Contractor’s guide to DOTAS: part one
We’re all for acronyms, but the main one as far as contractors are concerned is ‘HMRC.’ And its main acronym that affects contractors is ‘DOTAS,’ writes Lydia Southern of WTT Consulting.
Indeed, the Disclosure of Tax Avoidance Schemes (DOTAS) regime is the most commonly used tool in HMRC’s armoury against avoidance. Unfortunately, it is also regarded as one of the more complex pieces of tax legislation.
If a group of taxpayers were asked to explain DOTAS, the acronym may be known, but after that almost certainly a long pause. It seems that despite being a widely known principle, the details of why and how it was put into practice then and now are largely unknown.
With its application becoming increasingly important it pays contactors to understand the principles of DOTAS, why it affected them, how it continues to do so and what might happen in the future. This three-part guide exclusively for ContractorUK will explore each of those, in order.
DOTAS and its implementation
Casting minds back to 2004, perhaps more memorable for most as the year of the Athens Olympics rather than the birth of DOTAS, the Finance Act 2004 incorporated the regulations which implemented a platform to count and monitor the tax avoidance schemes in circulation. This was limited to arrangements connected to employment or financial products which claimed a tax advantage. The purpose? To afford HMRC a chance to counter anything they felt was abusive. Like the judging of the Men’s gymnastics that year -- perhaps just as controversial.
The way in which HMRC were to initiate this power was via a process of identifying potentially abusive schemes by their ‘Hallmarks.’ If a scheme did not satisfy the hallmarks, then there was no obligation to disclose to HMRC. If, however, any hallmarks were relevant then a disclosure would need to be made. HMRC would then issue a Scheme Refence Number (SRN) a critical element. We’ll cover these later.
At inception(1), just two hallmarks existed, both of which related to Financial Products. These were subsequently extended to include seven more, bringing with them greater oversight and opportunity for HMRC to identify potentially aggressive avoidance products.
The hallmarks are as follows:
- The 'Standardised Tax Product' hallmark was intended to prevent arrangements that are usually referred to as mass marketed tax schemes. The hallmark has since been amended to eliminate the ability to claim 'grandfathering', a process whereby arrangements were exempt from disclosure if they were substantially unchanged from a pre DOTAS arrangement or similar to another arrangement with an SRN already in existence.
- The 'Financial Products Hallmark’s' to identify schemes using financial instruments.
- The 'Inheritance Tax (IHT)' hallmark was introduced in 2011.
- The 'Confidentiality' hallmark applied when a promoter requested that the workings of the scheme remain confidential from other promoters and from HMRC.
- The 'Premium Fee' hallmark assumes that the additional risk in an avoidance scheme brings an increased fee. For many contractor schemes, the pricing was set to mimic ‘Own Co-type’ plans, but could fall foul of this.
- The ‘Employment income’ hallmark based on employee’s remuneration. The purpose was to protect employees from being forced to adopt tax avoidance structures into their remuneration.
- The ‘Leasing arrangements’ hallmark.
- The 'Losses Hallmark'.
James Smith is an IT contractor who has discussed with his accountant how best to manage his contract with TechCorp, which includes how he should be paid to ensure compliance with legislation. He is advised to operate within his own Limited Company and to receive salary subject to PAYE and dividends. He is also introduced to a promoter who has an arrangement whereby James’s contract is part paid by loans from an offshore entity. John is assured by the promoter that hundreds of other contractors are adopting the same approach. It is likely that this is a mass marketing arrangement, therefore and that the scheme being offered would fall under the Standardised Tax Product Hallmark and a disclosure would need to be made.
Disclosing the Arrangement
The obligation to disclose was placed on the scheme promoter who was required to explain to HMRC which legislation created the tax advantage, within five days of it becoming available to prospective clients. HMRC were then afforded the ability to review the scheme and amend legislation should they deem it to be too aggressive. What is evident is that they did not have the ability to shut down the scheme itself. This opportunity to view arrangements before implementation sought to remove the need for any retrospective legislation creating clarity in the tax.
Following disclosure, HMRC then have 90 days to issue a SRN. Far from the issue of the SRN ‘being advised,’ meaning a scheme was being approved as tax-compliant, both promoters and HMRC have agreed it is potentially tax avoidance.
As tax enquiry specialists, perhaps the most common question we hear is why HMRC can retrospectively deem an arrangement to be tax avoidance when it has been declared under DOTAS?
We have the luxury of hindsight of course, but at the time a deliberate play on words has misled many into believing HMRC had approved the scheme. It’s important that both contractors and HMRC appreciate that DOTAS was widely used as a marketing tool and that HMRC silence indicated tacit approval.
Ultimately the failure of HMRC to take timely action is regarded as the single biggest failing of the DOTAS regime to date, and one that is causing extensive issues for both contractors who have been duped -- and HMRC who are back pedalling to correct previous omissions.
Did DOTAS work?
It certainly gave HMRC information -- so much information that they were overwhelmed and stunned into inaction. It allowed the unscrupulous to sell products that are now under enquiry. It allowed HMRC to (slowly) mobilise to strike at the worst offenders.
Did it work for or against contractors? Evidence suggests that contractors were fooled into thinking DOTAS was approval; have seen it used to issue demands for money; has given them no certainty as to what is or is not legal. On balance, no, it did not work.
Editor’s Note: This is the first instalment of a three-part guide on DOTAS for contractors, by WTT Consulting exclusively for ContractorUK. Part two will explore DOTAS’s impact today and Part three, DOTAS’s impact in the future.
1. The original regulations were in 2004 but brought into use in August 2006