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Disclosure of tax avoidance schemes DOTAS What it all about


									Disclosure of tax avoidance schemes (DOTAS)

What's it all about?
This new scheme is an early warning system.. It is designed to provide the UK Inland
Revenue with immediate notification of tax planning schemes which involve the use of
employment related arrangements or financial products and which create a tax advantage.
Once the Revenue knows about these schemes, it can decide whether it wants to take steps
to block them.

Table 1 sets out details of where to find the legislation Although the scheme begins on 1
August 2004, there is a transitional period so that the first disclosures for notifiable
proposals and arrangements which occur after 1 August 2004 need to be made by 30
September 2004. There are also rules to cover proposals and arrangements which occurred
before 1 August 2004 as per Table 2.

As noted above, for the moment DOTAS applies only to tax planning schemes involving
financial products or arrangements in connection with employment. However, it is likely that
in future years the scope of DOTAS will be extended to other areas of taxation and products.

Regulations and Guidance Notes
The Guidance Notes which explain in detail how the scheme is to work were not issued until
28 July 2004 although a draft version had been circulated eight days earlier on 20 July. The
Regulations on which the scheme is anchored were not issued in final form until 9 July 2004
and even then, when laid before the House on 22 July 2004, included a major amendment
to the 'premium fee' test in relation to financial products.

Not surprisingly with legislation introduced, and amended, at such breakneck speed there
are bound to be problems of understanding and implementation. The above regulations
were then further amended to address a number of issues.

The law puts the onus on the promoter to disclose notifiable proposals/arrangements within
five days of various trigger dates, the 'relevant date'. Promoter is a rather more widely
defined term than what one would normally refer to as a promoter and it potentially includes
an accountant who advises his or her client about a particular transaction. One of the trigger
dates is when the proposal is made 'available for implementation' by the client.

Pages 41 to 47 of the Guidance Notes provide further guidance on who is, and is not, a
promoter. In essence this is when the person is not at the heart of the proposal or
arrangement. We would be particularly interested for any comments on the Table on page
47 and whether it helps you identify those situations when you might have a requirement to
disclose, provided that all the other conditions are present.

Some problem areas
One of the major problems with the initial proposals was that they seemed likely to require
routine tax planning advice to be disclosed, despite the overall objective of DOTAS for the
Revenue to be informed only about 'innovative use of sophisticated financial products'. It
was not intended that the proposals 'would impact on ordinary tax planning and so would not
affect the majority of advisers'.
The main means of achieving these objectives has been the use of a number of tests.
These are set out in the Prescribed Descriptions Regulations. There are two tests that apply
to both financial and employment products, namely the 'Premium fee' and the
'Confidentiality' tests. Both of these tests need to be satisfied in order for the tax planning
not to be disclosed. The premium fee test is the one which kept changing as the draft law
was being considered during May, June and July and the final version only emerged when
the Prescribed Descriptions Regulations were laid before the House on 22 July 2004. At that
stage, it applied only to the financial products (as did the confidentiality test. However, the
Regulations were then amended and these tests were extended to include employment

Premium fee test
It is not immediately clear what the Revenue mean by a premium fee from merely reading
the Regulations. There are a number of different elements, but in essence if you, or anyone
else, could charge an abnormally high fee as a result of the particular financial product
element of the proposal/arrangement, which will produce the tax advantage which is the
main benefit of the proposal/arrangement, then you will fail the test and will have to disclose.

The above is a somewhat over simplified rendering of what is a very difficult test. If you have
problems applying the test, we suggest you get in touch with the newly set up Avoidance
Intelligence Unit (AIU) and see whether they can resolve the problem. If not get in touch with
us and we will include your problem in our representations to the Revenue.

Confidentiality test
The confidentiality test is that the expected tax advantage does not arise from any element
of the arrangement or its structuring which a promoter might reasonably be expected to wish
to keep confidential from other promoters (disregarding for this purpose a duty of
confidentiality owed to any person).

The Guidance Notes explain that the tax avoidance element is only capable of generating
any competitive advantage for the promoter if other competitors are unaware of it and hence
could not have included it in their advice to clients. Where the tax avoidance element is well-
known to other tax advisers, against whom the promoter is in competition, the confidentiality
test will be passed and provided a premium fee could not be charged the arrangements will
not be disclosable.

The immediate priorities
This is a completely new system and all firms will now be finalising their internal systems
and training all their staff so that they are aware of the requirement to disclose
proposals/arrangements and the circumstances when that is necessary. Now is the time
when quite a lot of practical difficulties are bound to emerge. Some may be relatively
straightforward to deal with and resolve but others will prove more intractable. If you do have
problems then please get in touch with us.

Legal Professional Privilege (LPP)
Finally, in the early part of July the Law Society contacted the Revenue to inform them that
in the view of the Law Society solicitors were excused from compliance with DOTAS
because to comply would put them in breach of LPP. This view was confirmed in a guidance
note issued by the Law Society to its members on 20 September 2004. Following lobbying
by bodies such as the ICAEW Tax Faculty, the Government tabled a late amendment to the
Regulations which seeks to deal with this issue, even though the Government remains
convinced that lawyers are able to claim LPP.
The amendment has the effect that if a lawyer believes that he or she cannot disclose
because LPP applies, then the obligation to disclose passes to the client and the disclosure
must be made within five days of the transaction. This time limit for disclosure is the same
as that which applies where accountants provided such advice. The effect is that tax advice
by lawyers and accountants is broadly in the same position whether or not LPP applies,
although the obligations on who must disclose are different.

                                             TABLE 1
Primary legislation
Sections 306 to 319, Finance Act 2004

Secondary legislation
The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 (2004/1863)
The Tax Avoidance Schemes (Information) Regulations 2004 (2004/1864)
The Tax Avoidance Schemes (Promoters and Prescribed Circumstances) Regulations 2004 (2004/1865)

Inland Revenue guidance
Published on 29 July 2004

                                              TABLE 2
Employment products
Available for implementation by a promoter
or where any transaction forming part of the
notifiable proposal or notifiable arrangements occurred                            Disclosure date
Onshore promoter between
18 March 2004 and 31 July 2004                                                   31 October 2004
Offshore promoters and for in-house users
between 23 April 2004 and 31 July 2004                                            31 October 2004
Between 1 August 2004 and 24 September 2004 (onshore, offshore and in-house)   30 September 2004

Financial products
Available for implementation by a promoter
or where any transaction forming part of the
notifiable proposal or notifiable arrangements occurred                            Disclosure date
Between 22 June and 31 July 2004                                                  31 October 2004
Between 1 August 2004 and 24 September 2004                                    30 September 2004

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