The recently published disclosure of tax avoidance schemes regulations (The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) (Amendment) Regulations 2016) give us the new hallmarks for arrangements involving standardised tax products and loss schemes, as well as an update on the planned next steps for inheritance tax schemes.
Broadly speaking, the new regulations seek to expand the reach of Dotas. The main sector interest is in relation to IHT but the proposed expansion of the hallmarks to cover a wider range of schemes in this area will be consulted on further later this year.
It is encouraging the Treasury is looking for the expansion to be tightly targeted so it does not catch ordinary, non-abusive tax plans. The draft regulations made a reasonable stab at achieving this objective by excluding loan trusts and discounted gift trusts. However, some rewording was clearly necessary, as was further reassurance in relation to other, arguably even more straightforward, IHT planning strategies.
At this point, I thought it would be worth revisiting the key aims of Dotas and the motivation behind widening its reach. The regime serves two main purposes:
1: Early warning system
To help HM Revenue and Customs identify cases and schemes that need to be investigated and challenged. In other words, it acts as a kind of early warning system. The responsibility to provide the required information (with “supplementary” financial penalties for not complying) falls on the scheme promoters.
Having registered a scheme, a reference number will be issued and all users of the scheme should include this on their tax return so HMRC can readily identify it. There was some evidence in its early stages that having a Dotas reference number (a prerequisite to promotion of schemes within the hallmarks) was considered (presented even) as some form of HMRC approval. Bizarre.
More recently there has been evidence of activity among promoters focused on creating schemes that ostensibly fell outside the need to be disclosed under Dotas: for example, because a scheme was similar to one being promoted before the hallmarks were introduced or just fell outside of the (possibly too narrowly drawn) hallmarks as they stood. One would always counsel caution over such schemes.
The primary test for consideration of adoption should be whether the arrangement proposed would achieve its aim within the relevant legislation as it stands. When considering what “as it stands” means, you should bear in mind how the courts and tribunals are increasingly taking a “purposive” approach to interpreting legislation as opposed to a strictly “formal” one.
Add to this the existence of the general anti-abuse rule and you have a fairly powerful case for a scheme having to be within what Parliament intended if it is to be successful these days.
Promotion of a scheme on the basis it does not need to be disclosed under Dotas would seem worrying, especially if there is some doubt over whether the central tax-saving purpose would be achieved anyway. Not having to disclose under Dotas may also be promoted as avoiding the chance of receiving an accelerated payments notice.
2: Tax cashflow
That brings me on to the second purpose and motivation for widening the reach of the regime. Having a properly issued Dotas reference number can lead to the issue of an APN.
Tax cashflow is extremely important to HMRC and the ability to issue APNs to individuals with Dotas schemes (and partner payment notices to partnerships) enables it to address one of the key contentions in relation to “aggressive” schemes. This is that, while the effectiveness of a tax avoidance scheme with a Dotas number is being determined by the tribunal or courts, the outstanding tax under dispute ought to rest with the authorities rather than the taxpayer.
Naturally, on the basis the taxpayer won their case, the tax collected via the APN would be returned with interest. Unsurprisingly, however, HMRC seems relatively confident few such returns will need to be made.
So that is the Dotas regime for you. Hardly surprising, then, that we are seeing moves being made to expand its reach.
Tony Wickenden is joint managing director at Technical Connection