FOR THOSE DETERMINED to avoid tax, it seems obvious that notifying HM Revenue & Customs of a given scheme would, of course, lead to an investigation.
And so, for those people, the next logical step is to find a way of circumventing that.
The Disclosure of Tax Avoidance Schemes (DOTAS) has proven an effective tool for the taxman, which has seen a string of contrived structures shut down as a result of those investigations and subsequent tribunals.
Given its record, HMRC can rightly be pleased with the inroads it's made against tax avoidance. Notably, it's shut down controversial schemes such as Icebreaker and Eclipse, which will see investors forced to pay back billions of pounds in sheltered tax. According to the most recent tax gap figures, avoidance now stands at £4bn in lost revenues, compared to total shortfall of £35bn, and £8bn lost from fraud and error every year.
Progress is being made against avoidance, and those determined to keep their cash and not pay their share are looking for new avenues, knowing a DOTAS number is an invitation for investigation.
Initially, this relatively fertile space was encouraged with quite tame penalties, but HMRC now say that failing to disclose can lead to fines of up to £1m and it is in the process of further strengthening its hand.
Outside the system
There is, it seems, something of a profile emerging of the promoters of such schemes. According to advisers, some of the promoters who used DOTAS numbers as tacit approval from HMRC initially, are now promoting schemes outside the DOTAS system.
Some promoters are therefore looking hard at their product lines and designing versions that escape the rules. Those rules have become so prescriptive, advisers say, that the longer they become, the easier they are to find holes in.
For example, class action group Rebus claims to know of at least two promoters looking for non-DOTAS versions of old products and that their materials will be in the market at the beginning of the selling season in mid- to late-September. They also claim to know that some business models say that they are non-DOTASed even though many of their clients use the model to create tax losses.
It is often argued by promoters, advisers say, that their present offering is so similar to something that was done before that it is protected by 'grandfathering' rules. Thus, a scheme that already disclosed under DOTAS and now appears in a different version would not be subject to its own DOTAS registration. If the previous scheme had not been subject to DOTAS, then neither would the latest iteration.
A subjective objective
It's also a fact that for a scheme to be disclosed its main object, or one of its main objects, has to be a tax advantage. Defining a tax advantage is in legislation and relatively objective. Whether the 'main purpose' is to achieve a tax advantage is far more subjective. A scheme that is overtly commercial, especially if asset-based, is perhaps on the borderline. Advisers suspect that until we get a cast-iron definition of tax avoidance from the courts, there will always be room for interpretation.
For HMRC, the battle has broadened and continues to move and evolve. It has timed updating its rules well, but rules can only go so far, and as such, its tracking of unusual activity is going to have to compensate.
How HMRC will track non-DOTAS schemes in light of the potential for renewed activity in the space is unclear. The taxman failed to provide specific details about its compliance processes to Accountancy Age when asked, although it did say it receives information from a "wide range of sources" on schemes and arrangements that are not disclosed to it under the DOTAS rules."
As such, it is hoped its sanctions will prove enough of a deterrent to curtail non-DOTAS activity.
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