House of Lords Inquiry: Tax Experts Warn Against Criminalising DOTAS Non-Compliance

^{Original report on the first session was published 24 October. Report on second session and chair's letter added 31 October}

Giving evidence to the House of Lords Finance Bill Sub-Committee, representatives from the Chartered Institute of Taxation (CIOT), the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants in England and Wales (ICAEW) and the Law Society of England and Wales expressed strong reservations about the scope and design of the proposed offence.

The session highlighted a broad consensus among professional bodies: while the government’s objectives are understood and supported, the current proposals risk overreach and unintended consequences.

A second session on the same day took evidence from Tax Policy Associates (TPA), TaxWatch, the Confederation of British Industry (CBI) and the chair of the Tax Professionals Forum. Dan Neidle of TPA said he was no longer convinced that non-disclosure under DOTAS should be criminalised, believing other proposals being put forward by the government would be sufficient in tackling this problem.

The chair of the committee has written to the tax minister putting witnesses' concerns to him and posing a series of questions about the government's proposals.

Session One: CIOT, ICAEW, ACCA and the Law Society [Transcript]

Witnesses:
Margaret Curran, Technical Officer, Chartered Institute of Taxation
Jason Piper, Policy Lead for Business and Tax Law, Association of Chartered Certified Accountants
Lindsey Wicks, Senior Technical Manager, Institute of Chartered Accountants in England and Wales
Lydia Challen, Co-Chair, Law Society Tax Law Committee.

“Not Designed with Criminal Offences in Mind”

Lindsey Wicks (ICAEW) opened the session, stating: “The regime was not designed with criminal offences in mind. The hallmarks that are used to decide whether a disclosure is made are drafted to be deliberately uncertain, and that is to encourage disclosure. That means that they are not sufficiently certain to apply in a criminal context.”

She explained that the hallmarks could apply to “reasonable tax planning that happens to fall within a hallmark,” and highlighted the extensive HMRC guidance needed to clarify their scope.

Margaret Curran (CIOT) agreed, adding: “There is uncertainty because they are vague and broad. The other issue here is that the criminal offence that is being proposed is strict liability, so the prosecution does not have to prove intent.”

She compared this to offences such as speeding or parking fines, where the rules are clear-cut, and warned that “sometimes it is difficult to decide whether you need to make a notification.”

Jason Piper (ACCA) echoed these concerns: “Tax is inherently a regulatory regime. It is a civil law construct, so the hurdles to impose a criminal offence around tax should be quite high.”

He described the proposal as “perhaps using the wrong tool for the job,” and warned that “having the spectre of this possible criminal liability hanging over, which most professional advisers would never go anywhere near, is probably a step too far.”

Lydia Challen (Law Society) focused on the subjective nature of the hallmarks: “You might have to ask yourselves whether a financial instrument has a contrived or abnormal feature. To a lot of people, a lot of what goes on in the commercial world might look a bit abnormal but that does not mean that it is abnormal; it just depends on the perspective from which you are looking at it.”

She added that advisers would be forced to “second guess all the time how it will be looked at, not even by the Revenue but possibly by a jury.”

Disproportionate Reach and Offshore Challenges

The panel questioned the proportionality of the measure, which is intended to target a small group of 20–30 persistent promoters.

Wicks noted: “The size of the tax advice market is 85,000 firms. If this potentially applies to all 85,000 firms, that is clearly disproportionate compared to the target.”

Challen warned that the rules “could capture routine commercial advice and reputable firms, and their true targets will probably continue to ignore the rules.”

On the likelihood of successful prosecutions, Curran said: “Most of these promoters have at least some offshore presence, so it will be an extra difficult hurdle if people need to be extradited.”

She added that “the consultation process did not really address that issue,” and that the burden of proof in criminal cases “will probably pose its own challenges.”

Baroness Bowles of Berkhamsted asked if we were “starting from a presumption that all tax planning is not allowed and then there are exemptions?” Challen said you are allowed to plan tax but DOTAS was introduced so that the government would know “what tax planning was being done and then could decide whether they thought it needed to be addressed and counteracted in legislation or was completely normal and inoffensive.” The new offence doesn’t “criminalise everything” but it does criminalise a failure to disclose everything, she explained.

