Disclosure of Tax Avoidance Schemes (DOTAS)

What is Disclosure of Tax Avoidance Schemes (DOTAS)

DOTAS (Disclosure of Tax Avoidance Schemes) is the acronym used for the procedure introduced by the UK government in 2004 aimed at minimizing tax avoidance. Tax avoidance in the UK, unlike tax evasion, is not illegal since it involves using the available tax laws to reduce one's tax burden. However, the government is actively seeking ways to eliminate the methods by which tax can be avoided by continually amending its tax policies.

BREAKING DOWN Disclosure of Tax Avoidance Schemes (DOTAS)

The primary purpose of the Disclosure of Tax Avoidance Schemes (DOTAS) is to alert Her Majesty's Revenue and Customs (HMRC) of the schemes which individuals or corporations use to avoid tax. HMRC can investigate these schemes and their providers and, as a result, may amend legislation where deemed necessary to reduce tax avoidance options that can circumvent the law. Under the DOTAS legislation, anyone involved in an arrangement which offers tax benefits must notify Her Majesty's Revenue and Customs (HMRC).

The types of tax covered by the DOTAS requirements include income and capital gains tax, corporate tax, stamp duty land tax, inheritance tax, value-added tax (VAT), and national insurance contributions.

Disclosure is required to be made by any party entering a program which offers the benefit of minimizing taxes if the program falls within the disclosure rules. Anyone failing to comply with these DOTAS regulations may have penalties imposed. There are two separate procedures for disclosure. The first deals with value-added tax (VAT) and the second is with direct tax and national insurance contributions.

Discouraging Tax Avoidance Schemes

With DOTAS, the HMRC warns of the consequences of entering tax avoidance schemes and makes it clear that anyone doing so is liable to be challenged in court over the nonconformity.

HMRC also offers advice on the pitfalls of becoming involved in tax avoidance schemes, suggesting that most of these programs are ineffectual for participants. Generally, these schemes serve no real purpose, other than for the tax benefit, and involve processes which are simply carried out to this end. These schemes often sound, and in many cases are, too good to be true by promising substantial savings to the participant at little or no cost.

Holding DOTAS Promoters Accountable

The initial and primary purpose of DOTAS was to require promoters of tax avoidance schemes to inform the government of their activities. A developer generally falls into the category of a tax service provider, a securities house, or a banking institution. These promoters are involved in organizing, providing, and managing any system that includes tax avoidance facilities. They may also be involved in the creation or marketing of such a scheme.

Since the inception of DOTAS, promoters have continued to find loopholes and have devised ways to take advantage of these loopholes. HMRC endeavors to keep abreast of this ongoing finagling by making amendments to the existing laws. In February 2016, criteria for the DOTAS rules was broadened substantially, with the intention of encompassing more standard tax planning practices as well as the more dubious schemes. Once a promoter has made a disclosure, HMRC will provide a DOTAS number that must be used by the system. The system will then be monitored for compliance, and non-compliant parties may be penalized or terminated for any breach of conditions.