Contentious Tax Update

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

In this contentious tax update (based on an article written by Adam Craggs and Harry Smith and published in Tax Journal on 5 April 2024), 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 Part 7, Finance Act 2004, has been around for nearly 20 years, and was originally designed to give HMRC a 'heads-up' on marketed tax avoidance arrangements that were prevalent at the time it was introduced.  Since then, the world has moved on and taxpayers' appetite for such arrangements has diminished.

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.

There are three main consequences to registration of arrangements under the DOTAS regime:

  1. 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 (see section 305A, Finance Act 2004, and paragraphs 44-46, Schedule 31, Finance Act 2021).  The clients must in turn confirm to HMRC that they have used the arrangements;
  2. notification under the DOTAS regime is one of the preconditions for HMRC to issue an accelerated payment notice (APN) 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, set out in section 219, Finance Act 2014.  APNs cannot be appealed – the only route to challenge is by way of an application for judicial review; and
  3.  since 2022, HMRC has been able to 'name and shame' promoters of arrangements notified/notifiable under the DOTAS regime (see section 86, Finance Act 2022).  

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

HMRC v IPS Progression Ltd [2024] UKFTT 136 (TC)

In this case 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. In the FTT's view, the terms of the 'loan agreements' were such that it was unlikely 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 section 306(1), Finance Act 2004, 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 section 118(2), Taxes Management Act 1970).  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 Ltd v HMRC [2024] UKFTT 68 (TCC)

In this case, HMRC sought, and was granted, its costs under rule 10(1)(b), Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (FTT Rules) 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 it 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 section 311(3) and (5), Finance Act 2004, 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. Alpha Republic's appeal against the allocation of an SRN has yet to be determined 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 (we are aware of further activity on this front by HMRC that has not yet reached the FTT).  Even in circumstances where 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 appears clear 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 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.  We 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).  We are aware of numerous instances of HMRC's Fraud Investigation Service sending 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 likely and without a valid basis. When requested to confirm the basis of the allegation, HMRC is generally unable to provide any further details.

This approach to R&D claims is consistent with the message presented by the recent report of the Public Accounts Committee, 'HMRC performance in 2022-23' (  This 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' (paragraph 17).  

HMRC does not, apparently, agree with the suggestion that its approach has discouraged R&D investment.  Although it is accepted that HMRC lacks a significant quantity of engineering experts in-house, HMRC claims 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 (ECCTA) received Royal Assent in October 2023.  It has significantly increased the scope for prosecution of corporates in connection with criminal conduct. 

The ECCTA introduces two key changes:

  1. A new offence of 'failure to prevent fraud' has been created (see section 199).

    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 have been introduced.

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 ECCTA changes this.  Section 196 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 which has been added to 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 corporates 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.

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