Curran said that existing penalties for failing to disclose under DOTAS are very high. “I think the maximum is about £1 million and there have been some recent cases at the tax tribunals of promoters who have been found not to have disclosed who should have disclosed. So there obviously is a way to get to some of these people through the civil system. The issue seems to be that even these high penalties are not discouraging some of them from not disclosing.”

“Commercial Transactions That Otherwise Might Have Gone Ahead Will Not”

Lord Leigh of Hurley, a chartered tax adviser, asked whether there was a risk that commercial organisations would not be able to get proper tax advice on commercial transactions. The panel thought there was.

Curran said it should be looked at alongside other Finance Bill measures, such as one looking at non-compliance facilitated by advisors “where there is a wide definition of deliberate conduct, which could bring in legal interpretation issues”. She said CIOT’s members are saying “that they can foresee a lot of difficulties going forward with the advice they can comfortably give because of the increased risk”.

Wicks thought that some would get advice from elsewhere: “There is a risk of exporting tax advice to other jurisdictions.”

Piper said that as you increase the risk to the advice giver, they either have to introduce governance processes to manage that risk, which will increase the cost of giving the advice, or if the risk is too high, they simply will not give the advice at all. “That does not just mean they do not take the fees and the profit element on giving the advice; commercial transactions that otherwise might have gone ahead will not”.

Challen warned that by penalising the adviser you are potentially setting up a conflict between the adviser and their client. “If the advisor is looking over their shoulder all the time to see whether they might personally be liable for a criminal offence, that introduces friction into that relationship. For all the same reasons, I think it will probably have a chilling effect on the giving of completely legitimate tax planning advice.”

Alternative Approaches Suggested

The panel offered several suggestions for more targeted approaches.

Challen said the Law Society had proposed “a specific hallmark that could found a criminal offence but be targeted at those schemes,” and suggested that “dealing with how the schemes go to market in the first place, how they are advertised and other avenues” might be more effective.

Piper proposed a hallmark “around the overseas operations,” and said: “Ultimately, the dream would be to have an environment where people recognise that if you are taking advice on a UK tax structure, there should be no good reason to take that advice from someone who is not based in the UK.”

Curran described the offence as “a bit of a blunt instrument,” and outlined several ideas from CIOT, including targeting “the type of business models of the promoters and the features of their schemes around generic counsel’s opinions, restrictions on users’ ability to share the opinion, multiple users and so on.”

Another idea was whether the schemes could be targeted at avoidance schemes, crafted around wording from the HMRC standard for agents, so schemes that “are highly artificial or highly contrived and seek to exploit shortcomings in the relevant legislation”. A separate disguised remuneration hallmark and applying the criminal offence just to that was another possibility.

She also suggested scoping out advisers registered under HMRC’s new agent registration regime, noting that “a lot of the people behind these sort of disguised remuneration schemes probably are not in that category.”

Session Two: Tax Policy Associates, TaxWatch, CBI and Tax Professionals Forum

Witnesses:
Dan Neidle, Founder, Tax Policy Associates
Mike Lewis, Director, TaxWatch
Alice Jeffries, Head of Tax Policy, Confederation of British Industry (CBI)
Chris Sanger, Chair, Tax Professionals Forum and Global Government Tax Leader, EY

Avoidance schemes – where do things stand?

Opening the discussion at the second session, the Chair of the sub-committee, Lord Liddle, invited the panel to reflect on the tax avoidance schemes that continue to be marketed and the adequacy of HMRC’s existing powers.

Dan Neidle (TPA) said, “When I was in practice, I would have said that tax avoidance schemes are dead and that nobody does them because they are all destined to fail… but a lot of people are [still] out there selling tax schemes”. He continued that the individuals selling the schemes are not “proper advisors” and are mostly unregulated. Their clients “either will never be spotted by HMRC… or will be spotted, in which case the schemes go down in flames and the clients end up in severe financial trouble.” He suggested it was “as much a mis-selling problem as a tax problem”.

Mike Lewis (TaxWatch) thought the number of people engaged in avoidance was probably wider than suggested by HMRC’s focus on 20 to 30 individuals. He also took issue with the idea “that this marketplace continues because it is totally divorced from professional bodies or the regulated professions”. He claimed that there were still “tax schemers” who are “members in good standing of the ICAEW and the CIOT” and argued that professional standards, particularly those governing conduct in taxation, have failed to prevent schemers from remaining in respected professions.

