Image of boat and water.

Contentious tax quarterly: Spring review

01 May 2024. Published by Adam Craggs, Partner and Harry Smith, Senior Associate

In this quarterly review we consider: (1) recent developments in relation to the Disclosure of Tax Avoidance Schemes (DOTAS) regime; (2) the state of play in relation to R&D reliefs; and (3) some implications of the Economic Crime and Corporate Transparency Act 2023.


The DOTAS regime, contained in FA 2004 Part 7, has been around for nearly 20 years, and was originally designed to give HMRC a ‘heads-up’ on the mass-marketed tax avoidance products that were prevalent at the time it was introduced. Since then, the world has moved on, and taxpayers’ appetite for tax avoidance schemes has diminished significantly.

However, we have seen a recent flurry of activity from HMRC seeking to require the registration of arrangements under the DOTAS provisions and/or to impose penalties for failure to do so within the applicable time limits.

Readers will recall that there are three main consequences to registration of arrangements under the DOTAS regime:

  • If someone is a ‘promoter’ of a scheme notifiable under the DOTAS regime and receives a ‘scheme reference number’ (SRN) in respect of the relevant arrangements, they must provide the SRN to all their clients to whom they have made the arrangements available, using the prescribed form (FA 2004 s 305A and FA 2021 Sch 31 paras 44–46). The clients must in turn confirm to HMRC that they have used the arrangements.
  • Notification under the DOTAS regime is one of the preconditions for HMRC to issue an accelerated payment notice to those who have utilised the arrangements, requiring them to pay any disputed tax up-front (rather than awaiting the outcome of litigation) (see Condition C in FA 2014 s 219). Accelerated payment notices cannot be appealed; the only route to challenge is by way of an application for judicial review.
  • Since 2022, HMRC has been able to ‘name and shame’ promoters of arrangements notified/notifiable under the DOTAS regime (FA 2022 s 86). This can constitute a very significant reputational threat and in practice can have a significant detrimental effect on the business concerned.

The increase in HMRC’s activity in this area can be seen from the number of cases reaching the tax tribunal.

IPS Progression

In HMRC v IPS Progression Ltd [2024] UKFTT 136 (TC), HMRC applied to the First-tier Tribunal (FTT) for imposition of a penalty on the respondent (IPS) for failure to provide it with prescribed information relating to notifiable arrangements. The FTT held that IPS (an umbrella company providing PAYE payroll services in respect of individuals whose personal services were made available by recruitment agencies to end users) was a promoter in relation to arrangements pursuant to which part of payments made to employees was treated as a loan, rather than as income. IPS had argued that the ‘loan’ portion of the payments was intended to be repaid out of employees’ bonuses in due course. However, the FTT determined that there had never been any intent to operate a bonus scheme or pay the relevant bonuses, or to obtain repayment of the amounts paid by way of the ‘loans’. Nor had the employees expected ever to repay these amounts: the terms of the ‘loan agreements’ were such that it was unlikely, in the FTT’s view, that 1,593 employees would have been willing to agree to them if they were genuine. The FTT therefore considered the arrangements to be ‘notifiable arrangements, ’ for the purposes of FA 2004 s 306(1), because whether the ‘loan’ amounts were genuine loans or payments of employment income, they were ‘standardised tax products’ falling within hallmark 5 (the legislation sets out a number of descriptions of arrangements that are referred to as ‘hallmarks’) and IPS had acted as promoter of the arrangements.

On the evidence available to the FTT, the first employee had started work using the arrangements on 11 April 2016, and, since the arrangements were notifiable, IPS as promoter had been required to make a DOTAS notification by 18 April 2016. It did not make a ‘protective’ disclosure until 25 April 2022. The FTT considered that IPS had no reasonable excuse (which would excuse it from a penalty while that excuse subsisted under TMA 1970 s 118(2)). In the circumstances, the FTT determined the penalty at £900,000, near the top of the permissible range (of £0 to £1,318,200) due, inter alia, to: (i) the deterrent effect of a substantial penalty; (ii) the quantum of fees received by IPS as promoter (around £3.6m); and (iii) the fact that although the failure had not been deliberate, it was more than ‘simple carelessness,’ since IPS had been specifically made aware of the issue of DOTAS notifiability from 1 November 2017 and had continued to use the arrangements without having notified them to HMRC.

Alpha Republic

In Alpha Republic Ltd v HMRC [2024] UKFTT 68 (TCC), HMRC sought, and was granted, its costs under rule 10(1) (b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273, on the basis that Alpha Republic had acted unreasonably in making an application for HMRC’s statement of case to be struck out and for HMRC to be barred from taking part in proceedings, pursuing this application for nearly eight months, and then withdrawing it on the working day before the hearing, in circumstances where they had sought no further and better particulars of HMRC’s case. The strike¬out application was refused, and costs were awarded against Alpha Republic.

However, it is the underlying appeal that is of more interest for present purposes. This was brought by Alpha Republic against the allocation of an SRN pursuant to FA 2004 s 311(3) and (5), in respect of arrangements that appear to be broadly similar in character to those in IPS – employees received payments partly by way of salary and partly by way of loans, which were expressed to be repayable out of bonuses to be received not later than seven years after the loans were made. No decision in relation to Alpha Republic’s appeal against the allocation of an SRN has yet been published by the FTT.

