1 Introduction
1.1 Who should read this practice note?
Solicitors who give bespoke advice to clients as to how to arrange their affairs which may result in a tax advantage and those that market tax efficient schemes to their clients.
1.2 What is the issue?
On 1 August 2004 statutory provisions came into effect requiring the disclosure of tax avoidance schemes (DOTAS) to HM Revenue & Customs (HMRC). Tax avoidance schemes are arrangements that enable a person to obtain a tax advantage.
DOTAS currently covers the following taxes:
- Capital gains tax
- Corporation tax
- Income tax
- Inheritance tax, from 6 April 2011
- NICs
- Stamp duty land tax
- VAT
The DOTAS regime may also be extended to cover the bank levy.
The precise rules differ between taxes. This practice note provides an overview of the regime and the interaction of the statutory obligations with legal professional privilege (LPP).
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2. The DOTAS regime
2.1 Overview
In Finance Act 2004, rules were introduced which placed obligations on promoters of various tax arrangements to disclose details of the arrangements to HM Revenue and Customs (HMRC).
The purpose of the legislation is to identify the detail of schemes seeking to avoid tax and to identify those who use such schemes. HMRC's purpose is to:
- identify as early as possible schemes that are being used,
- challenge avoidance schemes by contesting returns and, where necessary, pursuing the matter through the Courts; and
- produce legislative changes that will close down avoidance schemes where litigation is not appropriate or where the amount of tax at stake is particularly large.
The Finance Act 2004 provides the statutory framework for the DOTAS regime and much of the detail is found in accompanying regulations. Solicitors who provide services relating to the taxes listed in 1.2 above may come within the ambit of the regime due to the definition of a 'promoter' set out in section 307 of the Finance Act 2004. See 3 Do I need to make a disclosure to HMRC?
A promoter must notify HMRC of any proposal or arrangements falling within the disclosure rules. The meaning of 'arrangements' defined in section 318 Finance Act 2004 is not exhaustive but includes any scheme, transaction or series of transactions.
HMRC may then within 30 days issue an 8-digit scheme reference number (SRN) to the promoter. The promoter must then provide that number to clients who will need to make reference to the SRN in their tax returns.
See 5 Scheme reference numbers for more information
The DOTAS regime has been implemented by a number of regulations that
- describe the proposals and arrangements which a promoter must notify to HMRC,
- set out the circumstances in which a person will not be treated as a promoter for the purposes of the disclosure rules, and
- prescribe the information that is to be given to HMRC.
Under the Tax Avoidance Schemes (Information) Regulations 2004 promoters must provide HMRC with sufficient information as will enable comprehension of the manner in which notifiable proposals or arrangements are intended to operate including:
- the promoter's name and address,
- details of the provision of the regulations by virtue of which the proposal or arrangements is or are notifiable,
- a summary of the proposal and name (if any) by which it is known,
- information explaining the significance of each step, or element, of the arrangements from which the tax advantage expected to be obtained under the proposal or arrangements arises; and
- the statutory provisions, relating to any of the prescribed taxes on which that tax advantage is based.
Forms for making disclosures can be found on the HMRC website.
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2.2 Income tax, corporation tax, capital gains tax (the main regime) and national insurance contributions (NICs)
The DOTAS regime applies to the whole of income tax, corporation tax and capital gains tax (the main regime). With effect from 1 May 2007 arrangements that give an NIC advantage also became disclosable.
The DOTAS regime is intended to apply only to those schemes that are new, innovative, or of specific concern. There are a series of 'hallmarks' which limit the need to disclose all tax efficient schemes (the 'main regime hallmark'). Where a hallmark applies to a particular scheme, it must be disclosed.
2.3 Inheritance tax
An inheritance tax (IHT) scheme will be disclosable under the DOTAS regime if the arrangements
- fall within the prescribed description in the IHT description regulations - see tests 1-3 below, and
- do not fall out of the scope of the regime as a result of the grandfathering provisions (see 2.3.4 below)
The main regime hallmarks referred to in 2.2 above do not apply to IHT arrangements.
2.3.1 Test 1: Do the arrangements result in property becoming relevant property?
The DOTAS regime only applies to IHT arrangements where as a result of those arrangements property becomes 'relevant property'.
