HM Revenue & Customs (HMRC) is plugging tax avoidance loopholes to stop the wealthy and celebrities from hiding their cash.
Disclosure of Tax Avoidance Schemes (DOTAS) rules were introduced 10 years ago with the aim of red-flagging ways of dodging tax.
Tax advisers were meant to register tax avoidance schemes with HMRC before offering them as a shelter to clients.
Registration gave HMRC advance warning of how the scheme worked. Tax inspectors then had time to investigate and change tax rules to stop the wealthy from piling cash into the scheme.
Several tax avoidance schemes involving hundreds of millions of pounds of tax savings were identified and defeated in the courts.
Many involved making artificial losses from funding films and even car sales firms. These losses could then be set off against other income to reduce the amount of tax paid by wealthy investors, many of whom are TV and sports celebrities.
But HMRC realised the number of schemes applying for registration was falling.
At first, this was thought to be because interest in tax avoidance schemes was waning, but now HMRC realises advisers are simply not registering the schemes because of loose interpretation of the rules and low penalties for failing to register.
One defence against paying a penalty involved a tax barrister giving a legal opinion that the scheme need not be notified under the DOTAS rules.
HMRC fears that advisers are ignoring DOTAS and have moved their tax avoidance schemes underground and taking a chance if their move is revealed, the penalty is relatively low compared with their earnings from clients.
Now, the government has launched a consultation aiming to plug the gaps in DOTAS rules.
HMRC argues that DOTAS has been a success for a decade – but has announced intentions to tighten the rules to stop tax advisers from failing to register their schemes.
“DOTAS has allowed HMRC to close down a number of tax avoidance schemes over the years and non-compliance can result in penalties of up to £1 million for promoters,” said an HMRC spokesman.
“Billions of pounds of tax has been recovered, but now is the time to reassess DOTAS and upgrade the rules because promoters are changing their game and we have to change the rules with it.”
The proposed changes involve updating non-disclosure exemptions and penalties to make non-compliance more expensive for promoters of tax avoidance schemes.