the scheme available to them for their use;
Makes the scheme available to others;
Organises or manages the implementation of the scheme.

Introducer – someone who makes a marketing contact, simply introduces the scheme to another, and puts them in touch with the Promotor.

Scheme Designer – someone who is only involved in the design of the scheme and does not themselves make it available to others, or organise or manage its implementation. This is however subject to three tests:

The Benign Test;
The Non-advisor Test; and
The Ignorance Test.

Scheme organiser and managers – someone who organises and manages a scheme but did not design it or make it available to others when they are not connected with the person who marketed or designed it or similar schemes – if there is a connection they will be a Co-Promotor.

Notifiable scheme – a scheme that meets certain Hallmarks (see below)

Client – a use of a notifiable scheme

The DOTAS rules have been updated a number of times over the years and their scope has been widened. Both the taxes covered and the hallmarks have been extended.

Three key questions which will be covered further below are:

Is a scheme required to be disclosed?
Who has the obligation to disclose, and by when?
What are the consequences of failing to comply with or breaching the rules?

Is a scheme required to be disclosed?

Disclosure covers certain tax arrangements relating to the following taxes:

Income Tax (IT), Corporation Tax (CT), and Capital Gains Tax (CGT)
National Insurance Contributions (NIC)
Stamp Duty Land tax (SDLT)
Annual Tax on Enveloped Dwellings (ATED)
Inheritance Tax (IHT)

The different taxes have different rules and different hallmarks.

Guidance on the rules for disclosing arrangements relating to VAT are not part of the DOTAS rules and can be found in Vat Notice 700/8 Disclosure Of Vat Avoidance Schemes.

Income Tax (IT), Corporation Tax (CT), and Capital Gains Tax (CGT)

A tax arrangement should be disclosed if:

It will, or may be expected to enable a person to obtain a tax advantage;
The tax advantage is the main benefit or one of the main benefits of the arrangement;
It is a hallmarked scheme, that is it falls within any of the hallmarks in the relevant regulations.

The relevant Hallmarks are:

1(a) – Confidentiality from other promotors
1(b) – Confidentiality from HMRC
3 – Premium fee
5 – Standardised Tax Products
6 – Loss Schemes
7 – Leasing Arrangements
9 – Employment Income

A deeper explanation of the hallmarks is not within the scope of this factsheet.

National Insurance Contributions (NIC)

As for IT, CT and CGT with the exception of Hallmarks 6 and 7.

Stamp Duty Land tax (SDLT)

The hallmarks do not apply to SDLT. An SDLT arrangement should be disclosed if meets certain tests:

Test 1 – are there arrangements that enable an SDLT advantage?
Test 2 – Is the advantage a main benefit of the arrangements?
Test 3 – Grandfathering – an exemption for arrangements designed before 1 April 2010, there are exceptions the exemption.
Tests 4 to 7 – Steps A to F – no disclosure is required for a scheme that comprises one or more of the six steps. However Tests 5, 6, and 7 place restrictions on the application of the steps.

Step A – Acquisition of a chargeable interest by special purpose vehicle (SPV)
Step B – Claims to Relief
Step C – Sale of shares in SPV
Step D – Not exercising election to waive exemption from VAT
Step E – Transfer of a business as a going concern
Step F – Undertaking a joint venture

Annual Tax on Enveloped Dwellings (ATED)

The hallmarks do not apply to ATED. The disclosure rules for other taxes may however apply. An ATED scheme must be disclosed if it meets certain tests:

Test 1 – Are there arrangements to enable an ATED advantage to be obtained?
Test 2 – Is the tax advantage a main benefit of the arrangement?
Test 3 – Does the arrangement fall within one of the prescribed descriptions?

The prescribed descriptions can be found in the legislation and are not within the scope of this factsheet.

There are a number of important exclusions which exempt a scheme from disclosure, these are:

Exclusion 1 – the transfer is on such terms would reasonably be expected to be agreed between unconnected persons.
Exclusion 2 – the transferor and transferee are members of the same group of companies and the transferee meets the ownership condition.
Exclusion 3 – The transfer constitutes a distribution out of the assets of the transferor, and the transferee is an individual, a corporate sole, a trustee or persona who meets the ownership condition.
Exclusion 4 – The transfer constitutes a settlement.

Generally the ATED DOTAS rules apply from 4th November 2013.

Inheritance Tax (IHT)

The Hallmarks do not apply to IHT. An IHT scheme must be disclosed if it meets certain tests:

Test 1 – Are there arrangements or proposals for arrangements that result in property becoming “relevant property”?
Test 2 – Are those arrangements or proposals for arrangements such that they enable a “relevant property entry charge” advantage?
Test 3 – Is the tax advantage a main benefit of the arrangements?
Test 4 – Grandfathering – exempting from disclosure arrangements that were in place before 6th April 2011.

There are a list of 19 grandfathered arrangements, details of these can be found in HMRC’s DOTAS guidance.

Who has the obligation to disclose and by when?

Generally the scheme promotor has the obligation to disclose, however in certain circumstances, for example where the promotor is offshore, or a scheme was devised “in house” then it is the user that must make the disclosure.

When a promotor is required to disclose he must do so within 5 days (starting the day after) of:

Making a firm approach to another person making a scheme available to them; or
Makes a scheme available for implementation by another person; or
Becomes aware of a transaction forming part of the scheme.

