House of Commons - Tax avoidance: tackling marketed avoidance schemes

Tax avoidance: tackling marketed avoidance schemes - Public Accounts Committee Contents

2 The disclosure regime

9. The Government introduced a disclosure regime, the Disclosure of Tax Avoidance Schemes (DOTAS), in 2004. The purpose of DOTAS was to provide early information about tax avoidance schemes to HMRC, identify the users of tax avoidance schemes and reduce the supply of avoidance schemes by altering the balance of financial advantage gained from avoidance. DOTAS requires the promoter of certain types of avoidance schemes to disclose information about the scheme to HMRC within five days of making it available for use. Taxpayers who use these schemes are required to report the scheme reference number on their tax return.[24]

10. There have been 93 changes to tax law as a result of information from DOTAS since its introduction.[25] Tax Trade told us that DOTAS appears to be working, citing an example where HMRC changed legislation to close down a tax avoidance scheme within two weeks of disclosure. It said the early warning it provided to HMRC was unhelpful for those promoting tax avoidance schemes.[26]

11. HMRC told us that the majority of promoters are upfront about what they are selling and co-operate fully with HMRC's investigations into avoidance schemes, but that there is a small number of boutique promoters who as part of their strategy throw every obstacle in the way of HMRC finding out what they are doing.[27] In these cases HMRC told us it has powers to get the information it needs. However, we are not convinced HMRC is making enough use of its powers to make life much more difficult for uncooperative promoters, for example by investigating all their tax affairs closely to discourage this behaviour.[28]

12. DOTAS only captures 46% of tax avoidance. HMRC has other ways of detecting avoidance through gathering market intelligence and through its risk assessment work, but does not know how much avoidance is not disclosed but should be.[29] HMRC has only issued 11 penalties for £5,000 to promoters for non- disclosure of a scheme under DOTAS since its introduction.[30] The maximum penalty was increased to £1 million in 2010, but HMRC has yet to apply this.[31] HMRC has also yet to apply a penalty to an individual taxpayer for failing to disclose a scheme on their tax return.[32]

13. We were alarmed that promoters have been able to use some QCs' opinions' to protect themselves from fines for not disclosing schemes under DOTAS.[33] HMRC is not able to fine promoters or taxpayers for not disclosing a scheme where they have a legal opinion that the scheme does not need to be disclosed as it constitutes a "reasonable excuse" for not disclosing.[34] HMRC agreed that the "reasonable excuse" practice was being used more widely than it thought was appropriate and told us that it is consulting on whether it can make it more difficult to use a legal opinion to provide protection from breach of the DOTAS rules.[35]

14. The majority of avoidance schemes are not covered by the Financial Services Act. We were told that some promoters continue to sell highly contrived avoidance schemes and receive the fee for the scheme regardless of whether they work.[36] The only risk to promoters from mis-selling schemes is that their clients may litigate.[37] We questioned Tax Trade about the dangers of promoters mis-selling avoidance schemes to ordinary taxpayers who are not high wealth individuals.[38] We were told that some promoters may not have told their clients the risks involved in the avoidance schemes they are using.[39] HMRC told us that it is consulting on whether the model of financial services mis-selling could be used for avoidance schemes.[40] HMRC acknowledged that it needs to do more to make the risks of involvement in avoidance more overt and visible to people.[41]