The DOTAS regime introduced in 2004 enabled HMRC to more easily identify tax avoidance and was (and is) a key weapon in HMRC’s ‘crackdown’ on avoidance. The regime requires both the promoters of avoidance to disclose their arrangements and users to notify HMRC through their tax return of their participation. A ‘win-win’ for HMRC? Until 2014, this process was relatively uncontroversial, and many ‘schemes’ were registered under DOTAS to avoid any accusation of falling foul of the regime, as other than the administrative burden there was no real downside. In fact, some promoters sought to use DOTAS registration for their benefit – readers will, we suspect, be familiar with the refrain of schemes being ‘Revenue approved’.
The landscape changed dramatically in 2014 with the advent of the accelerated payment notice (APN) regime. Overnight, a user of a DOTAS scheme potentially faced a demand for an upfront payment on account of the ‘tax advantage’. A ‘win-win’ for HMRC? For promoters, the DOTAS formality became a DOTAS conundrum: to notify or not to notify? HMRC, with one eye undoubtedly on accessing the APN regime, was also faced with a conundrum: how to challenge those schemes that were not notified under DOTAS, but were in fact notifiable ?
The legislation: a brief overview
HMRC has the power to apply to the FTT for an order under FA 2004 s 314A and/or s 306A where it considers a scheme to be notifiable or that it should be treated as notifiable. An application under s 314A can be made where HMRC can prove an arrangement is notifiable, whereas an application under s 306A can be made where there are reasonable grounds for suspecting a scheme may be notifiable.
For an order to be made, HMRC is required to:
(a) specify the arrangements (ss 314A(2)(a) or 306A(2)(a));
(b) show the arrangements are notifiable or that it suspects they are notifiable (ss 306(1)(a)–(c) and 306A(5)) because:
(i) they fall, or HMRC correctly suspects they fall, within the descriptions prescribed in regulations, i.e. the hallmarks requirement;
(ii) they enable or might be expected to enable any person to obtain a tax advantage that is so prescribed in relation to the identified arrangements, i.e. the tax advantage requirement;
(iii) the main or one of the main benefits of the arrangements is obtaining the tax advantage, i.e. the main benefit requirement (together ‘the notifiable requirements’); and
(c) specify the promoter (ss 314A(2)(b) or 306A(2)(b).
Crucially for HMRC, an order by the FTT will attract a penalty for the promoter for failure to notify, and also require them to retrospectively provide details of the scheme and its users. If an order is made under s 314A, penalties can be imposed from the date of implementation of the arrangement, while under s 306A penalties can only be imposed from a future date. For users, HMRC can issue APNs and reverse the cashflow advantage of the scheme.
Hyrax and Curzon
HMRC v Hyrax Resourcing Ltd and others [2019] UKFTT 175 (TC) and HMRC v Curzon Capital Ltd [2019] UKFTT 63 (TC) are the first cases to consider in detail the question of ‘notifiability’ and what it means to be a ‘promoter’.
In both Hyrax and Curzon , the arrangements are disguised remuneration (DR) schemes that broadly involve individuals receiving their earnings through a small taxable element and the remainder in the form of a loan normally routed through an offshore trust in a low or no tax jurisdiction. In both cases, HMRC applied to the FTT for an order pursuant to FA 2004 ss 314A and 306A that the arrangements were notifiable or should be treated as notifiable.
Hyrax and Curzon made various arguments (discussed below) against the FTT making an order, but in both cases the FTT agreed with HMRC that the arrangements were in fact notifiable . However, whereas in Hyrax the FTT found Hyrax to be a promoter, the FTT found Curzon not to be a promoter. Hyrax’s European Convention on Human Rights (ECHR) arguments were rejected.
‘Arrangements’
The FTT first considered the term ‘arrangements’ and HMRC’s interpretation of this. In Curzon , it was accepted by the parties that the relevant arrangements fell within the definition of ‘arrangements’ in FA 2004 s 318, which states that ‘“arrangements” include any scheme, transaction or series of transactions’. However, in Hyrax , counsel did not accept that any such ‘arrangements’ existed, despite previous iterations of the scheme having been notified to HMRC.
