Contractor’s guide to DOTAS: part three
(Continued from part two)
DOTAS into the Future
Perhaps the taxman’s failure to stop abusive schemes is the biggest indictment of a system that was fit for purpose but rendered powerless by a lack of resource.
Certainly there has been a lack of disclosure by some promoters, combined, however, with lack of HMRC understanding or simply too much administrative burden, and it is clear that the continued use of “Discovery” is a means to cover up a failure to act in time. This has led to accusations of abuse of power, see “Burgess & Anor v HMRC(1) " where the Upper Tribunal (UT) found that HMRC had failed to discharge its burden of proof.
If an individual has not disclosed their SRN under DOTAS legislation HMRC should be targeting employers under s.312a, above, but a continued misuse of discovery is HMRC’s preferred weapon. Rather they should be enquiring of the promoters.
DOTAS was created to tackle attempts to avoid tax, yet HMRC appears to use it as a system to exploit individuals over an extended period of time. This is particularly noticeable in the introduction of Accelerated Payment Notices; perhaps the most controversial piece of tax legislation in the last 20 years.
An immediate demand for tax which HMRC unilaterally decides is due, requires a DOTAS number to be in existence. This in simple terms means HMRC can issue a retrospective demand for underpaid tax on a scheme if it was declared under DOTAS. This is an abuse of the original intention of the system.
Until recently the use (and misuse) of DOTAS legislation has gone unchallenged. The case ‘HMRC v Root2 Tax Ltd 2017’(2) is the first to be heard in respect of a DOTAS notification. Root2 were promoters of the ‘Alchemy’ scheme which involved entering into almost simultaneous spread bets and hedging transactions. HMRCs view was that Root2 should have disclosed this. Issues were raised whether the arrangements of the scheme were notifiable or should be treated as notifiable. Root2 raised the argument that due to the nature of the bet, the outcome could go either way and that the employee could achieve or profit or suffer a loss and therefore creating commercial uncertainty. The First Tier Tribunal (FTT) disagreed and found that the scheme enabled, or might have been expected to enable, a person to gain a tax advantage. The scheme would have fallen under the ‘Standard Tax Product’ hallmark and therefore should have been disclosed.
The decision meant that Root2 will be penalised for failure to disclose under DOTAS, but it also gives HMRC the ability to issue APNs on all who took part in the scheme.
HMRC will provide all users of the Alchemy scheme an SRN. For users who made trades using the Alchemy scheme prior to April 6th 2016 and who have not disclosed the trades in their SATR, amendments should be made. For tax years which are unable to be amended due to time limits (pre-2012/13 at the time of publication) then the user should consider making a ‘voluntary disclosure’ which would include a statement referencing the Root2 decision. Penalties for users should not apply for failure to disclose use of the scheme to HMRC as the liability falls on the promoters, in this case Root2, and as above, the ignorance test is likely to be successfully argued.
The Root2 case has highlighted the importance of a scheme user to ask the question ‘why a scheme hasn’t been provided with a DOTAS number’. In the past, promoters used the fact a scheme was DOTAS-registered as a marketing platform for compliance with HMRC rules, yet in the present day and no doubt the future, promoters will challenge the hallmarks to avoid disclosure, instead. Although substantial penalties will fall primarily on the scheme promoters is it essential that moving forward scheme users take a level of responsibility and if in doubt seek third party, independent, advice on the position to avoid punitive penalties and open-ended enquiries.
From the above, I believe DOTAS’s original aim, to afford HMRC an opportunity to review the full extent of a tax advantaged scheme, thereby protecting them from aggressive tax avoidance, has failed significantly. Where this is the case, we start to ask questions as to the real objective of a piece of legislation and whether HMRC has acted in good faith. It is apparent that post-2014, HMRC seem to be using the DOTAS regulations as the basis of issuing scheme users with APNs and late enquiries, both of which could have been avoided if the primary objective was achieved.
This was highlighted with the U-turn by HMRC relating to taxpayers who participated in the Montpelier IR35 Manx Partnership arrangement. In this case Montpelier successfully argued that while at the time they had taken protective measures to notify HMRC of the arrangement under DOTAS, it was not actually a notifiable scheme. As a result, HMRC were forced to withdraw 2,000 APN notices, many of which had resulted in significant distress for the taxpayer. This blatant disregard for due process in light of a reactive need to regain ground following poor administration, highlights a worrying misuse of both the APN legislation and also an understanding and application of the DOTAS regime.
With a government feeling the economic pressure of Brexit and increasing calls for investment in public spending, questions may be asked if funds generated from APNs are being used for their intended purpose and, as above, how much of that revenue generated will need to be returned in the event of an incorrect decision by HMRC. Will this mean that HMRC becomes more aggressive with utilising retrospective DOTAS deceleration, under the guise of it allowing them to issue APNs on schemes that they may not normally be able to? Either way it is imperative that contractors review historic arrangements in light of the DOTAS principles and decide for themselves if steps can be taken to mitigate the risk of a DOTAS investigation, which would in turn lead to an enquiry and possible demand for underpaid tax and penalties.
Many commentators are indeed seeing the 2019 DR charge as a APN for non-DOTAS schemes, extending HMRC’s raid on contractors.
There is however an opportunity for taxpayers affected by a DOTAS enquiry to appeal any subsequent penalties, where they have not personally disclosed the SRN. HMRC have an 'ignorance test'(3) which applies when an individual could not have reasonably been expected to have known that they were required to disclose. This may be due to not having sufficient information to enable them to know whether the arrangements are disclosable schemes or sufficient information, so as to enable that person to comply. The test continues to state that where having the 'relevant information' depends not merely upon factual knowledge, but upon the application of some particular expertise, persons will not normally be expected to have such an expertise if it falls outside their own area of professional capability. For many individuals who used a contractor scheme, where the promoter has not provided sufficient information this could be the best approach to mitigate exposure to penalties.
Editor’s Note: This is the final instalment of a three-part guide on DOTAS for contractors, by WTT Consulting exclusively for ContractorUK. Part two gauged DOTAS’s impact today, and part one explored how DOTAS came about to impact contractors in the past.
- Burgess & Anor v HMRC 2015
- HMRC v Root2 Tax Ltd 2017
- S1 2004/1865, reg 4