Four Observations on DOTAS

‘When we want to sink a convoy, we send out an observation plane first…. Of course, to observe is not its real duty – we already know exactly where the convoy is. Its real duty is to be observed…. Then, when we come round and sink them, the Germans will not find it suspicious…’

– Neal Stephenson, Cryptonomicion 2009

1.1 I am not, of course, suggesting through the quotation above that the purpose of the DOTAS legislation is anything other than to collect information. However, I am aware that these rules have been widely perceived by the taxpayer and their advisors as having the intention, if not to downright intimidate, to somehow disincentivise novel tax planning through the imposition of significant administrative burdens and the threat of extremely high penalties.

1.2 The scope of DOTAS is ever increasing in terms of the taxes covered – SDLT included in 2005, NIC in 2007 and IHT in 2011. The HMRC Consultation Paper ‘Lifting The Lid of Avoidance Schemes” states that the scope of this is only going to widen in other ways:

2.7 The initial focus of DOTAS was upon gaining information about avoidance schemes, particularly new and innovative schemes, to identify loopholes in the law that were being exploited and inform legislation to close them down. DOTAS has performed this role well and has informed over 60 measures in Finance Acts since 2004.

2.8 DOTAS also needs to adapt to keep in step with the changed avoidance environment described in paragraph 2.4. In particular, it is increasingly important for DOTAS to identify avoidance schemes, regardless of whether or not they are new and innovative, to enable communication with users and inform counteraction by operational challenge.

1.3 The attraction to HMRC of DOTAS is that HMRC can work with HMT to amend legislation quicker. At the same time, they are not precluded by reason of any amendment from seeking to collect in cases under the old regime.

1.4 However, there are some mitigating factors at play here. I consider only four of them below.

First observation – Not all planning warrants a legislative response

1.5 The first observation to make is that HMRC might well be reconciled to the tax planning in question. Or more importantly, Parliament might be. I can do no better than quote the words of Lord Nolan in Willoughby [1997] STC 995 at 1002:

The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.

So, it might simply be that the disclosure does not result in any action being taken at all. Consider, also, the old charge and debt schemes which were implemented in the context of IHT. Not only did Parliament not object to these – it enacted section 8A IHTA to affect the result without any steps being taken!

1.6 That this might be the case (i.e. that there may not be reactive legislation) is implicitly acknowledged by the legislator of the Descriptions Regulations in paragraph 6(2). This provides:

6(2) Arrangements are prescribed if the promoter would, but for the requirements of these Regulations, wish to keep the way in which the element of these arrangements that secures, or might secure, the tax advantage confidential from HMRC at any time following the material date, and a reason for doing so is to facilitate repeated or continued use of the same element, or substantially the same element, in the future.

1.7 However, the guidance seems to have misunderstood the significance of this Description. This provides:

For both promoters and scheme users, the relevant questions to be asked are not hypothetical questions. They do not ask what another promoter may do; what HMRC knows; or how HMRC, the Treasury or Parliament may react if they knew about the scheme (although this may be in the promoter or user’s mind when he forms his decision).

One observation to make here is that this is contradictory – not only does it contradict ITSELF, it also contradicts the immediately following paragraph:

Indicative factors include:

How new, innovative and aggressive the scheme is. Schemes that promoters know to be known to HMRC are not caught by the hallmark. These can be evidenced from, for example, technical guidance notes, case law, or past correspondence with a case officer in HMRC where the detail of how the scheme works has been made clear.

Whether a promoter imposes an obligation upon potential clients, whether in writing or verbally, to keep the details of the scheme confidential from third parties including HMRC. This factor would not be considered if the agreement is a general agreement.

Whether confidentiality agreements, general or specific, between a promoter and client allow the client to disclose information to HMRC without referral to the promoter.

The use of explicit warnings in marketing material or other communications to a client to the effect that the scheme may have a limited ‘shelf life’ because Parliament may act to close it once it became known.

The degree of co-operation to requests for information from HMRC concerning a specific scheme and the reasons for not providing information.

