Over the last decade, the word “avoidance” has become a very dirty word for HM Revenue & Customs (HMRC). In many instances HMRC refer to “tax avoidance” and “tax evasion” in the same sentence, revealing their desire to collect more revenue and close the often talked about “tax gap”.

HMRC have a published Anti-Avoidance Strategy which states they:

“aim to persuade our customers not to attempt to engage in avoidance by:

• Making the law robust against avoidance
• Engaging with our customers about our approach to avoidance
• Optimising our operational response to avoidance
• Changing the economics of avoidance to make it less attractive

so that the expected costs, difficulties and risks of attempting avoidance outweigh the expected potential gains.”

In the UK, the Anti-Avoidance Group (AAG) is responsible for the development, maintenance and delivery of HMRC's Anti-Avoidance Strategy. This strategy has a number of stated aims, which include:

• Closing down avoidance by effective legislation
• Knowing what avoidance schemes or bespoke arrangements are being marketed and used
• Knowing which organisations and individuals are more likely to carry out avoidance and organising their resources accordingly
• Treating those who avoid their tax obligations as higher risk
• Being proactive in challenging avoidance by investigation and effective litigation

Clearly a key tool for HMRC in achieving these aims is the transparency and intelligence they obtain from the disclosure rules enabling them to become aware of earlier arrangements: this is where the ‘Disclosure of Tax Avoidance Schemes’ (DOTAS) comes in.

The disclosure regime was introduced with effect from 1 August 2004. Initially it was limited in scope to tax arrangements concerning employment or certain financial products. This has been widened several times since and now includes the whole of Income Tax, Corporation Tax, Capital Gains Tax, VAT, NIC and Stamp Duty Land Tax.

In February 2010, HMRC published an updated DOTAS Guide that came into effect on 1 April 2010. It is a 93 page document (available on HMRC's website www.hmrc.gov.uk) but does not even cover VAT – guidance on the rules for disclosing arrangements relating to VAT can be found in VAT Notice 700/8.

The primary legislation for DOTAS is set out in:

• Finance Act 2004, Part 7 (section 306 to section 319) (amended by FA 2007, section 108 and FA 2008, section 116 and Sch.38)
• Social Security Administration Act 1992. section 132A
• Taxes Management Act 1970, section 98C
• VAT Act 1994, Schedule 11A (amended by FA2004 Sch.2 and Finance (No. 2) Act 2005 section 6 and Sch.1)

In addition there is a voluminous amount of secondary legislation and commentary.

There are some specific points relevant to each of the individual taxes, the NIC, SDLT and VAT in relation to whether disclosure of an arrangement is required. For example, disclosure in relation to VAT is required for (currently) ten specific “listed schemes” and others that carry certain “hallmarks” which are defined within the VAT rules.

However, generally whatever type of arrangement, it must be disclosed when:

• It will, or might be expected to, enable any person to obtain a tax advantage
• That tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement
• It is a tax arrangement that falls within any description (“hallmark”) prescribed in the relevant regulations

The hallmarks include items such as:

• Wishing (the promoter) to keep the arrangements confidential from a competitor
• Arrangements for which a premium fee could reasonably be obtained
• Arrangements that are standardised tax products
• Arrangements that are loss schemes

In most situations where a disclosure is required, the obligation to disclose rests with the scheme promoter and it should be done within five days of it being made available. There are instances when the scheme user needs to make the disclosure: for example if the promoter is based outside the UK.

On disclosure, HMRC issue an eight-digit scheme reference number for that scheme. The promoter must provide this to each participant of the scheme, who in turn must include the number on their tax return or separately on a specific HMRC form (AAG4).

The allocation or notification of a scheme reference number does not indicate that HMRC accepts that the scheme achieves, or is capable of achieving, any purported tax advantage.

HMRC has specific information powers to enquire into non-disclosure of a scheme and, not unexpectedly, the whole regime is backed up by specific penalty provisions for non-disclosure either of the scheme or the reference number by individuals.

The AAG amongst other things, risk-assesses disclosed avoidance schemes and co-ordinates responses including devising and delivering the operational strategy for handling enquiries into avoidance schemes.

In view of the published aim of HMRC in relation to “avoidance”, the success of the disclosure regime may look to be measured by the number of schemes currently in circulation. It can be seen from the statistics that 503 and 607 direct tax schemes were disclosed in the financial years ended 31 March 2005 and 2006 respectively compared with 130 and 176 in years ended 31 March 2009 and 2010. The equivalent numbers for VAT disclosures are 680 and 91 compared to 16 and 12. These are dramatic reductions and any adviser undertaking planning work will be only too aware of the limited opportunities that exist for clients in the current climate.

This was, and continues to be, precisely HMRC's intention and any perceived breach of their attack on avoidance continues to be investigated in depth with a high chance of litigation.

In the recent UK Budget, away from the headline increase in VAT and CGT, the section on Enforcement and Compliance was littered with references to action being taken on a series of Anti-Avoidance measures including further strengthening of the DOTAS regime, a consultation in respect of bringing Inheritance Tax as it applies to trusts within DOTAS and a further review of whether the UK Government should opt for a General Anti-Avoidance Rule.

The continued actions of AAG (and other teams such as Special Investigations), the continued strengthening of DOTAS, and the disruptive investigations and litigation only confirm HMRC's continued dislike for tax avoidance.

In this climate, the question to consider will be “Is tax planning dead?”. I do not think it is. HMRC will not dispute that any individual can legitimately structure their affairs in a tax efficient way. However, under the rules it may well be necessary to inform HMRC what you are doing and HMRC is likely to challenge whether the structure achieves the intended advantage. At that point it is most important that record keeping has been good and that the structure has been implemented correctly and as intended. Only then can the client put up the best defence against HMRC's challenge and maintain their filing position.

Andrew Walker is a Director with BTG Tax.
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