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What is Disclosure of Tax Avoidance Schemes (DOTAS)?
Disclosure of Tax Avoidance Schemes (DOTAS) refers to a procedure introduced by the U.K. government in 2004 as a tool to minimize tax avoidance. Unlike tax evasion, tax avoidance is not illegal if it involves using available tax laws to reduce one’s tax burden. However, the government is actively seeking ways to eliminate tax avoidance methods by continually amending its tax policies.
Key Takeaways
- Disclosure of Tax Avoidance Schemes (DOTAS) refers to a regime in the U.K. requiring parties to disclose their use or promotion of tax avoidance schemes.
- DOTAS was introduced in 2004 as a measure to reduce the number of tax avoidance schemes in use.
- Those who fail to comply with DOTAS regulations may face penalties.
- A wide range of tax types are covered by the DOTAS regime, including income, corporate, inheritance, and value-added taxes.
- As a result of DOTAS, tax avoidance schemes may subsequently face scrutiny or even be legislated to be made illegal.
Breaking Down 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 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.
Who Is Required to Declare a Tax Avoidance Scheme in the U.K.?
In general, the party that promotes a tax avoidance scheme is obligated to disclose it. Promotion involves both the design of a scheme or the marketing of it. In some instances, the promoter isn’t on the hook, and the user of a scheme is. These cases include instances in which the scheme promoter is based outside the U.K., or the scheme is developed without the help of a promoter.
What Is the Difference Between Tax Avoidance and Tax Evasion in the U.K.?
Tax evasion refers to illegal activity undertaken to reduce the amount of taxes one owes. This might include failing to disclose sources of income, or misrepresenting earnings. Tax avoidance is the use of loopholes or other legal avenues to reduce one’s tax obligations.
What Is DOTAS Penalty?
Tax avoidance schemes are required to be disclosed within five days of implementation under DOTAS. Failing to do so incurs a penalty of 500 GBP per day initially, though the penalty can reach up to 1 million GBP.
The Bottom Line
DOTAS is a regime in the U.K. that mandates the disclosure of tax avoidance schemes. It was introduced in 2004, and covers a wide range of tax types, including income, corporate, inheritance, and value-added taxes. Those who don’t comply with disclosure rules may face penalties. Tax avoidance schemes disclosed through DOTAS can later inform regulator scrutiny and may even be legislated to be made illegal.