So, is one allowed to take into account how Parliament would respond to the arrangement or not? It’s not clear from the guidance. My own view is that this should be relevant, given how the sub-paragraph is phrased.

1.8 Also, when considering how Parliament would respond to the arrangement, I would submit that the relevant questions to ask are not whether the scheme is new or innovative. As far as I know, Parliament has never objected to innovation in tax planning. Rather, the question, to return to Willoughby, is whether the ‘economic consequences’ are borne.

Second observation: Not all reactive legislation is efficacious

1.9 Let us assume that Parliament would object to the arrangement. The point that emerges is that this does not mean that it will remedy the problem with legislation as effectively as it would like.

1.10 Consider for instance how Parliament reacted to the decision in Padmore v IRC [1987] STC 36, 62 TC 352 – this section 858 of the Income Tax (Trading and Other Income) Act 2005. That section provided that where a UK resident is a member of a foreign partnership firm (i.e. one which resides outside the UK or carries on a trade the control and management of which is outside the UK) and by virtue of DTAs any of the income of the firm is relieved from tax in the UK, the partner is liable to income tax on the partner’s share of the income of the firm despite the DTA. However, this provision did not appear to cater for circumstances in which the taxpayer was not a partner but simply a beneficiary with a life interest in a trust which was the partner. And so it was that further legislation was required to contend with planning of the type exemplified in Huitson [2011] EWCA Civ 893 (the necessary section being section 58 FA 08).

1.11 Consider Part 7A. It still isn’t unambiguously clear to me what the main objective of this legislation is. If it was to dovetail the income tax charge and corporation tax deductions regime, then this could have been achieved by tempering the corporation tax regime alone (so that deductions were contingent upon a tax charge arising). There was no need to create a new income tax charge. To that the reply would be that it was intended to accelerate the income tax charge, which have been deferred through the use of loans. But if that (collecting IT) was the objective, then why only extend this to third parties?

1.12 My preferred – by which I mean most degustative – example of ill-advised legislation is the new corporation tax deductions regime. In Dextra, HMRC lost before the Commissioners. Instead of waiting for the litigation to proceed through the higher tiers, they moved to amend the regime. ‘Provisional emoluments’ under section 43 FA 1989 was replaced with the ‘Employment Benefit Contributions regime’ now found in section 1290 CTA 10. What they didn’t know was that they would succeed in the Court of Appeal and in the House of Lords, the expression ‘provisional emoluments’ being construed widely by these courts. On the other hand, the new ‘Employment Benefit Contribution’ is not considered as casting as wide a prohibition.

1.13 To include a recent example, I consider DV3. This involved the interplay between sub-sale relief and partnerships. It was argued by HMRC that the purchase by the secondary buyer was made from the vendor. It was argued by the taxpayer that the purchase was made from the intermediate party, so that reliance could be placed on the partnership provisions. The Upper Tier Tribunal agreed with the taxpayer. The Tribunal also appears to take the view that this arrangement is now obsolete:

[67] … Similarly, if the relevant transactions had taken place a few months later, they would probably have been caught by anti-avoidance provisions in sections 75A to 75C of FA 2003 which were enacted in relation to disposals taking place on or after 6 December 2006. Thus the loophole of which the Company and the Partnership have, if I am right, succeeded in taking advantage was open for only a short period, and it appears to reflect a period of considerable legislative uncertainty about how to deal with transfers involving a partnership.

It is not clear to me that this is the case. Or, to put it more particularly, it may be that section 75A blocks this particular arrangement but it does not preclude a continued use of the element – sub-sale relief and dividends in specie.

1.14 The point that emerges from all this is that new legislation does not in itself preclude planning potential – and sometimes it will give rise to it. Quite apart from constituting a point which in itself is worth bearing in mind, it also implies that a fear of new legislation need not always be assumed on the part of the promoter for the purposes of the constituent rules, such as paragraph 6(2) of the Descriptions Regulations cited above.