In both cases, the FTT indicated that the term ‘arrangements’ in s 318 had a very broad meaning and thus Hyrax’s arrangements were caught by the legislation. The FTT rejected Hyrax’s argument that HMRC had to establish that there had been ‘tax avoidance’ over and above whether the arrangements gave rise to the relevant tax advantage. In practice, it is likely the FTT will almost always conclude that a scheme or series of transactions amount to ‘arrangements’.
‘Tax advantage’
The FTT again interpreted this broadly. In Hyrax , the FTT considered the definition to be ‘very wide … consistent with the construction of the legislation which is to cast the net of “tax advantage” wide but restrict its application to cases’, satisfying the relevant notifiable requirements in s 306(1)(a)–(c).
The FTT in Curzon indicated that the policy would be ‘stultified if any detailed examination had to be carried out into the robustness of any scheme’ and determined that if the arrangements were promoted in such a way as to claim that a tax advantage will/may flow from using them, then unless such a claim was clearly incorrect, it was more than likely to be said that the arrangements ‘might be expected to enable’ the tax advantage to be obtained. In both cases, it was obvious to the FTT, on the evidence, that the arrangements intended to avoid or reduce the charge to income tax such that the tax advantage requirement (s 306(1)(b)) was met.
DOTAS hallmarks
The FTT then looked at whether the arrangements fell under any of the hallmarks relied on by HMRC. In Curzon , HMRC relied on the premium fee (hallmark 3) and the standardised tax product (hallmark 5). In Hyrax , HMRC also relied on the employment income hallmark (hallmark 8).
Both Hyrax and Curzon argued that no fee was paid/received and therefore the arrangements did not fall within hallmark 3. In Curzon , the FTT explained that the question to be answered is not whether a premium fee was actually paid/received for the arrangements; rather, it was whether ‘it might be reasonably be expected that a promoter … would be able to obtain a premium fee’. This was reiterated in Hyrax . The fact that a large number of users did in fact pay a premium fee for the use of the arrangements is clearly a strong indicator that a promoter of such arrangements ‘might reasonably be expected … to be able to obtain a premium fee’ from a person receiving services of the type provided. In Hyrax , it was clear that they would retain c. 18.5%. Essentially, this was a ‘cut’ for the arrangements put in place and sufficient for it to amount to a fee in the eyes of the FTT.
Regarding hallmark 5, the FTT looked at whether the arrangements are a ‘product’, a ‘tax product’, a ‘standardised tax product’, and finally if the exception in SI 2006/1543 reg 11 applied. An arrangement will be deemed a ‘product’ if, inter alia , it had standardised documentation for the purpose of implementation by the users of the arrangement. The form of such documentation must have been determined by the promoter and not tailored to the circumstances of a specific client. On the evidence, it was clear that the arrangements in both cases amounted to a ‘product’, ‘tax product’ and ‘standardised tax product’. Regulation 11 was held not to apply.
‘Main benefit’
Regarding the ‘main benefit’ requirement in s 306(1)(c), the question that the FTT asked was not whether the user was enabled to obtain a specific tax advantage, nor whether the scheme succeeded in its aim or if it was a sham, but whether an informed observer would conclude that the main purpose (or one of the main purposes) of the arrangement was to enable a user to obtain the tax advantage. On the evidence, it was clear that the arrangements in both cases were marketed and sold on the basis of their tax advantage and, in any event, the FTT considered there was no other reason why anyone would implement such a ‘convoluted and expensive set of arrangements but for the tax advantage they provided’.
‘Promoter’
‘Promoter’ is defined in FA 2004 s 307 as a person who in the course of a relevant business, is responsible for the design of the scheme, makes it available for implementation by others, and organises/manages such implementation.
In determining whether Hyrax (and two other defendants, B and P, on which HMRC also served an application) and Curzon were promoters, the FTT considered: how the arrangements were structured; the parties involved in the creation and implementation of the arrangements; and the level and type of involvement by the entities/persons involved in the arrangements.
In Curzon , the FTT found that a promoter had to make firm approaches with a view to making the schemes available for implementation. On the facts, the FTT held that Curzon was not in a position to make the arrangements available. Consequently, HMRC’s application for an order failed.
In Hyrax , the FTT found that Hyrax (not B and P) was a promoter. The FTT considered the role that Hyrax played in respect of the implementation, design, organisation and management of the arrangements. Because Hyrax agreed to be the counterparty to all the necessary contracts, the FTT ultimately found it to have made the notifiable proposal available for implementation by the scheme users.