These two cases illustrate a renewed focus within HMRC on ensuring compliance with the requirement to register arrangements under the DOTAS regime (and the authors are aware of further activity on this front by HMRC that has not yet reached the FTT). Even in circumstances where mass-marketed tax avoidance is a less substantial industry than it once was, HMRC is still incentivised to register tax avoidance schemes under the DOTAS provisions as the imposition of substantial penalties swell the Exchequer’s coffers, and it would appear that it intends to continue to do so for the foreseeable future.

Research and development relief

While the government’s intention to merge the existing SME and R&D Expenditure Credit schemes into a single scheme (see ‘Planning for the merged R&D regime’ (Carrie Rutland & James Rolfe), Tax Journal, 14 February 2024) may grab the headlines, there remain significant issues with the administration of the existing R&D schemes that are unlikely to be fixed by the proposed changes. The authors are aware of multiple instances of R&D enquiries being under-staffed with HMRC case workers who are not adequately trained to conduct enquiries into what is a highly technical area. Obtaining the contact details of the individual who is running the enquiry so that one can engage in a meaningful discussion is nigh on impossible, and correspondence – when it arrives – evidences a failure to engage with the evidence presented by the taxpayer (including in-depth technical data being dismissed by HMRC officers as a result of their misinterpreting a basic internet search!). The authors are aware of numerous instances of HMRC’s Fraud Investigation Service issuing pro-forma letters to businesses whose R&D claims have already been allowed, stating that HMRC suspect their claims to be fraudulent without providing any details whatsoever. Such a serious allegation (which by necessity involves an allegation of dishonesty) should not be made lightly and without a valid basis. When requested to confirm the basis of the allegation, HMRC are unable to provide any further details.

This approach to R&D claims is consistent with the message presented by the Public Accounts Committee’s recent report, HMRC performance in 2022/23. The report notes input from organisations representing tax professionals highlighting ‘concerns about the impact of HMRC’s volume compliance approach on companies, ’ and noting that ‘HMRC compliance staff [treat] companies with suspicion and lack the necessary expertise and training to determine whether projects qualify as research and development for tax purposes’ (para 17).

HMRC do not, apparently, agree with the suggestion that their approach has discouraged research and development investment. Although it is accepted that HMRC lacks a significant quantity of engineering experts in-house, HMRC claim that ‘these are typically not needed for volume compliance work’ and that ‘it can bring in expertise externally or from other parts of government’ when this expertise is required.

Being eternal optimists, we can but hope that matters will improve in the not too distant future.

Economic Crime and Corporate Transparency Act 2023

The Economic Crime and Corporate Transparency Act 2023 (‘the Act’) received royal assent in October 2023. It has significantly increased the scope for prosecution of corporates in connection with criminal conduct.

The Act introduces two key changes:

  1. A new offence of ‘failure to prevent fraud’ has been created (s 199 of the Act): Under this offence, a large organisation (as defined), and members of its group, can be criminally liable if it fails to prevent a person associated with it from committing certain specified fraud offences, where that fraud is intended to benefit the organisation or a person to whom services are provided on behalf of the organisation. As with the corporate offences of failure to prevent the facilitation of tax evasion (introduced in the Criminal Finances Act 2017), a defence is available where an organisation can demonstrate that, at the time of the fraud, it had in place reasonable procedures to prevent the offending.

  2. Changes to the identification doctrine: Prior to these changes coming into force, the attribution of an individual’s actions to a corporate required that individual to be the ‘directing mind and will’ of the company. This ‘identification doctrine’ has historically been interpreted very narrowly by the courts, with the result that for many large corporates it has been difficult for regulators, such as HMRC, to identify one individual who serves as the ‘directing mind and will’ of the company. As a consequence, prosecutions of companies themselves (as opposed to the individuals associated with them) have been rare.

The Act changes this. Section 196 of the Act maintains the identification doctrine, but the ‘directing mind and will’ test is replaced with a new test – whether or not the individual is a ‘senior manager’ of the body corporate or partnership. This will be the case if they play ‘a significant role in the making of decisions about how the whole or a substantial part of the activities of the ... [organisation] are to be managed or organised, or the actual managing or organising of the whole or a substantial part of those activities’

Clearly, as a matter of practice, this change in the law is likely to significantly expand the scope for corporate prosecutions (and prosecutions in relation to partnerships) by HMRC (and other regulators). Despite recent widely-reported comments by HMRC (in relation to the Criminal Finances Act 2017) to the effect that criminal legislation could be effective even if no prosecutions had been brought for failing to prevent the facilitation of tax evasion (due to the shifts in behaviour that HMRC claims the legislation has provoked), it would be surprising if HMRC did not consider deploying this new powerful weapon in its arsenal. We are aware that a significant number of long running criminal investigations were dropped by HMRC in December 2023, with the issue of ‘No further action’ letters. It may not be too much of a stretch to consider this as something of a ‘clearing of the decks’ in order to prepare for investigations and ultimately prosecutions to be brought against bodies corporate and partnerships using this new legislation. HMRC has already begun to enter into deferred prosecution agreements with companies where the company is charged with a criminal offence, which of course involve the corporate concerned paying a substantial sum to the Exchequer. Watch this space.

This article was originally published in Tax Journal.

Stay connected and subscribe to our latest insights and views 

Subscribe Here