Third observation: Putting penalties in perspective

1.15 The DOTAS provisions are not especially well-drafted. If the provisions are so badly drafted, why has the disclosure rate been so high? The fear of penalties exigible under secion 98C TMA. This provides:

98C Notification under Part 7 of Finance Act 2004

(1) A person who fails to comply with any of the provisions of Part 7 of the Finance Act 2004 (disclosure of tax avoidance schemes) mentioned in subsection (2) below shall be liable—

(a) to a penalty not exceeding

(i) in the case of a provision mentioned in paragraph (a), (b) or (c) of that subsection, £600 for each day during the initial period (but see also subsections (2A), (2B) and (2ZC) below), and

(ii) in any other case, £5,000], and

(b) if the failure continues after a penalty is imposed under paragraph (a) above, to a further penalty or penalties not exceeding £600 for each day on which the failure continues after the day on which the penalty under paragraph (a) was imposed (but excluding any day for which a penalty under this paragraph has already been imposed).

…

(2ZB) The amount of a penalty under subsection (1)(a)(i) is to be arrived at after taking account of all relevant considerations, including the desirability of its being set at a level which appears appropriate for deterring the person, or other persons, from similar failures to comply on future occasions having regard (in particular)—

(a) in the case of a penalty for a person’s failure to comply with section 308(1) or (3), to the amount of any fees received, or likely to have been received, by the person in connection with the notifiable proposal (or arrangements implementing the notifiable proposal), or with the notifiable arrangements, and

(b) in the case of a penalty for a person’s failure to comply with section 309(1) or 310, to the amount of any advantage gained, or sought to be gained, by the person in relation to any tax prescribed under section 306(1)(b) in relation to the notifiable arrangements.

(2ZC) If the maximum penalty under subsection (1)(a)(i) above appears inappropriately low after taking account of those considerations, the penalty is to be of such amount not exceeding £1 million as appears appropriate having regard to those considerations.

1.16 However, the provisions may not be as minatory as first appears.

1.17 (2ZB) is a rare example in UK tax law where a demonstrative penalty can be set – i.e. the penalty can be set with a view to deterring other persons. As far as (2ZB)(a) is concerned, there may be a difference between the fees received by ‘the person’ and the fees received by his employer. In most cases, ‘the person’ will not receive any fees, he will simply receive his salary. Of course, the problem is that the employer itself may be a promoter:

307 Meaning of “promoter”

(1) For the purposes of this Part a person is a promoter—

(a) in relation to a notifiable proposal, if, in the course of a relevant

business, the person (“P”)—

(i) is to any extent responsible for the design of the proposed

arrangements,

(ii) makes a firm approach to another person (“C”) in relation to the

notifiable proposal with a view to P making the notifiable proposal

available for implementation by C or any other person, or

(iii) makes the notifiable proposal available for implementation by other persons, and

(b) in relation to notifiable arrangements, if he is by virtue of paragraph (a)(ii) [or (iii)] a promoter in relation to a notifiable proposal which is implemented by those arrangements or if, in the course of a relevant business, he is to any extent responsible for—

(i) the design of the arrangements, or

(ii) the organisation or management of the arrangements.

The fact that the employer might be a promoter is made clear in the Guidance:

3.2 Who is a promoter? (FA 2004, s.307) You may be a promoter if, in the course of providing services relating to taxation (or, where applicable, National Insurance contributions), or if you are a bank or securities house, you:

 are to any extent responsible for the design of a scheme;

 make a firm approach to another person with a view to making a scheme available for implementation by that person or others;

 make a scheme available for implementation by others; or

 organise or manage the implementation of a scheme.

However, there may be a solution involving co-promoters (which I do not discuss here).