Relevant property is defined in section 58(1) IHTA 1984 and does not include, for example, property held on charitable trusts, a qualifying interest in possession or a disabled person's interest.
It does not matter whether or not property becomes relevant property straight away or whether it remains relevant property; a scheme will require disclosure if at any point in the arrangements or proposed arrangements property becomes relevant property.
Where, arrangements do not, at any stage, lead to property becoming relevant property then the scheme will not require disclosure under the Regulations.
For more information see 8.2 Legal and statutory requirements
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2.3.2 Test 2: Do the arrangements give rise to a 'relevant property entry charge' advantage?
A 'relevant property entry charge' is defined as the charge to inheritance tax which arises on a transfer of value made by an individual during that individual's life as a result of which property becomes relevant property. The DOTAS regime does not apply to deemed or notional transfers of value.
The term 'advantage' is construed very widely and in the context of the relevant property entry charge would mean the avoidance, reduction, relief or deferral of the relevant property entry charge.
Where there is no transfer of value and no wider arrangements then no advantage can be obtained in respect of a transaction which results in property becoming relevant property.
2.3.3 Test 3: Is the advantage a main benefit of the arrangements?
This test is objective and you should consider the value of the expected tax advantage compared to the value of any other benefits likely to be enjoyed.
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2.3.4 Grandfathering
The purpose of the DOTAS regime is to require disclosure of schemes which are new or innovative.
To reduce the administrative burden on both practitioners and HMRC those schemes which are the same or substantially the same as arrangements made available before 6 April 2011 are exempt from disclosure. This is known as 'grandfathering'.
It is a matter of fact whether an arrangement is grandfathered. To assist you in deciding whether the IHT arrangements are exempt from disclosure under this test, HMRC have produced a list of schemes which they regard as being 'grandfathered' and do not have to be disclosed. See paragraph 9B.6.1 of HMRC guidance.
The fact that any particular scheme is exempted from disclosure should not be taken as an indication that HMRC either finds the scheme acceptable, or that they accept that it has the intended tax effect under current law. It merely signifies that they are already aware of it or that it does not fall within the Regulations.
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2.4 Stamp duty land tax (SDLT)
DOTAS applies to tax arrangements relating to stamp duty land tax (SDLT) where the subject matter of the arrangements is:
- non-residential property with a market value of at least £1 million
- residential property with a market value of at least £5 million
- mixed use schemes where the value of the residential component is at least £1 million or the non-residential component at least £5 million.
Unlike the main regime referred to in paragraph 2.2 above, hallmarks are not applied to limit what is required to be disclosed. However schemes which HMRC already know about do not have to be disclosed. HMRC have published a 'white list' of arrangements that do not have to be disclosed. see paragraph 9.7.1 of HMRC guidance.
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2.5 Value added tax
A separate disclosure regime applies to VAT. Disclosure is limited to two broad categories:
- listed schemes and
- hallmarked schemes:
2.5.1 Listed schemes
Listed schemes are specific generic schemes that are designated in the relevant legislation.
Taxable persons who are party to a listed scheme must notify HMRC unless their annual turnover (or, if part of a group, the turnover of the group to which they belong) is below £600,000.
2.5.2 Hallmarked schemes
Hallmarked schemes are schemes that include or are associated with a 'hallmark' of avoidance designated in the relevant legislation. Disclosure is not required if:
- a third party, such as the scheme promoter, has voluntarily disclosed it to HMRC and provided the reference number allocated to it to the person who would otherwise be liable to make a disclosure;
- the turnover threshold applies - ie the person (or the group to which they belong) has an annual turnover below £10 million.
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2.6 The legal professional privilege exception
The requirement to make a disclosure to HMRC under the DOTAS regime is subject to section 314 of the Finance Act 2004 which provides that nothing in Part 7 of the Finance Act 2004 requires any person to disclose any privileged information.
Privileged information is information for which a claim to legal professional privilege (LPP) could be maintained.
2.7 Changes to DOTAS from 1 January 2011
A number of measures were introduced in Finance Act 2010 altering the DOTAS regime. These measures are:
- A change to the trigger point for disclosure of marketed schemes to ensure early disclosure of schemes.