European Convention on Human Rights
The question arose in Hyrax as to the significance of the ECHR as the proceedings were ultimately criminal in nature. Hyrax argued that HMRC failed to inform the parties ‘in detail’ of the nature and cause of the accusation against them. Therefore, the FTT had no jurisdiction to make either of the orders HMRC sought.
In deciding that there was no breach of ECHR, the FTT looked at, inter alia , the purpose of the DOTAS legislation. According to the FTT, the legislation’s very purpose presupposes that HMRC does not know everything there is to know about the arrangements or their legal effect. The FTT held that the legislation only requires HMRC to specify the arrangements in sufficient detail for them to be identifiable, and that there is no requirement for HMRC to state why it thinks they are notifiable.
Conclusion
In both cases, the FTT gives broad meaning to ‘arrangements’, ‘tax advantage’ and in its interpretation and application of the hallmarks when considering HMRC’s applications for a s 314A and/or s 306A order. One glimmer of hope for those involved in the promotion or bringing to market of such arrangements is the arguably narrow interpretation adopted by the FTT in its consideration of who qualifies as a promoter for the purposes of the legislation.
It remains to be seen whether HMRC will now pursue more applications for such orders, given the gateway that DOTAS notification provides for issuing APNs. Whilst not binding, HMRC’s success at establishing that both arrangements were notifiable under DOTAS will be seen as an important victory for HMRC in its continued battle against avoidance.
Shortly after the decisions, HMRC published Spotlight 52 stating, in the case of Hyrax , that it will consider issuing APNs to bring into charge the disputed tax. As no such collection mechanism applies for Curzon , HMRC is likely to prompt users to disclose details of their outstanding loans on their 2018/19 tax returns and pay the 2019 loan charge. Whichever mechanism HMRC uses, it will be confident of its ability to collect the underlying tax. This is certain to prove not only an administrative burden but also financial hardship for many individuals.
The authors thank Sarah Stenton, tax director at Stewarts, for her contribution to this article.
The DOTAS regime introduced in 2004 enabled HMRC to more easily identify tax avoidance and was (and is) a key weapon in HMRC’s ‘crackdown’ on avoidance. The regime requires both the promoters of avoidance to disclose their arrangements and users to notify HMRC through their tax return of their participation. A ‘win-win’ for HMRC? Until 2014, this process was relatively uncontroversial, and many ‘schemes’ were registered under DOTAS to avoid any accusation of falling foul of the regime, as other than the administrative burden there was no real downside. In fact, some promoters sought to use DOTAS registration for their benefit – readers will, we suspect, be familiar with the refrain of schemes being ‘Revenue approved’.
The landscape changed dramatically in 2014 with the advent of the accelerated payment notice (APN) regime. Overnight, a user of a DOTAS scheme potentially faced a demand for an upfront payment on account of the ‘tax advantage’. A ‘win-win’ for HMRC? For promoters, the DOTAS formality became a DOTAS conundrum: to notify or not to notify? HMRC, with one eye undoubtedly on accessing the APN regime, was also faced with a conundrum: how to challenge those schemes that were not notified under DOTAS, but were in fact notifiable ?
The legislation: a brief overview
HMRC has the power to apply to the FTT for an order under FA 2004 s 314A and/or s 306A where it considers a scheme to be notifiable or that it should be treated as notifiable. An application under s 314A can be made where HMRC can prove an arrangement is notifiable, whereas an application under s 306A can be made where there are reasonable grounds for suspecting a scheme may be notifiable.
For an order to be made, HMRC is required to:
(a) specify the arrangements (ss 314A(2)(a) or 306A(2)(a));
(b) show the arrangements are notifiable or that it suspects they are notifiable (ss 306(1)(a)–(c) and 306A(5)) because:
(i) they fall, or HMRC correctly suspects they fall, within the descriptions prescribed in regulations, i.e. the hallmarks requirement;
(ii) they enable or might be expected to enable any person to obtain a tax advantage that is so prescribed in relation to the identified arrangements, i.e. the tax advantage requirement;
(iii) the main or one of the main benefits of the arrangements is obtaining the tax advantage, i.e. the main benefit requirement (together ‘the notifiable requirements’); and
(c) specify the promoter (ss 314A(2)(b) or 306A(2)(b).