1.18 There are other issues with penalties. In IRC v Mercury Tax Group Ltd [2009] UKSPC SPC00737 (17 February 2009), Dr. Avery Jones arrived at the conclusion:

13. Although Mr Angiolini contends that the opinion is short on analysis, the more important point is that Mercury went to the trouble and expense of taking counsel’s opinion. Counsel addresses his or her mind to the point and reaches a justifiable conclusion, with which I happen to agree. The contrary point of view is not set out but is mentioned in para 10. I consider that it would be wrong to penalise Mercury if (on the assumption I am now making that my decision is wrong) that opinion was also wrong. Other than to take advice there is nothing else they could do; they could hardly ask HMRC whether they agreed without disclosing the scheme in the process. In my view Mercury acted properly in relying on counsel’s opinion and arguing the case as a matter of principle rather than taking a view themselves and paying the penalty if they were found to be wrong, which I suspect would have been cheaper. If therefore I am wrong in deciding that the scheme is not notifiable and a penalty is payable I would fix the amount at nil.

1.19 I am curious to know which barrister this is whose fees are more than the DOTAS penalties. Tellingly, even Dr. Jones did not know who the barrister was – so he must assume that the DOTAS penalty would not have been very high in any event – by which I mean he did not even consider that the penalty would be towards the higher end of the prescribed scale. The starting point was low and (2ZC) was not even in contemplation.

1.20 The primary point that emerges in this context, of course, is that if the promoter goes through the expense and trouble of getting advice from counsel and then acts in reliance of it, it should not be the case that a penalty is exigible. If reliance is to be placed on the advice, then it must be sought well within time. Otherwise the claim may not be acceptable.

1.21 Even if advice is sought from counsel and that advice is wrong, then there is, according to this quotation, no basis for the imposition of a penalty.

1.22 Of course, it helps if counsel’s advice is justifiable and the position is even better when it is downright correct. Promoter Promoters should therefore consider obtaining advice from a specialist in DOTAS before disclosing in a rush. There is no objection to seeking advice from someone other than the barrister from whom advice is sought in relation to the scheme – indeed, anything which evinces extra expense and trouble is helpful.

1.23 (The other thing I find interesting here is the fact that he agreed with the reasoning of the barrister. I turn to this later).

1.24 HMRC have the following to say about this in their publication Lifting the Lid on Tax Avoidance Schemes 23^rd July 2009:

4.11 If the promoter eventually agrees that the scheme is discloseable, they will generally rely upon the fact they have legal opinion that the scheme was not discloseable as providing ‘reasonable excuse’ for non-disclosure. Where reasonable excuse applies, the effect is that there is no failure to comply with the rules. HMRC’s view, as described in its published guidance, is that whether or not the obtaining of legal advice provides reasonable excuse is contextual and not absolute. However, it acknowledges that not all promoters agree with that view.

I find this hard to reconcile with the Mercury decision. It continues:

4.13 The Government considers that, in the particular circumstances of DOTAS, there is a case for raising the hurdle for a reasonable excuse as extinguishing a prima facie breach of the rules (e.g. to where the promoter relied upon a reasonable interpretation of both fact and law).

So, the hurdle for claiming ‘reasonable excuse’ is to be raised – yet another sacrosanct cornerstone of the tax regime is being tinkered with. Howsoever the new ‘reasonable excuse’ test is framed, however, I would expect that obtaining counsel’s advice would suffice.

Fourth observation: The DOTAS provisions themselves are poorly drafted

1.25 However, the DOTAS provisions are poorly drafted (and I am surprised that there have been so many disclosures under DOTAS that might result in 60 legislative amendments). I seem to be in good company. As per Dr. John Avery Jones in Mercury:

8. I find the Regulations hard to interpret….

Though he is referring to a superseded regulation, the style of the provisions remains similar today and, in particular, the problematic way in which the question of causation is poised. In the remaining part of this piece, I consider Hallmarks 1(a) and (b).