Alice Jeffries (CBI) called for HMRC to place a greater focus on upstream compliance and the use of the Advertising Standards Authority (ASA). “If you were to apply advertising standards policy codes to most advice for tax avoidance schemes, are they legal, decent, honest and truthful? No. They are mis-selling products”, she argued. She noted the tobacco advertising ban in the UK and asked why the same ban cannot be applied to tax avoidance schemes. She suggested that HMRC’s guidance is “too woolly, too specific, too generic” and requires updating in line with case law.

Criminalising non-disclosure: proportionality and practicality

Lord Leigh of Hurley said the committee was “worried that the creation of a criminal offence is a bit of a sledgehammer to crack a nut”. Would it catch a company looking for the most tax-efficient way to carry out a commercial transaction?

Responding, Neidle said that the idea of criminalising failure to disclose under DOTAS was his. However he regretted it “because I think that the government have come out with a better proposal and that this measure probably should not proceed”. He explained that “prosecuting failure to disclose is very hard… On the other hand, if you make it too simple so that a jury will easily buy it, you risk criminalising a normal advisor who happens to get things wrong. We must never criminalise a normal advisor who just makes a mistake”.

Neidle suggested that two other proposals being put forward by the government would be effective in tackling this problem, namely “serious DOTAS penalties” for beneficial owners and a criminal offence for breaching a universal stop notice. “Those two things together are more practical. They are easy to prosecute, on the one hand—no prosecution is needed for the civil penalties—and are without the potentially adverse consequences of criminalising ordinary advice. So I am… rowing back on lots of things I have said in the past. This proposal may be the answer in theory but, actually, the other answers that the government have provided are better”.

Chris Sanger (Tax Professionals Forum and EY) emphasised the success of DOTAS but warned of the unintended consequences of criminalising non-disclosure. “I used to call DOTAS DOUBTASTAS, which stood for disclosure of usually benign transactions and some tax avoidance schemes. It was that big funnel. If we end up going down a criminalisation route, it will become a massive thing again, and we will lose all of that benefit. So I do think that there is a real downside to going down this provision route.”

Jeffries agreed that DOTAS is wide, covering many commercial transactions, and since its implementation, there has been a combination of guidance with lengthy lists of things that were thought to be so far out of scope they were excluded from statutory instruments. She likened it to the police saying to you, “We’ve got a new definition of ‘burglary’—entering a house and intending to use what is inside—but we will have some guidance that says that, if you used your own key and it’s your fridge contents, that’s fine, so, don’t worry, we won’t prosecute you”. “We are very concerned about having a criminal offence based on [something this wide] and about the impact of that on the tax advice market”, she said.

Lewis emphasised the difference between criminalising non-disclosure and criminalising a piece of advice or a structural transaction that falls within DOTAS, saying: “Nobody is suggesting that, simply because you give a piece of advice or create a structural transaction that falls within a DOTAS hallmark, that should in itself be criminalised”.

Safeguards and alternative approaches

Baroness Fairhead discussed possible safeguards and alternative approaches to ensure that any criminal offence is appropriately targeted.

Neidle said he had thought a “firm-wide defence” could be a solution. “So we have a bona fide business test. You would say that you have a defence: unless at least 50% of the business undertaken by your company was DOTAS-disclosable, you would be out of the rules because you would have a bona fide business.” However, he reflected, this does not solve the fundamental problem: the complexity and uncertainty that make prosecutions challenging.

Sanger suggested ‘agreed-upon’ reasonable procedures, saying that “[i]f you could do this, those firms that were going to be in the environment where they were having to make DOTAS decisions could show those procedures to HMRC and make sure that they have been validated”.

Lewis advocated for some sort of threshold test in the legislation itself, which would get at the nature of the activity that Neidle’s original idea was supposed to tackle: “that is, firms that are persistently and flagrantly not reporting schemes that are clearly within DOTAS hallmarks, publicly available and notified to various people.”

Enforcement and offshore challenges

The sub-committee questioned the effectiveness of enforcement, especially where promoters are based elsewhere.

Neidle stated, “I do not believe that a single promoter has ever been prosecuted for taking a ridiculous tax position”. This was despite some schemes being “not much more credible” than claiming that you can escape income tax by, eg, painting your front door red. He suggested that HMRC never prosecutes promoters because the promoters can say, “We thought that the scheme worked. We were being honest”.