- An information power to require persons who introduce scheme promoters to clients to identify who the promoter is.
- Enhanced penalties for failure to comply with a disclosure obligation.
- A requirement for a promoter to provide HMRC with a periodic list of clients to whom they have issued SRNs.
- Revised and extended hallmarks (the descriptions in regulations of the main regime of schemes required to be disclosed).
Four sets of Regulations implementing these measures came into force on 1 January 2011. These are:
- Penalty Regulations
- Descriptions Regulations
- Information Regulations and
- NICs Regulations.
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3. Do I need to make a disclosure to HMRC?
The extent of your obligation to disclose arrangements under the DOTAS regime will depend on whether you fall within the definition of promoter, the circumstances and whether you are giving legal advice that is covered by the legal professional privilege exemption.
3.1 Who is a promoter?
You may be a promoter if, in the course of providing services relating to taxation (or, where applicable, National Insurance contributions) you:
- are to any extent responsible for the design of a scheme,
- make a firm approach to another person with a view to making a scheme available for implementation by that person or others,
- make a scheme available for implementation by others, or
- organise or manage the implementation of a scheme.
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3.1.1 Are you a scheme designer?
A person who is only involved in the design of a scheme, and does not make the scheme available for implementation by others or organise or manage it, is not a promoter if any one of three tests is passed. These are:
- the benign test
- the non-advisor test and
- the ignorance test.
The benign test
The benign test applies where, in the course of providing tax advice, the person is not responsible for the design of any element of the arrangement or proposal (including the way in which it is structured).
For example, if you are asked to advise a promoter marketing or designing a scheme in relation to a particular element of it - in these circumstances you will not be a promoter, despite being involved in the design of the overall scheme, so long as any tax advice does not contribute to the tax advantage element of it.
For example, you may be asked by a promoter to advise whether two companies are 'connected' for any purpose of the Taxes Acts. Provided the advice goes no further than explaining the interpretation of words used in tax legislation, it would be benign as would advice on general compliance requirements and so on.
On the other hand, if the advice given seeks to highlight opportunities to exploit the relevant provisions then it is not benign advice.
Where the advice recommends some alteration to 'a taxpayer's affairs', then whether the advice is benign will depend on the expected tax outcomes of any transactions entered into as a result of the advice.
The non-adviser test
The non-adviser test will apply if you, although involved in the design of a scheme, do not contribute any tax advice. For example, you give advice to a promoter in relation to company law and not tax law.
The ignorance test
The ignorance test applies when you could not reasonably be expected to have either:
- sufficient information to enable you to know whether or not the arrangements are disclosable schemes, or
- sufficient information so as to enable you to comply.
This test might apply where, for example, you have insufficient knowledge of the overall arrangements to know whether the 'benign' or 'non-adviser' tests are failed or have only a partial understanding of the scheme so that you would be unable to comply with the disclosure requirements.
Where having the relevant 'information' depends not merely upon factual knowledge, but upon the application of some particular expertise, you will not normally be expected to have such an expertise if it falls outside your own area of professional expertise (unless the matters in question can reasonably be said to be common knowledge amongst solicitors with similar expertise)
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3.1.2 Do you make a scheme available for implementation by others?
You make a scheme available for implementation if and when:
- the scheme is fully designed,
- it is capable of implementation in practice, and
- you communicate information about the scheme to potential clients, suggesting that they consider entering into transactions forming part of the scheme.
The design of a scheme will typically consist of a number of elements (eg a partnership, a loan, partner's contributions, the purchase of assets etc) structured to deliver the expected tax advantage. The scheme will be capable of implementation in practice, only when the elements of the design have been put into place 'on the ground'.
So, for example, if the design includes a loan, it will be capable of implementation only if and when an actual loan provider is in place and funds made available.
A scheme can be made available by more than one person such as by the scheme designer or those who provide the scheme under a licensing agreement with the designer.
Each such person may be a promoter for disclosure purposes and have obligations as described in this guidance.
A person who acts solely as an intermediary between a scheme provider and potential scheme user (i.e. they seek clients for the provider, not themselves) is not a promoter.