Hallmark 1(a) – Confidentiality from Promoters

1.26 I don’t intend to highlight all the difficulties present in the DOTAS provisions here. However, I would like to mention some found in sub-paragraphs 6(1) (Hallmark 1(a)) and sub-paragraph 6(2) (Hallmark 1(b)) of the DOTAS Descriptions Regulations. I start with the first:

6(1) Arrangements are prescribed if —

(a) any element of the arrangements (including the way in which the arrangements are structured) gives rise to the tax advantage expected to be obtained under the arrangements; and

(b) it might reasonably be expected that a promoter would wish the way in which that element of those arrangements secures, or might secure, a tax advantage to be kept confidential from any other promoter at any time following the material date.

First observation – Causation

1.27 The question being posed here is not whether:

the promoter would wish to keep the element confidential from any other promoter.

The question rather is whether:

he would wish to keep the way in which that element of those arrangements confidential from another promoter.

Can there be a distinction between ‘the element of the arrangements…which gives rise to a tax advantage’ and ‘the way in which that element secures a tax advantage’? If so, it might be argued that the actual arrangement falls within the former and the relevant provision might fall within the latter. I struggled with this and privately came to the conclusion that there could not be. The answer comes partly the parenthesized part in (a):

any element of the arrangements (including the way in which the arrangements are structured)….

When the italicized portion in (b) is read in conjunction with this, then the question which emerges is:

Would the promoter wish to keep the way in which [the way in which the arrangements are structured] secures or might secure the tax advantage confidential from any other promoter?

To me this suggests that what is being asked here is simply how the design secures the tax advantage and whether this is something the promoter would wish to keep confidential from any other promoter. In light of this it should not be possible to argue that the ‘way in which the element achieves the tax advantage’ is through a particular provision and that this section, being the law, is not something the promoter would wish to keep confidential.

1.28 However, unexpected support for a contrary view of things comes from the Mercury case. The scheme was as follows (as outlined by Dr. Jones):

The scheme in outline consists of high income individuals forming a Jersey limited partnership (Liberty 1) for carrying on a financial trade and contributing capital equal to the tax loss they wish to create. An offshore parent company (SPV1) has a subsidiary (SPV2). SPV2 declares a large dividend out of its share premium account. SPV1 sells the right to the dividend to Liberty 1 for an amount equal to the dividend, which is paid for by the partners’ contributions, following which Liberty 1 receives the dividend. The scheme is said to work (it is no part of these proceedings to decide whether it does work) because s 730 of the Income and Corporation Taxes Act 1988 (‘the Taxes Act 1988’) provides that the seller of the right to the dividend (SPV1) is taxable on it and not the recipient (Liberty 1), while the cost of purchasing the dividend is deductible on general principles as being expenditure incurred in the course of the financial trade of Liberty 1.

The question arose as to whether this should have been disclosed under paragraph 6(1) of the old 2004 Prescribed Descriptions Regulations:

6—(1) The arrangements specified in this Part are those which—

(a) satisfy the condition in sub-paragraph (2); and

(b) include one or more of the financial products to which paragraph 7 applies,

unless they are arrangements that are excluded by paragraph 8.

(2) The condition is that the tax advantage expected to be obtained under the arrangements arises, to a significant degree, from the inclusion in those arrangements of the financial product or any of the financial products to which paragraph 7 applies.

It was clear that a share constituted a ‘financial product’ for the purposes of paragraph 7. So, the question being posed here is does the tax advantage arise (to a significant degree) from the financial product (in this case, the shares in SPV2 held by SPV1) – or from something else? This is what Dr. Jones had to say:

I find condition (2) more difficult to apply. Does the expected tax advantage arise from the inclusion of a share in the arrangements, or from something else? The more proximate cause of the expected tax advantage is the purchase of the right to the dividend. The inclusion of the share in the arrangements is much more a ‘but for’ cause, that but for the inclusion of the share there would be no dividend and therefore no expected tax advantage. I consider that the Regulations are looking at the proximate cause of the expected tax advantage, which is not therefore from the inclusion of a share in the arrangements.

So, where then does the tax advantage derive from? The anonymous barrister, on whose advice the taxpayer relied, concluded:

10. A further prescribed financial product is a share and whilst, of course, shares are involved in the Liberty proposal, it is not, in my opinion, the involvement of a share that produces to a significant degree the tax advantage in question.

