A tax scheme promoter has been forced to disclose details of its ‘Alchemy’ tax avoidance scheme under the Disclosure of Tax Avoidance Scheme provisions (DOTAS).  This allows HM Revenue and Customs (HMRC) to claim tax from participants in advance while it challenges the legitimacy of the scheme.

Financial Advisers and other professionals advising on the Alchemy scheme could now find themselves facing professional negligence claims if their clients are forced to pay tax they had been told they had avoided.

The DOTAS rules were introduced to ensure that promoters of tax avoidance schemes told HMRC about their proposals in advance.  Clients using the schemes are then obliged to use a ‘DOTAS number’ to declare their participation in the scheme on their tax return.  This allows HMRC to issue Advance Payment Notices, requiring the client to pay tax while the tax authorities go through the process of challenging the legitimacy of the scheme.

In this case, the promoters of the Alchemy tax scheme had not reported it under the DOTAS rules.  HMRC successfully took the promoters to a Tax Tribunal, which ordered full disclosure.  HMRC described the ruling as a “great victory that sends a clear message to tax avoidance scheme promoters that we will pursue you if you don’t play by the rules.”

The Alchemy scheme used a complex arrangement of spread betting and hedging contracts to allow directors of owner-managed companies to extract money from a company without paying tax or paying reduced tax.  HMRC argued that the scheme was a ‘disguised remuneration scheme’ on which income tax and national insurance should be due.

 “HMRC is using the DOTAS rules to go after tax avoidance schemes it believes are illegitimate,” said James Burgoyne, Director – Claims & Technical, Brunel Professions. “Advisers active in this sector need to make sure that they are absolutely clear to their clients about the risks they face, and are able to evidence that they have done so.  Otherwise they could find themselves accused of professional negligence if HMRC successfully challenges the scheme and their clients end up with big tax bills.”

Reports on the decision have been published by Accountancy Live, Taxation and by law firm, Wright Hassall.

The final paragraphs of the Wright Hassall article are illuminating, as the solicitor is inviting participants to consider whether they have a professional indemnity claim against relevant professionals. Wright Hassall are not alone in doing this.

Brunel secures competitive professional indemnity insurance cover for accountants and financial advisers.  To find out more call Mark Sommariva on 0203 475 3275.