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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. Promoters 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 products. 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
"Disclosure of tax avoidance schemes DOTAS What it all about"