…

13. More particularly, I am of the opinion that the tax advantage arises by virtue of the clear wording of s 730 of the Taxes Act 1988 which provides that in certain circumstances, within which the Liberty arrangement falls, the receipt of a distribution is not charged to tax in the hands of the recipient. Further a payment for such a dividend right, under general tax principles is deductible. It is the mismatch between the tax free receipt and the tax deductible payment which produces a loss which may be accessed to the individual members pursuant to sections 380 and 381 Taxes Act 1988: no financial product produces the advantage per se in my opinion.

In other words, the proximate cause was section 730 ICTA – even though the presence of a financial product (in the form of shares in SPV2) was necessary, this was not the ‘proximate cause’. Dr. Jones found this to be justifiable.

1.29 What this shows, among other things, is that questions such as what it is that causes a tax advantage (certainly in the context of DOTAS) are relatively new concepts. (I am making a contra-distinction from questions such as the purpose for which the transactions are entered into – such as posed by TAA or TiS). Even though an element might be necessary in order to obtain a tax advantage, it does not necessarily follow that it is what causes to ‘arise’ (to refer to the old paragraph 6) or what ‘secures’ (to refer to the new paragraph 6) the tax advantage. Remoteness is a consideration too.

1.30 I like this sort of argument – because it is fact-specific. It does not etiolate the provision altogether, to make any such attempt would be to run the risk of suggesting that the legislator has acted in vain in providing this provision. A dangerous idea at the best of times. Far better to restrict the provisions.

1.31 Moving on, if one considers the phrase ‘the way in which that element of those arrangements secures, or might secure, a tax advantage’ in the current paragraph 6(1)(b) through the prism of the Mercury case, then it might be possible to argue that what ‘secures’ the tax advantage (i.e. the proximate cause) is not a particular element (be it a financial product or otherwise) but that it is simply the relevant provision. On this basis, it might then be concluded that the provision (or indeed even the way the provision interacts with the predicate facts of the arrangement) is not something which the promoter wishes to keep confidential from another promoter. What he really wants to keep confidential from another promoter is the arrangement itself. Once the arrangement is made public, then the way in which it secures the tax advantage can be readily inferred by another promoter.

Second observation – Efficacy

1.32 In the current paragraph 6(1)(b), I am not sure what is meant by the expression ‘might secure…a tax advantage’:

(b) it might reasonably be expected that a promoter would wish the way in which that element of those arrangements secures, or might secure, a tax advantage to be kept confidential from any other promoter at any time following the material date.

The legislator’s implicit acknowledgement here that there may be some uncertainty as to whether a series of steps may or may not result in taxation under the law is astonishing to me, As a matter of philosophy, the position under the law is meant to be clear:

We shall all agree that Mr. Smith (say) is mortal and we may, loosely, say that we know this because we know that all men are mortal. But what we really know is not ‘all men are mortal’; we know rather something like ‘all men who are born more than one hundred and fifty years ago are mortal, and so are almost all men born more than one hundred years ago.’ This is our reason for thinking that Mr. Smith will die. But this argument is an induction, not a deduction. It has less cogency than a deduction, and yields only a probability, not a certainty; but on the other hand it gives new knowledge, which deduction does not. All the important inferences outside logic and pure mathematics are inductive, not deductive; the only exceptions are law and theology, each of which derives its first principles from an unquestionable text viz the statute books or the scripture.

– Bertrand Russell, A History of Western Philosophy, 1946 (Chapter 22, Aristotle’s Logic).

Whilst it may be common for the class of lawyers or judges to manifest some uncertainty as to how the law is to be interpreted, an admission by the legislator himself that his words may be unclear is altogether new to me – though such an admission does go some way towards illiciting sympathy in those cases where the members of the former class do struggle.