Crucially for HMRC, an order by the FTT will attract a penalty for the promoter for failure to notify, and also require them to retrospectively provide details of the scheme and its users. If an order is made under s 314A, penalties can be imposed from the date of implementation of the arrangement, while under s 306A penalties can only be imposed from a future date. For users, HMRC can issue APNs and reverse the cashflow advantage of the scheme.
Hyrax and Curzon
HMRC v Hyrax Resourcing Ltd and others [2019] UKFTT 175 (TC) and HMRC v Curzon Capital Ltd [2019] UKFTT 63 (TC) are the first cases to consider in detail the question of ‘notifiability’ and what it means to be a ‘promoter’.
In both Hyrax and Curzon , the arrangements are disguised remuneration (DR) schemes that broadly involve individuals receiving their earnings through a small taxable element and the remainder in the form of a loan normally routed through an offshore trust in a low or no tax jurisdiction. In both cases, HMRC applied to the FTT for an order pursuant to FA 2004 ss 314A and 306A that the arrangements were notifiable or should be treated as notifiable.
Hyrax and Curzon made various arguments (discussed below) against the FTT making an order, but in both cases the FTT agreed with HMRC that the arrangements were in fact notifiable . However, whereas in Hyrax the FTT found Hyrax to be a promoter, the FTT found Curzon not to be a promoter. Hyrax’s European Convention on Human Rights (ECHR) arguments were rejected.
‘Arrangements’
The FTT first considered the term ‘arrangements’ and HMRC’s interpretation of this. In Curzon , it was accepted by the parties that the relevant arrangements fell within the definition of ‘arrangements’ in FA 2004 s 318, which states that ‘“arrangements” include any scheme, transaction or series of transactions’. However, in Hyrax , counsel did not accept that any such ‘arrangements’ existed, despite previous iterations of the scheme having been notified to HMRC.
In both cases, the FTT indicated that the term ‘arrangements’ in s 318 had a very broad meaning and thus Hyrax’s arrangements were caught by the legislation. The FTT rejected Hyrax’s argument that HMRC had to establish that there had been ‘tax avoidance’ over and above whether the arrangements gave rise to the relevant tax advantage. In practice, it is likely the FTT will almost always conclude that a scheme or series of transactions amount to ‘arrangements’.
‘Tax advantage’
The FTT again interpreted this broadly. In Hyrax , the FTT considered the definition to be ‘very wide … consistent with the construction of the legislation which is to cast the net of “tax advantage” wide but restrict its application to cases’, satisfying the relevant notifiable requirements in s 306(1)(a)–(c).
The FTT in Curzon indicated that the policy would be ‘stultified if any detailed examination had to be carried out into the robustness of any scheme’ and determined that if the arrangements were promoted in such a way as to claim that a tax advantage will/may flow from using them, then unless such a claim was clearly incorrect, it was more than likely to be said that the arrangements ‘might be expected to enable’ the tax advantage to be obtained. In both cases, it was obvious to the FTT, on the evidence, that the arrangements intended to avoid or reduce the charge to income tax such that the tax advantage requirement (s 306(1)(b)) was met.
DOTAS hallmarks
The FTT then looked at whether the arrangements fell under any of the hallmarks relied on by HMRC. In Curzon , HMRC relied on the premium fee (hallmark 3) and the standardised tax product (hallmark 5). In Hyrax , HMRC also relied on the employment income hallmark (hallmark 8).
Both Hyrax and Curzon argued that no fee was paid/received and therefore the arrangements did not fall within hallmark 3. In Curzon , the FTT explained that the question to be answered is not whether a premium fee was actually paid/received for the arrangements; rather, it was whether ‘it might be reasonably be expected that a promoter … would be able to obtain a premium fee’. This was reiterated in Hyrax . The fact that a large number of users did in fact pay a premium fee for the use of the arrangements is clearly a strong indicator that a promoter of such arrangements ‘might reasonably be expected … to be able to obtain a premium fee’ from a person receiving services of the type provided. In Hyrax , it was clear that they would retain c. 18.5%. Essentially, this was a ‘cut’ for the arrangements put in place and sufficient for it to amount to a fee in the eyes of the FTT.