For stamp duty land tax schemes, a person providing the typical services of a conveyancer, and nothing more, will not be a scheme promoter.
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3.1.3 What is meant by 'making a firm approach to another person'
This is intended to ensure that the requirement to make a disclosure is triggered as soon as any steps are taken to market the scheme, whether or not it is or could be made available for implementation at the same time or later.
The legislation contains three key tests to determine whether or not you are a promoter under this aspect of the 'promoter' definition. All three tests must be met. They are:
1) You 'make a marketing contact' with another person X in relation to the scheme.
This involves you communicating information about the scheme to X with a view to X entering into transactions forming part of the arrangements. The information includes an explanation of any tax advantage that a person might be expected to obtain from using the arrangements. It is not necessary for you to explain how the scheme works.
2) At the time of the marketing contact, the scheme is 'substantially designed'.
A scheme is substantially designed at any time if, at that time, the nature of the transactions to form part of the scheme has been sufficiently developed that it would be reasonable to believe that a person who wishes to obtain the tax advantage communicated might enter into either:
- transactions of the nature developed at the time, or
- transactions not substantially different from those developed at the time.
3) You make the marketing contact with a view to making the scheme available for implementation by X or any other person.
The test is that a person makes a marketing contact with a view to making the scheme available himself (i.e. he is making a marketing contact with a view to obtaining clients who will buy the scheme from him).
A person who is simply an introducer will not meet this test and will not be a promoter because an introducer solicits clients for another person (the promoter) not himself.
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3.2 Solicitors' marketed schemes
HMRC have indicated that they take the view that since the DOTAS rules seek the disclosure of the fact that a product has been promoted rather than legal advice, the rules do not engage legal professional privilege where schemes are marketed.
Therefore, where you conceive a tax avoidance scheme, independently of any advice to a client, which you then attempt to sell to people who may be interested in it, once the tests outlined in 3.1 above have been met then you must make a disclosure of the scheme to HMRC.
The obligation to disclose is triggered by making a firm approach to another person. If you have conceived a scheme independently of any client, then it follows that at the moment of your first firm approach to a third party there is no client to whom legal advice has been or is being given.
You will be acting as principal and in these factual circumstances there is therefore no question of LPP arising. However, if a client has generally retained you to communicate to them any bright ideas you may dream up about tax, then doing so does not count as acting as a principal.
In addition, please note that you should take care when engaging in entrepreneurial activities such as marketing a scheme in which particular clients may be advised to participate, since this may potentially give rise to a conflict between your entrepreneurial interests and your professional duty.
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3.3 Arrangements where advice is covered by legal professional privilege
In light of the exception for privileged information that exists in the DOTAS regime, the Law Society has taken advice from leading Counsel as to the extent of solicitors' disclosure obligations under the regime.
We are of the view that, in many cases, information that you would otherwise be required to disclose under the tax avoidance regulations would be subject to legal professional privilege (LPP). Such information would not have to be disclosed to HMRC.
The basis for this view is that legal advice privilege applies to confidential communications between solicitors and clients for the purpose of giving and obtaining legal advice and assistance.
Traditionally, legal advice privilege has been construed broadly and includes advice as to what should prudently and sensibly be done in the relevant legal context. (Balabel v Air India [1988] 1 Ch 317 at 330)
Legal professional privilege has been recognised by the House of Lords as a fundamental human right. It is the privilege of the client and, unless unambiguously waived by the client, must be asserted by you. You must uphold privilege until such time as any unambiguous waiver has been expressly communicated to you by your client.
If you have advised clients about affairs which give rise to a notifiable proposal or notifiable arrangements under the DOTAS regime, it is likely that the services which you provide to your client in connection with the proposal or arrangements will involve legal advice about how the scheme should be constructed and/or the likelihood that a scheme which is constructed in a particular way will achieve its objective of obtaining a tax advantage.
In these circumstances, if you disclose the prescribed information sought by HMRC including the principal features of a proposed scheme, you are likely both to be disclosing the fact that your client has consulted you for legal advice on a particular subject, and to be revealing (directly or indirectly) the substance of privileged communications passing between you and your client for the purpose of obtaining and giving that legal advice.