1.33 There is another point that follows from this. As I say, an element of an arrangement (or the arrangement itself) either secures a tax advantage or it doesn’t. If it doesn’t (i.e. even if it is subsequently found or rather held by a court not to), it is arguable that the element or the arrangement was not notifiable under paragraph 6(1)(b) in the first place. Of course, this particular argument is not very attractive – the scheme doesn’t work and it is not disclosable. What we want is a scheme that does work and is not disclosable – however, there will be circumstances in the real world where a scheme is found not to work and the occlusion of a DOTAS liability will be welcome there.

Third observation – The Standard

1.34 There is another feature of Regulation 6(1)(b) which is worth considering – it is the way in which the standard is prescribed:

(b) it might reasonably be expected that a promoter would wish the way in which that element of those arrangements secures, or might secure, a tax advantage to be kept confidential from any other promoter at any time following the material date.

We have already considered the definition of ‘promoter’ above. What emerges from that definition is that there may be more than one promoter within an organization or else the organization and the employee or independent advisor may together constitute two promoters. There will usually be at least one person who designs the arrangement and another who makes it available to another person. The question arises as to whether in such circumstances the arrangement would fall outside this regulation.

1.35 The Guidance seems to insert a qualification:

The test would be answered in the affirmative if an element of the scheme were sufficiently new and innovative that a promoter would want the details to remain secret in order to maintain their competitive advantage and ability to earn fees.

This interpretation seems to suggest that the test is whether:

(b) it might reasonably be expected that a promoter would wish the way in which that element of those arrangements secures, or might secure, a tax advantage to be kept confidential from any other promoter at any time following the material date in order to maintain their competitive advantage and ability to earn fees.

There are various points to make about this interpretation:

(a) First, this seems more acceptable as a matter of policy.

(b) Second, it does not undermine the provision in a way it would be if the standard was set so high that most arrangements would fall outside it – the objection that one does not fall within it is more a propos and not a priori, and so the legislator is not considered to have acted in vain.

(c) Third, it might be said that there is indeed some literal basis on which to erect this construction – that is through the words ‘at any time following the material date’. In other words, the promoter might be resigned to disclosing it prior to the implementation where necessary but he would not be so after implementation.

1.36 On the other hand, there are problems with this interpretation too. Sometimes – often! – a promoter would wish to disclose to another promoter (such as a barrister or an employee) with the particular view to maintaining their competitive advantage and their ability to earn fees. Furthermore, the definition of ‘material date’ refers (in the context of section 308(1)) to the first time the promoter makes a firm approach to another person: paragraph 2(2) Descriptions Regulations 2006. So, it is likely, in many cases, that he will still wish to disclose to other promoters even after the material date – especially if he is to implement the arrangement more than once (which you would expect him to do if he is to keep a competitive edge and maintain his ability to earn fees).

1.37 Given the uncertainty, I think it would be reasonable to place reliance on the literal interpretation. It is also worth noting that the literal interpretation does not mean that the provision is rendered otiose – as indeed there are arrangements which I have developed which I in fact do wish to keep confidential from any other promoter, quite simply because they are that esoteric. This must be true of other promoters too. Finally, it worth bearing in mind the comments of Dr. Jones in Mercury – and he clearly made a distinction between arriving at the right conclusion and a justifiable one. The latter would also suffice to completely mitigate penalties (indeed, he indicates that a wrong one might suffice too where it is obtained from third party counsel). A literal interpretation must be justifiable. And once the ‘reasonable excuse’ threshold is raised in the future, I would assume that to place reliance on a literal interpretation would continue to be reasonable too.

1.38 As for the recent HMRC paper, Lifting The Lid of Tax Avoidance Schemes, this does not address paragraph 6(1)(a) in much detail and provides simply:

5.13 HMRC has seen a number of schemes that it would have expected to have been disclosed under this hallmark, in particular under the second test [Confidentiality from HMRC], which have not been disclosed (e.g. schemes that purport to circumvent the Disguised Remuneration legislation in Part 7A of ITEPA).

It would not appear from this that this Hallmark (Confidentiality from Promoters) is to be amended.