The five days does not include non-working days such as weekends or bank holidays.

Disclosure can be made online, further details can be found in HMRC’s guidance.

Once disclosure has been made, if appropriate HMRC will issue a Scheme Reference Number (SRN) which must be included on the tax return of any client that uses the arrangement.

A promotor must issue a client with an SRN within 30 days of either receiving it from HMRC or from the client entering into a transaction within the scheme.

If a promotor issues a client with an SRN then within 10 days the client must notify the promotor of their National Insurance number (NINO) and Unique Taxpayer Reference (UTR).

From 1st January 2011 promotors are also required to provide lists of clients that they have issued an SRN to, these lists must be provided every quarter for clients issued with an SRN within that quarter.

There are slightly different rules for disclosable schemes relating to ATED, SDLT and IHT.

What are the consequences of failing to comply with or breaching the rules?

HMRC may impose penalties for non-compliance with the DOTAS rules, broadly these penalties fall into three categories:

Disclosure Penalties – for failing to disclose a scheme.
Information Penalties – all other failures except those covered by the next point.
User Penalties – for failure by a user to notify HMRC of a SRN they have been issued with.

For disclosure penalties an initial penalty will be determined by a tribunal, a further penalty may apply for continued non-compliance.

In all other cases (except for user penalties) HMRC will apply to a tribunal to impose a penalty, applications will be subject to a hearing where each party can state their case.

Each case will be looked at carefully based on the facts and will only be taken where there is not a reasonable excuse for the failure. In all cases the individual circumstances will be taken into consideration when deciding whether to impose a penalty.

There is a right of appeal against any penalty imposed.

Disclosure penalties – An initial penalty of up to £600 per day for an initial period starting with the failure and ending with the date the tribunal determines the penalty.

If the tribunal determines this penalty does not create a sufficient deterrent then it may increase the penalty to a maximum of £1,000,000.

HMRC may then impose a further penalty of up to £600 per day if the failure continues.

Information Penalties – a tribunal may determine an initial penalty not exceeding £5,000 for each failure.

HMRC may then impose a daily penalty of up to £600 per day for each day the failure continues. In certain prescribed cases this can be increased to £5,000 per day.

User Penalties – a user who fails to report an SRN is liable to a penalty of £100 for a first occasion, this rises to £500 if a failure on a second occasion is within 3 years of the first occasion, and £1,000 on a failure on the third occasion.

These penalties are imposed by HMRC and do not need tribunal approval.

If you are concerned about how DOTAS rules may affect you then please do not hesitate to get in touch by calling 0203 039 3993.

Intermediaries Legislations IR35

05 January 2016

Intermediaries Legislations commonly known as IR35 was introduced by HMRC in April 2000.

The legislation that aims to identify individuals that are using a 'personal service company' (PSC) or a 'limited liability partnership' (LLP) as an intermediary to avoid paying the correct tax and national insurance and get an unfair advantage according to HMRC, who will not recognise these individuals as self-employed but rather 'disguised employees'.

IR35 was introduced to allow HMRC to crack down on 'disguised employees' and stop the loss of tax and national insurance to the exchequer.

Until 5 April 2015 there was an online system called the business Entity Test to assess whether businesses were at High, Medium, or Low risk of IR35 applying. This was withdrawn after much criticism that it was biased in HMRC’s favour.

Now in order to assist businesses to distinguish between employees and self-employed, an employment status indicator (EIS) tool has been developed which can be found on HMRC’s website.

You answer a series of questions about the working relationship between the engager and the worker and a conclusion is provided, it’s not necessary to provide personal details.

Both the engager and the worker are responsible to distinguish the workers employment status as the engager would have to ensure that they fulfil the tax and national insurance contribution liabilities.

To determine whether you are caught by IR35, HMRC will look at both the way the work is carried out by the worker on daily basis and the written contract between the parties.

The main assessment criteria’s are:

Personal Service/ Substitution

Supervision, Direction and Control (SDC)

Mutuality of Obligations

One of the strongest indicators of self-employment is the right of substitution, where a worker can either provide a substitute or engage a helper to provide a service rather than being individually hired to provide their services personally.

Another test to clarify ones employment status is the degree of Supervision, Direction or Control over how the worker completes their tasks. A Self-employed worker may be asked to perform a particular task or provide a service at a specific time and location but it’s not likely for the client to have control over how the task is performed although this doesn’t affect the rights of the client (engager) to request the work carried out to be of certain quality.

An employed person on the other hand is subject to a high degree of control, as they are likely to be told where and how to perform their tasks.

Finally mutuality of obligation is another area for HMRC to determine an individual’s employment status. A self-employed contractor would benefit from providing their services efficiently and moving to another assignment or task and would not be entitled to expect further work form the same engager. However an employee would be supplied with continues supply of work form the employer and would be expected to carry out the task when he is required to do so.

When work is regularly provided to a contractor HMRC may take the view that an employee status has been created by custom and habit and as a result a great emphasis is been place on the right of the contractor to walk away from a contract early, if they choose to.

If you aren’t certain about your IR35 Statue, we can help check your contract for IR35 Compliance.

We provide a detailed contract review service which can be used in defence of your IR35 status.

If you require any assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993.

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