HMRC is incessantly working to identify and close down tax avoidance schemes. In 2004, a new piece of legislation was introduced called ‘The Disclosure of Tax Avoidance Schemes’ (DOTAS). The main focus of DOTAS is to crack down on tax avoidance schemes by targeting the promoters and users of them. Our latest article answers a series of questions about DOTAS and explains the responsibilities of your recruitment agency.
What is ‘The Disclosure of Tax Avoidance Schemes’ (DOTAS)?
The Disclosure of Tax Avoidance Schemes (DOTAS) was introduced in 2004 by HMRC, with the intention of reducing the number of tax avoidance schemes available, especially those deemed as being aggressive.
How does DOTAS work?
- DOTAS focuses on clamping down on avoidance of paying the correct amount of Corporation Tax, Capital Gains Tax, Stamp Duty Land Tax, Annual Tax on Enveloped Dwellings and Inheritance Tax. It also targets VAT avoidance.
- An organisation that promotes a scheme that encourages tax avoidance must contact HMRC and let them know about it within 5 days of discovering it.
- Whilst it is the responsibility of a promoter to alert HMRC about tax avoidance schemes, the user must also contact HMRC and let them know about a scheme if they suspect something is not ethical. Just because a promoter has not declared a tax avoidance scheme does not mean that the user can use ignorance as an excuse for engaging with it.
- Arrangements that are reported as potentially involving tax avoidance will be assigned a SRN by HMRC.
- HMRC will then investigate the arrangement and will decide whether or not it is tax avoidance. If HMRC believes it is tax avoidance, they will either change legislation to make the use of the scheme and other similar schemes illegal. Alternatively, they will simply close the scheme down.
- There are a number of ‘hallmarks’ that are used to help identify tax avoidance schemes, including premium fees, loss schemes, pension benefit schemes and leasing schemes. The two most recently introduced hallmarks (2016) are ‘Employment income provided through third parties’ (e.g. job boards) and ‘Financial products’ (e.g. loan schemes).
Who must report a tax avoidance scheme according to DOTAS?
The DOTAS regulations state that any promoter of a scheme, including a majority of its users, must alert HMRC that they are engaging with the scheme.
As soon as HMRC has been made aware of a new tax avoidance scheme that was previously not on their radar, they will assign it with a Scheme Reference Number (SRN). Every user and promoter of a scheme that has been assigned a SRN must alert HMRC every time they engage with it, or they will face severe penalties.
It is the responsibility of the scheme promoter to issue the user with the SRN. The user is then required to pass this on to HMRC.
What are the penalties associated with DOTAS?
If you are aware of a tax avoidance scheme and have not let HMRC know about it within 5 days of the scheme being made available or it being implemented, your recruitment agency could face a penalty of up to £600 a day. In some cases, HMRC will not see this punishment as sufficient and could issue fines of up to £1 million.
If HMRC considers your recruitment agency to be a promoter, the punishments that could impact your business are extensive. For every candidate you refer to a tax avoidance scheme and fail to give them the SRN, you could face a £5,000 fine. Further penalties of up to £600 per day can be issued if HMRC decides you are continuing to break the DOTAS regulations.
Any of your candidates who use tax avoidance schemes will also face serious repercussions from HMRC:
- The first time a tax avoider uses a scheme and fails to alert HMRC with the Scheme Reference Number (SRN), they will be faced with a £5,000 penalty.
- The second time a tax avoider fails to alert HMRC, they face a £7,500 penalty.
- The third time a tax avoider fails to alert HMRC, they face a £10,000 penalty.
If you are understood to owe HMRC tax, this outstanding amount will be added to the fines for failing to report the SRN. The overall penalty that you might face could be devastating.
What should recruitment agencies do to comply with DOTAS?
DOTAS is legislation designed to target tax avoidance schemes, so providing your agency has a good understanding of the legislation and is fully prepared to deal with it, there is nothing to worry about. However, non-compliance with DOTAS could result in penalties, as stated above, and these could undoubtedly be catastrophic to your business. Therefore, follow these tips to ensure you have nothing to be concerned about.
- Make sure you have an up-to-date Preferred Supplier List (PSL) – Your PSL should be regularly updated and must only include providers that operate in full compliance with HMRC legislation and who you can unreservedly trust.
- Give your candidates a choice – It is your responsibility to provide your candidates with the knowledge to make good decisions. Therefore, let them have a choice over the payroll service they choose, but make sure the options available to them are all compliant. Please pass on our contact details to your candidates if they have any questions at all.
- Make it clear that you value compliance – When speaking to your candidates, make it evident that your company wants absolutely nothing to do with tax avoidance schemes. If your candidates want to use a risky scheme, make sure you report this to HMRC immediately. If you are aware that the scheme already has a SRN issued by HMRC, please pass this information on to your candidate and encourage them to get in contact with HMRC.
- Contact HMRC if you are unsure – if you are unsure whether a scheme could be tax avoidance, please contact HMRC anyway. It is not worth taking any risks.
How do you identify a tax avoidance scheme?
HMRC has released some helpful tips to help users and promoters understand what a tax avoidance scheme is. Here is a summary:
- It’s too good to believe – if a scheme states that your candidates can significantly reduce their tax burden and keep, for example, 90% of their pay, alarm bells should be ringing. In situations like this, you can almost guarantee the scheme is tax avoidance.
- HMRC would be shaking their heads – just because a scheme has not been identified by HMRC, your agency can still be retrospectively punished for promoting it. Therefore, if you suspect a scheme would not be approved by HMRC – don’t promote it.
- You do not receive straightforward payments – typically, if your candidates are using a compliant payroll service, they should expect to receive their salary minus income tax and National Insurance Contributions (NIC). Some tax avoidance schemes offer to pay contractors and freelancers in the form of loans that do not need to be paid back.
- Highly misleading – if a scheme is keen to shout about being able to offer your candidates huge take home pay retention whilst being HMRC friendly – they are almost certainly lying.
- Third parties – if a set up involves your candidates’ money being passed around different organisations, and often organisations based offshore, it is probably a tax avoidance scheme.
- HMRC has issued it with a Scheme Reference Number (SRN) – if a scheme already has a SCR, it means HMRC’s currently investigating it because they believe it is probably tax avoidance. Therefore, anybody who decides to engage with or promote a scheme that already has a SRN is asking for trouble.
Why should you refer your candidates to Churchill Knight?
Your candidates deserve to be referred to a reputable and reliable payroll provider they can trust. Churchill Knight & Associates Ltd has never offered or promoted a tax avoidance scheme and has always operated in full compliance with HMRC legislation. Our services include industry leading contractor accountancy, PAYE umbrella company, CIS services, accountancy for small and medium-sized businesses, a dedicated personal tax team and accountancy for landlords. When you refer your candidates to us, you can be assured that they are in the safest hands and the service they receive will be to the highest standard.
Churchill Knight understands that no two recruitment agencies are the same and therefore we will tailor our partnership with your agency to ensure every one of your requirements is met. For more benefits of partnering with Churchill Knight, please visit our Recruiters Zone.