Regarding hallmark 5, the FTT looked at whether the arrangements are a ‘product’, a ‘tax product’, a ‘standardised tax product’, and finally if the exception in SI 2006/1543 reg 11 applied. An arrangement will be deemed a ‘product’ if, inter alia , it had standardised documentation for the purpose of implementation by the users of the arrangement. The form of such documentation must have been determined by the promoter and not tailored to the circumstances of a specific client. On the evidence, it was clear that the arrangements in both cases amounted to a ‘product’, ‘tax product’ and ‘standardised tax product’. Regulation 11 was held not to apply.
‘Main benefit’
Regarding the ‘main benefit’ requirement in s 306(1)(c), the question that the FTT asked was not whether the user was enabled to obtain a specific tax advantage, nor whether the scheme succeeded in its aim or if it was a sham, but whether an informed observer would conclude that the main purpose (or one of the main purposes) of the arrangement was to enable a user to obtain the tax advantage. On the evidence, it was clear that the arrangements in both cases were marketed and sold on the basis of their tax advantage and, in any event, the FTT considered there was no other reason why anyone would implement such a ‘convoluted and expensive set of arrangements but for the tax advantage they provided’.
‘Promoter’
‘Promoter’ is defined in FA 2004 s 307 as a person who in the course of a relevant business, is responsible for the design of the scheme, makes it available for implementation by others, and organises/manages such implementation.
In determining whether Hyrax (and two other defendants, B and P, on which HMRC also served an application) and Curzon were promoters, the FTT considered: how the arrangements were structured; the parties involved in the creation and implementation of the arrangements; and the level and type of involvement by the entities/persons involved in the arrangements.
In Curzon , the FTT found that a promoter had to make firm approaches with a view to making the schemes available for implementation. On the facts, the FTT held that Curzon was not in a position to make the arrangements available. Consequently, HMRC’s application for an order failed.
In Hyrax , the FTT found that Hyrax (not B and P) was a promoter. The FTT considered the role that Hyrax played in respect of the implementation, design, organisation and management of the arrangements. Because Hyrax agreed to be the counterparty to all the necessary contracts, the FTT ultimately found it to have made the notifiable proposal available for implementation by the scheme users.
European Convention on Human Rights
The question arose in Hyrax as to the significance of the ECHR as the proceedings were ultimately criminal in nature. Hyrax argued that HMRC failed to inform the parties ‘in detail’ of the nature and cause of the accusation against them. Therefore, the FTT had no jurisdiction to make either of the orders HMRC sought.
In deciding that there was no breach of ECHR, the FTT looked at, inter alia , the purpose of the DOTAS legislation. According to the FTT, the legislation’s very purpose presupposes that HMRC does not know everything there is to know about the arrangements or their legal effect. The FTT held that the legislation only requires HMRC to specify the arrangements in sufficient detail for them to be identifiable, and that there is no requirement for HMRC to state why it thinks they are notifiable.
Conclusion
In both cases, the FTT gives broad meaning to ‘arrangements’, ‘tax advantage’ and in its interpretation and application of the hallmarks when considering HMRC’s applications for a s 314A and/or s 306A order. One glimmer of hope for those involved in the promotion or bringing to market of such arrangements is the arguably narrow interpretation adopted by the FTT in its consideration of who qualifies as a promoter for the purposes of the legislation.
It remains to be seen whether HMRC will now pursue more applications for such orders, given the gateway that DOTAS notification provides for issuing APNs. Whilst not binding, HMRC’s success at establishing that both arrangements were notifiable under DOTAS will be seen as an important victory for HMRC in its continued battle against avoidance.
Shortly after the decisions, HMRC published Spotlight 52 stating, in the case of Hyrax , that it will consider issuing APNs to bring into charge the disputed tax. As no such collection mechanism applies for Curzon , HMRC is likely to prompt users to disclose details of their outstanding loans on their 2018/19 tax returns and pay the 2019 loan charge. Whichever mechanism HMRC uses, it will be confident of its ability to collect the underlying tax. This is certain to prove not only an administrative burden but also financial hardship for many individuals.
The authors thank Sarah Stenton, tax director at Stewarts, for her contribution to this article.
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