Taxman more secure against tax avoidance schemes
The DOTAS regime has helped lead to a decrease in tax avoidance schemes
The DOTAS regime has helped lead to a decrease in tax avoidance schemes
THE DOTAS scheme has changed the tax avoidance world. Figures announced last week by Exchequer secretary to the Treasury David Gauke showed that the number of legislation changes made as a result of the Disclosure of Tax Avoidance Schemes facility has been decreasing.
Alongside this, fewer schemes are being disclosed – yet the rhetoric on the prevalence of tax avoidance is getting stronger. So what are the reasons for this? Are scheme promoters more wary, or is there a lack of demand?
Under the terms of the facility, any tax arrangement schemes must be disclosed to HM Revenue & Customs. Failure to do so could lead to prosecution. Disclosing does not affect the user’s tax affairs, the guidance says, but HMRC could challenge the scheme in the courts or Parliament could enact retrospective legislation against it.
In the two years following its introduction, 2005/06 and 2006/07, almost 400 legislative changes occurred through schemes submitted to the regime. The following two years has seen 140 changes, while the past two years has led to 35 legislative changes.
The table below shows the number of schemes submitted per financial year. This number is decreasing as well but, interestingly, the number of legislative changes for every scheme submitted is also decreasing.
It’s important not to overstate these figures. The large numbers in the first years – and the high percentage of legislative changes, especially in 2006/07 – are likely a result of the scheme coming into place, forcing the existing schemes to disclose.
Furthermore, the number of schemes submitted is not a concrete indication of the number of different schemes – some schemes will be submitted by several different advisors. For example, the 277 submitted in 2007/08 could well be the same scheme submitted by 277 different firms.
Scheme popularity falls
That is not to say that nothing can be read into the figures. At the very least, we know there are far fewer tax avoidance scheme promoters around.
Tax barrister Daniel Feingold, who specialises in tax avoidance schemes, believes that this is because “the message has slowly got through that tax avoidance schemes do not work”. Feingold says he has never seen a scheme that has got through the DOTAS regime – that is, a scheme that the taxman has been made aware of and has made a tax saving for the customer.
DOTAS can take some credit for this. But it is not so much the specialist promoters that are put off selling the schemes. “Only this week, two companies approached me with schemes,” he says. Instead, it is reluctance from the clients. Because of DOTAS, when promoters tell clients that they must disclose the scheme to the taxman, they are effectively saying that there will be a fight. Nowadays, the scheme sellers are low key, and normally approach through independent financial advisers.
For the promoters, there is still a timing issue that makes the scheme worthwhile. When putting a scheme through DOTAS, it might take a while for HMRC to close the scheme down or to obtain the tax due. Sellers are adept at stalling the process, says Feingold. By the time the revenue has been collected and the scheme is closed two years down the line, the fees given to the promoters are already banked and spent. In other words, promoters are in the money if they can find the custom, but customers are going to be few and far between if they are constantly out of pocket.
But DOTAS cannot take the sole credit for this decrease in avoidance schemes. In tandem with a cultural shift against tax avoidance, big firms and companies are less likely to want to involve themselves in increasingly frowned-upon practices.
Before the DOTAS regime was introduced, many established firms were setting up offshore subsidiaries, which they sold the schemes to, Feingold adds. “But even the big firms have stopped. The schemes are not working and they will damage reputations.”
There is not just the issue of bad publicity; in a recession, bigger firms rely on public sector contracts far more. The government is likely to take exception to firms that are involved in these schemes. For example, it is noticeable how the bigger firms are more reluctant to defend individuals on carousel fraud charges. This is also noticeable in the financial sector – companies dealing with the part government-owned banks have to be extra wary.
On a micro-level, the boutique operations that made their money from tax arrangement schemes often included chartered accountants who undertook more of the mundane work, says Feingold. However, once the chartered accountants realised the nature of the firm’s main revenue generation, they would leave to maintain their certification.
The worldwide crackdown on tax avoidance, with the US leading the charge, has made large corporations far more reluctant to involve themselves in aggressive tax planning. Corporate governance rules tend to prevent staff from undertaking activity solely for tax purposes.
Recession bites & further developments
Of course, much of this is a result of the recession: the catalyst of the crackdown on tax avoidance was the G20 meeting in London in 2009, when world leaders were searching for solutions to the economic crisis; firms are less likely to challenge the government when public work has become that much more important; and the collapse of the financial sector meant that the spotlight was put on the biggest users of the schemes.
But, most importantly, an obvious explanation is that when there is a recession, there is less profit to be sheltered.
As well as this, the courts have been finding in favour of HMRC, most recently in the Tower MCashback ruling this year. The case centred around the partnership artificially paying too much money for software rights, which was subsequently recycled back into the firm to pay back a bank loan.
Despite the Court of Appeal and the Upper Court finding in favour of the scheme, the Supreme Court applied the Ramsay approach, which allows a court to evaluate the true reality of a series of transactions rather than look at the particular transaction which the tax legislation seeks to tax or give relief for. This is being used increasingly, and favours the taxman.
Next week, Graeme Aaronson QC’s group on the general anti avoidance rule will report back. If the group can formulate a workable legal principle, it might be even harder for tax avoidance schemes to operate.
There is no doubt the DOTAS regime has been a success, however the figures are looked at. There are fewer schemes around, bigger companies and firms are shunning more aggressive tax planning, and HMRC is able to tackle the schemes without resorting to new legislation. But the real test will come when the economy picks up, firms are less worried about souring relationships with government and, more importantly, there are profits to shelter. Until then, DOTAS has proved that, for scheme users, if your name is down, your profits won’t be coming in.