Contractor’s guide to DOTAS: part two
(continued from part one)
DOTAS and its application today
Since DOTAS’s introduction, HMRC has continued to make changes to the legislation in order to increase their information on tax avoidance schemes. The Finance Act 2010 made changes to include a new category of a person required to disclose, an 'introducer'(1). This increased the chances of a disclosure being required where a promoter was not a UK entity.
A scheme user was also required to make a disclosure if the promoter was outside the UK; was a lawyer where legal privilege applied or where the scheme had no promoter. How is this evident where an individual was employed directly by the scheme? This was compounded by promoters advising that no personal tax return was required -- wrong. Disclosure would normally be made in the return whereby the scheme user was required to disclose an SRN he or she had been advised of but had no practical way of doing so.
As a result, penalties for failure to comply with a DOTAS obligation(2) have been issued, and are often excessive. They fall into three categories; Disclosure penalties (promoter and introducer), Information penalties (promoter and introducer), and User penalties (scheme user). In all cases apart from user penalties the initial penalty is determined by Tribunal.
As might be expected, user penalties apply when the scheme user has failed to report a Scheme Reference Number (SRN) to HMRC, regardless of whether the introducer or promoter have. Where this is the case, if a person has a reasonable excuse for not disclosing they can appeal the penalties. HMRC takes into consideration the level of knowledge and experience a person can be reasonably expected to have of DOTAS in reviewing the appeal. They also look at the adequacy of the systems that the person has put in place to ensure compliance with DOTAS, the nature in which failure occurred, such as carelessness or deliberate behaviour and whether HMRC had been notified to the failure before being prompted such as a pre-emptive disclosure after the time in which it should have first been made.
Although user penalties in comparison to promoter penalties are not high -- currently set at £100 per scheme for a first occasion, £500 per scheme on the second occasion within three years, and £1,000 per scheme on the third and subsequent occasions, if the scheme adapts and changes over time requiring disclosure of a new SRN then the penalties can quickly accumulate.
A working example:
Fraser Perry is an IT Consultant who was working under his own Limited Company "FP Ltd". He is currently contracted at Megabank where he has been working for the past year. He was approached by a scheme promoter who would employ Fraser and pay him through salary and loans from a trust. All of Fraser’s tax affairs and payroll was conducted by his employers. At the time the employers indicated that the scheme was subject to DOTAS and therefore that a disclosure would be made on Fraser’s return. The promoter moved Fraser from one scheme to another over the years and Fraser moved accountants. His accountants were not informed fully about the changes to schemes and did not make a disclosure on his returns. Similarly, when checking the returns for accuracy Fraser was not aware that disclosure needed to be made each year. He now runs the risk of being fined £2,600 (£100+£500+£1,000) for failure to disclose under DOTAS.
Under s.312a(3) 'the duty of clients to notify parties’ of the SRN, puts the emphasis on the employer to disclose, where indeed there is one. This section of legislation applies to the promoter in relation to notifiable arrangements e.g. where the employer and promoter are the same entity. This is important for contractors who used tax-advantaged arrangements while being employed via an umbrella company. The significant part of this section explains that where the client (Promoter) is an employer they must provide to each of the client's relevant employees (Fraser, in our example above) prescribed information relating to the reference number. With this in mind, the duty to provide an SRN should, in theory, fall on the employer rather than the employee.
Normally, HMRC have the power to open an enquiry into a taxpayer’s affairs, 12 months after the SATR (self-assessment tax return) is filed(4) or within four years if they deem there has been an incomplete disclosure which has led to a loss of tax(5), unless careless or deliberate in nature, which results in six and twenty years respectively.
Under DOTAS, HMRC has a time limit of 20 years if they deem a loss of tax has occurred as a result of:
- deliberate action
- failure to notify of liability
- a notifiable tax avoidance scheme
- a hallmarked scheme
- a listed scheme
Worked example continued:
On principle Fraser may be liable to a penalty for non-disclosure. Here, therefore, he should consider making a pre-emptive disclosure to HMRC of the SRN numbers for the years in question. He should also consider raising the following defences:
- That he was employed by an entity that was both his employer and the promoter and therefore the duty was not on him to disclose, but rather his employer.
- That he could not have reasonably been expected that he needed to disclose the information as sufficient information had not been provided by his employer, the promoter or the introducer.
- That he could not reasonably have been expected to know that a disclosure was required as he is not a tax or accountancy specialist.
HMRC use the DOTAS legislation as a trigger to issue a scheme user with an APN (Accelerated Payment Notice). HMRC use the payment notice as their projected calculation of tax they deem to be due on the basis the scheme is sought to be ineffective and therefore ‘defeated’. Users who use more than one scheme can be classed by HMRC as a ‘serial tax avoider.’
2017 and all that
The years from introduction to now have been marked by an increasing regulatory burden, complexity, imposition of fines and similar but unfortunately no more sign of HMRC adhering to their alleged reason for the regime -- the need to take counter action via legislation. Such legislation as has been seen is clearly rushed into existence and remains difficult to apply and certainly gives no clarity. The principle purpose of the legislation -- to provide clarity on what is and is not acceptable -- has been failed and this failure has to be put at the door of HMRC who have been the single largest recruiter for ‘dodgy’ schemes.
Editor’s Note: This is the second instalment of a three-part guide on DOTAS for contractors, by WTT Consulting exclusively for ContractorUK. Part three will explore DOTAS’s impact in the future, and part one explored DOTAS’s impact on contractors in the past.
- Section 307 FA 2004 – introducer
- 98C Taxes Management Act 1970, as amended by FA 2010
- Finance Act 2008
- S.9A Taxes Management Act 1970
- S.29 Taxes Management Act 1970