Disclosure of Tax Avoidance Schemes (DOTAS) and HMRC’s Risk-based Approach

The DOTAS mechanism provides a channel for the promoters and users of tax avoidance schemes to pre-notify HMRC.

The objectives of the disclosure rules are to obtain early information about tax arrangements and how they work; and information about who has used them. 

On its own, the disclosure of a tax arrangement has no effect on the tax position of any person who uses it. However, a disclosed tax arrangement may be rendered ineffective by Parliament, possibly with retrospective effect.

Separately, HMRC adopts a risk-based approach to identifying potentially abusive schemes, using a number of indicators which include:

  • Transactions or arrangements which have little or no economic substance or which have tax consequences not commensurate with the change in a taxpayer’s economic position.
  • Transactions or arrangements bearing little or no pre-tax profit which rely wholly or substantially on anticipated tax reduction for significant post tax profit.
  • Transactions or arrangements that result in a mismatch such as: between the legal form or accounting treatment and the economic substance; or between the tax treatment for different parties or entities; or between the tax treatment in different jurisdictions.
  • Transactions or arrangements exhibiting little or no business, commercial or non-tax driver.
  • Transactions or arrangements involving contrived, artificial, transitory, pre-ordained or commercially unnecessary steps or transactions.
  • Transactions or arrangements where the income, gains, expenditure or losses falling within the UK tax net are not proportionate to the economic activity taking place or the value added in the UK
  • Tax law is sometimes enacted to target particular transactions or arrangements and give them a particular tax result. Alternative transactions or arrangements designed to sidestep the effect of such legislation, but which otherwise achieve the same result.