Editor’s note: Baker & McKenzie, the international law firm, comments on recent UK government guidance on what is called the Disclosure of Tax Avoidance Schemes, incorporating changes made to the rules during 2010-11. The authors are Ashley Crossley, Yitzchak Unterman and Paul Stibbard.

HMRC recently published consolidated guidance on the Disclosure of Tax Avoidance Schemes regime, incorporating changes made to the rules during 2010-11. This, and the fact that the DOTAS regime applies to certain inheritance tax arrangements as of 6 April 2011, means that it is an appropriate time to briefly highlight the regime and how it applies to IHT.

The provisions could affect you if you:

- use tax avoidance schemes;

- promote tax avoidance schemes; or

- introduce clients to providers of schemes.

About the DOTAS regime

The DOTAS requirements are intended to provide HMRC with early information about tax avoidance arrangements and how they work and information about who has used them, thereby enabling swifter and more effective investigation and, potentially, counteraction.

The regime applies to arrangements that have as a main expected benefit the obtaining of certain UK tax advantages. On its own, the disclosure of a tax arrangement has no effect on the tax position of any person who uses it, but disclosed tax arrangements may be rendered ineffective by [the UK] parliament through legislative changes (possibly with retrospective effect).

The taxes it covers

The DOTAS regime was originally introduced in 2004 and has been extended in stages since then. It now applies to certain tax arrangements relating to:

- Income Tax;

- Capital Gains Tax;

· Corporation Tax;

· National Insurance Contributions;

· Stamp Duty Land Tax, and

· Inheritance Tax, with effect from 6 April 2011.

There are also disclosure obligations in relation to certain VAT schemes.

How DOTAS works

Broadly, the DOTAS provisions require the disclosure by certain persons of information to HMRC where "arrangements" have been made which might be expected to enable a person to obtain a UK tax advantage. An "arrangement" is defined very widely and includes any scheme, transaction or series of transactions.

The duty to disclose normally falls on the "promoter" of a scheme, but in certain circumstances the promoter's client or the scheme user will be obliged to disclose. A "promoter" is somebody who, broadly, is to any extent responsible for the design of a scheme, or makes a firm approach to another person with the view to making a scheme available for implementation, or organises or manages the implementation of a scheme. Both UK and non-UK based promoters are subject to the disclosure rules.

Although the general outline of the scheme is similar across the taxes, there is a difference in the detail of the rules which apply.

IHT and DOTAS

As mentioned, the DOTAS rules have most recently been extended to IHT as of 6 April 2011.

As it applies to IHT, arrangements are disclosable if, (i) as a result of any element of the arrangements, property becomes "relevant property" (within the meaning of the IHT legislation) and (ii) a main benefit of the arrangements is that a tax advantage is obtained in relation to a "relevant property entry charge".

In relation to (i), although disclosure is only required where property becomes relevant property, it does not matter whether or not it becomes so straight away or whether it remains relevant property.  In other words, a scheme will require disclosure if at any point in the arrangements or proposed arrangements property becomes relevant property.  In relation to (ii), since the scheme is only disclosable if there is a tax advantage in respect of a relevant property entry charge, where a scheme provides a tax advantage but the advantage is not in respect of the relevant property entry charge disclosure will not be required in relation to IHT.  There may, however, need to be disclosure if any element of the scheme falls to be disclosed under any other part of the DOTAS regime.

The extension of the disclosure rules to IHT restricts disclosure to those schemes which are new or innovative. Thus, schemes which are the same or substantially the same as arrangements which were first made available for implementation before 6 April 2011, or in relation to which the date of any transaction forming part of the arrangements falls before 6 April 2011, or in relation to which a promoter first made a firm approach to another person before 6 April 2011, are exempt from disclosure. HMRC's consolidated guidance includes a list of types of schemes regarded as exempt.

Disclosure procedure for IHT arrangements

Disclosure of schemes generally involves the promoter submitting a form to HMRC containing certain details of the scheme and information explaining its elements and how the expected tax advantage arises. The promoter will then receive a reference number from HMRC which it must pass on to its client. In some cases, a promoter might not disclose a scheme, such as where the promoter is a law firm bound by legal professional privilege or is outside the UK. In such a case the client or the scheme user is required to make disclosure. The time limits for disclosure are short and penalties are payable for failure or delay in disclosing. 

As of 1 January 2011 promoters are required to provide quarterly lists to HMRC of clients to whom they have become obliged to issue a scheme reference number during that calendar quarter. Persons who have been provided with a scheme reference number must provide it to any other person who they might reasonably expect to be a party to and to gain an advantage from the scheme. Clients/users of the Scheme will need to inform HMRC of the scheme reference number and the tax year in which they expect the tax advantage to be obtained.

Recently introduced information powers enable HMRC to require by written notice an "introducer" (a person who introduces clients to a promoter) to identify the person who provided them with information relating to the scheme.

Persons who may be "providers" of relevant tax-saving arrangements or "introducers" of such arrangements or their clients or users of such arrangements should be aware of their potential disclosure obligations. Due to the short timeframe within which disclosures must be made advice as to whether a disclosure requirement applies to particular planning should be sought at an early stage.

Baker & McKenzie LLP, August 2011.