Lewis said there had been prosecutions under the offence of ‘cheating the Revenue’, of promoters of sideways lottery schemes. Neidle said that that was “because they lied and made stuff up”. “Ridiculous film schemes, which involved people throwing lots of money in a circle and claiming 10 times the relief from the money they put in, were not prosecuted. People who went further and invented expenses were prosecuted. That is the kind of thing HMRC prosecutes; it does not prosecute ridiculous technical positions, no matter how ridiculous they are.”

Jeffries raised the limitations of civil penalties and gave an example of firms based on the Isle of Man. “Even if they come to the point where it is finally decided that they definitely owe money to the Revenue, it is unclear how that money will be obtained. If we were to criminalise it, what would be the chances of extradition of any of the people behind those schemes from the Isle of Man? They would probably be very low indeed.”

Mis-selling and HMRC’s work with ASA

Baroness Bowles of Berkhamsted returned the discussion to the issue of mis-selling and the potential for regulatory action via advertising standards. She asked: “Could HMRC be given the right to act in a space that is already occupied by another regulator”.

Jeffries said that HMRC have worked with the ASA before, and they could do it again. Neidle highlighted the limitations, believing that “[a] lot of promoters do not do paid-for marketing these days. They use YouTube, TikTok and direct mail shots; those things are within scope of the ASA’s rule only if the company is in the UK. There has been a trend over the past five years of promoters establishing themselves outside the UK because that makes it harder for HMRC to investigate them.”

Timing and wider impacts of proposed measures

Lord Pitkeathley of Camden Town enquired whether the panel believes sufficient time has been allocated for the proposed measures.

Sanger cautioned that more time is needed to develop effective solutions. He warned of market distortion and said, “If you have that criminal offence hanging over you, you will want to work out whether you actually want to be advising in that market… It distorts the market.”

Jeffries observed the wider business impact, saying that some advisory firms will cease to give advice, and some firms will report a lot more, which will waste HMRC’s time, advisory firm time and business money.

Lewis said that every time a new penalty, power or disclosure obligation is introduced in law, “we are told that it will lead to market distortion and to professionals stepping away from the market”. “We need to take those kinds of warnings with a pinch of salt,” he assessed. He thought that fears around over-reporting were much “more legitimate”, adding: “We are not opposed to a well-targeted new criminal offence, but there are a lot of other criminal offences on the statute book that are not used.”

Neidle thought that the reason dire warnings had not come to pass was that HMRC had underused its powers. He thought there were two realistic ways forward: “park the proposal to criminalise DOTAS and focus instead on the civil penalties for DOTAS and the criminal offences around universal stop notices” or, if the government go ahead with criminalising non-disclosure, opening a consultation on a firm-wide defence.

You can read the full transcript here.

Sub-committee letter to the minister

Following these two hearings – the only ones in this mini-inquiry – the sub-committee chair, Lord Liddle, has written to the Exchequer Secretary to the Treasury, Dan Tomlinson MP, highlighting the sub-committee’s concerns about the proposed criminal offence of DOTAS non-disclosure in its current form and posing a series of questions.

In the letter the chair cites the concerns of CIOT and other witnesses raised in the two hearings and asks:

• Whether the government think that the existing DOTAS civil regime is an appropriate regime on which to base a criminal offence
• What consideration the government has given to introducing a more targeted offence and to including a ‘firm-wide defence’ safeguard
• What consideration the government has given to the impact of the proposed offence on the tax advice market generally – as well as business and the economy generally – and how they will ensure that the proposed offence will not harm the provision of tax advice on legitimate planning
• Why the government considers the new offence is needed given the proposed new promoter action notices and universal stop notices, and what success the government has had in prosecuting promoters of avoidance under other existing criminal offences (eg failure to comply with a stop notice)
• What steps HMRC are taking to publicise the risks of involvement in tax avoidance schemes, and what consideration the government has given to banning the advertising of such schemes

The letter praises HMRC for its efforts to engage with stakeholders on this proposal and looks forward to questioning the minister on 8 December (presumably on both this topic and the inheritance tax changes being looked into separately by the sub-committee).

^{This report is based on the transcripts of the session which can be read here. Please note that these are uncorrected transcripts and neither peers nor witnesses had at the time of writing had the opportunity to correct the record so they may be subject to change. The drafting of this report was assisted by Microsoft Co-Pilot but it has been checked, edited and added to by CIOT's External Relations Team.}