Hallmark 1(b) – Confidentiality from HMRC

1.39 I do not intend to cover this sub-paragraph in detail. However, there are some quick observations I would like to make and then mention the legislative changes being contemplated.

1.40 Paragraph 6(2) of the Prescribed Descriptions Regulations provides:

(2) Arrangements are prescribed if the promoter would, but for the requirements of these Regulations, wish to keep the way in which the element of these arrangements that secures, or might secure, the tax advantage confidential from HMRC at any time following the material date, and a reason for doing so is to facilitate repeated or continued use of the same element, or substantially the same element, in the future.

Lifting the Lid on Tax Avoidance Schemes states that one way which in which this differs from Hallmark 1(a) is that this is a subjective test whereas the other is an objective test. However, this appears to me to be an objective test too – ‘would’.

1.41 I have already discussed issues of causation and remoteness above in the context of Hallmark 1(a).

1.42 One difference here is that the purpose of confidentiality is articulated. There are three points to make in the context of this purpose:

(a) As I have outlined at the start, not all tax planning will result in legislation;

(b) The standard is not as high as one might think. The test is not whether the promoter would wish to keep the arrangement confidential to maximize repeated use in the future – rather it is simply that he would wish to keep it confidential to facilitate repeated use in the future.

Now, given the deliberation which (rightly, for the reasons given above) attends and retards the amendment of legislation, a promoter would be fairly confident in most cases that he would be able to implement the scheme at least twice more time in the future even if the arrangement were disclosed to HMRC.

If the area involved is such that the promoter might reasonably believe that he could implement the arrangement a couple of more times in the future even if HMRC sought to legislate against it, it is questionable whether the arrangement would fall within this description;

(c) What about the effect of the GAAR? If the arrangement is one that might be caught by the forthcoming GAAR, then it is questionable that the promoter would fear future legislation in any event.

One example might be sub-sale relief in SDLT. Even though certain reliance on this provision was considered objectionable, HMT have responded with the insertion of section 45(1A) FA 03 through section 212 FA 12 – which only attacks a particular version of the sub-sale arrangements using options. It might be that they consider that the wider problem will be dealt with by GAAR. The promoter has little to fear as a result of HMRC becoming aware of this arrangement.

It might be thought that this argument cannot be relied upon once the GAAR comes into effect – because if the arrangement is caught by GAAR, then the scheme is inefficacious in any event. (In such circumstances, it could apply in the period before the introduction of GAAR.) However, the argument may well be tenable even after GAAR comes into force. This because the view may be taken that if the arrangement is not caught by GAAR, then it is reasonable and, on that basis, there is no reason as to why HMRC might wish to legislate against it in the future.

1.43 Lifting the Lid on Tax Avoidance Schemes provides that the test will be made objective. As I say, this should not constitute a change at all. They also provide:

5.17 The Government also proposes to make explicit that a scheme will fall within the second test if the promoter imposes specific conditions of confidentiality on the client, which will include instances where the promotion or implementation of the scheme is conducted with a degree of secrecy such that the client is not given or allowed to keep the promotional material, plans, legal, tax or financial analysis and opinions or commentaries from advisers, counterparties or promoters.

In my own practice, I have been an advocate of showing the lay client as much documentation as possible so that he makes an informed choice.

CONCLUSION

In this piece, I have considered the potency of the DOTAS legislation.

I have aimed to show that not all tax planning will result in legislation and that not all legislation will preclude the supposed tax advantage sought. These are points which are not only of comfort in themselves, but, for the reasons given above, they ought also have some bearing on the question of whether and how the DOTAS legislation is to be complied with in a given case. In addition, I have also highlighted certain problems with the provisions imposing penalties and, also, those describing the arrangements which are to be disclosed.

In light of the Mercury Tax Group case, a promoter would be well-advised to obtain from a specialist in this area a separate opinion on the applicability of the DOTAS obligations to any tax arrangements.

– Based on a speech I gave at a Tax Chambers Seminar in December 2012