Tax avoidance scheme disclosures at record low as HMRC acts to discourage new schemes

Out-Law News | 26 Nov 2013 | 9:53 am | 2 min. read

The number of tax planning schemes disclosed to HM Revenue and Customs (HMRC) last year fell to its lowest level since the 'early warning' mechanism was introduced, according to figures from Pinsent Masons, the law firm behind Out-Law.com.

HMRC received 77 notifications under the Disclosure of Tax Avoidance Schemes (DOTAS) programme in the year to 30 September, down by 36% from the 121 notifications it received the previous year. HMRC was notified about 587 tax planning schemes in 2004/05, following the introduction of the reporting requirements; and the number of schemes disclosed has fallen steadily ever since.

"The figures show that HMRC is taking a tougher stance on tax avoidance and winning the battle, if not the war, to eliminate elaborate tax schemes," said tax expert Jason Collins of Pinsent Masons. "They have been successful in dissuading the bigger accountancy firms from creating new tax avoidance schemes, with many major professional services firms now avoiding the more extreme forms of tax planning as it carries with it a reputational risk."

"Companies and high-earning taxpayers may still look for new ways to minimise their tax bill, but the fact that there were just a fraction of new schemes last year compared to previous years suggests that HMRC is doing a better job at using its understanding of existing avoidance schemes to 'police' the promoters and close loopholes in the law - often before they can be fully exploited," he said.

The DOTAS regime was introduced in 2004 and requires the 'promoter' of certain types of tax avoidance scheme to disclose that scheme to HMRC. This allows HMRC to review whether changes are needed to existing tax legislation as new avoidance schemes emerge, and to take action where necessary against the users and promoters of schemes they deem to be abusive.

However, Collins said that although HMRC was becoming more effective at reducing tax avoidance from the creation of new schemes, it could do more to encourage taxpayers to come forward and settle liabilities as a result of arrangements entered into five or 10 years ago. Old schemes, he said, tended to be settled very slowly; creating an "enormous backlog" of cases in the system and preventing the recovery of a greater proportion of 'missing' taxes.

"HMRC is getting better at using the 'stick', but it could recover more of what it considers to be the UK's missing taxes by making more use of the carrot," he said. "HMRC has introduced a number of tax settlement facilities in an attempt to encourage taxpayers to come forward and leave tax avoidance schemes, but in reality these facilities have been largely ineffective because HMRC has typically insisted on most of the tax in dispute being paid."

"To make such a system work better, there needs to be a proper 'amnesty' so that individuals and businesses have a reason to give up their claims. A broader HMRC amnesty would clear the enormous backlog of tax schemes, many of which have been around for more than a decade. HMRC could make clear that a taxpayer using the amnesty would face much tougher penalties if they engage in any new planning in the future," he said.

Under the 2013 Finance Act, HMRC was given tougher powers to force tax avoidance scheme members to provide information to tax scheme promoters and for the promoters in turn to pass information about clients in the scheme onto HMRC. It has also consulted on the introduction of a new power allowing it to 'name and shame' tax advisers whose behaviour is deemed to be high risk. A General Anti-Abuse Rule (GAAR) was also introduced in July, allowing HMRC to tackle the most "egregious" forms of tax planning.