You should also bear in mind that the form in which a disclosure takes place is immaterial. It is not the position that legal professional privilege will not be breached just because you do not provide copies of actual documents or planning advice to HMRC. Nor is it the case that legal advice privilege will not be breached merely because under the disclosure rules only facts or information about the features of a particular proposal are revealed rather than the actual advice given.
The Law Society considers that you should ask yourself whether any information that you would be required to disclose to HMRC under the DOTAS regime forms part of, or would otherwise reveal, the substance or subject matter of confidential communications that have passed between you and your clients for the purpose of obtaining and giving legal advice.
If the answer to that question is yes then the information will usually be subject to the privilege exception to disclosure of information set out in section 314 of the Finance Act 2004.
In such cases, the privileged information should not be disclosed unless you are aware that your client has waived the privilege. The position is not altered by the fact that you may give similar advice to several clients.
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3.3.1 The Tax Avoidance Schemes (Promoters, Prescribed Circumstances and Information) (Amendment) Regulations 2004.
The effect of these regulations is to stop lawyers from being treated as promoters where they would be unable to comply with the rules without breaching legal professional privilege.
In cases where these regulations apply, unless there is another promoter who can fulfil the obligation to disclose without breaching privilege, the scheme must be disclosed by your client when they enter into any transaction forming part of it.
It is our view that privilege will not prevent your client disclosing details of a scheme which they are implementing and setting out what they consider to be the tax effect of the scheme. This is because in a client's hands neither the facts as to what has been done nor the arguments on which a scheme is based are privileged. However, the advice your client received from you on the merits of the scheme and how it should be constructed would be privileged as is any information which identifies or is capable of identifying the fact that legal advice has been taken (this would include information on related issues such as the identity of the lawyer etc).
It should be noted, however, that legal advice privilege has a broader ambit in relation to information held by a solicitor than it does in relation to the same information held by a client, and that the privilege which a solicitor must assert on behalf of his client covers considerably wider ground than the client could assert himself. If your client communicates facts or arguments to you in order to obtain legal advice on them, then you yourself cannot be compelled to disclose them without your client's consent, even though your client could be so compelled. This is because your knowledge comes from the 'continuum' of exchanges which have taken place between you and your client for the giving and getting of legal advice and is therefore privileged (Balabel v Air India [1988] Ch 317). It is irrelevant that your client could be compelled to provide the information in question: your knowledge of it is covered by privilege and may not be disclosed without your client's consent.
You may wish to explore with your clients whether they require advice on their obligations to comply with the regulations. Your client may, if they wish, choose to waive any right to legal privilege. If legal privilege is waived then you must make the disclosure to HMRC, even where similar advice has been given to several clients. The disclosure is in relation to that client's affairs only and any SRN should only be given to the client that waived privilege.
The following important points should be noted in relation to waiver of legal privilege
- any waiver must be made within sufficient time to enable you to disclose within 5 days of the scheme being made available, otherwise the client must make the disclosure within 5 or 30 days, as applicable, of the first transaction; and
- any waiver can be limited by the client so as to apply only to the extent necessary to enable you to comply with the disclosure obligation and to have no relevance for any other purpose.
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3.4 In-house tax lawyers
If you are an in-house tax lawyer and you create a scheme that is used by your employer (or the group of companies of which your employer is part), there is no 'promoter' in respect of the scheme.
Despite the absence of a promoter, your employer must disclose the scheme when they enter into any transaction forming part of it.
Hallmarked schemes and hallmarked NI contribution schemes with no promoter are only required to be disclosed where the advantage is intended to be obtained by a business that is not a small or medium enterprise.
Disclosure only applies to schemes that have been implemented there is no requirement to disclose mere plans and ideas.
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4. Deadlines for disclosure
4.1 Where you are the promoter
If you are a promoter and must make a disclosure to HMRC, the disclosure must be made to HMRC within 5 days of the earlier of the date on which you:
- market the scheme,
- make it available for implementation, or
- become aware that it has been implemented.
As a promoter, you only need to disclose the same scheme once. Minor changes, for example to suit the requirements of different clients, need not be separately disclosed providing the revised proposal remains substantially the same.
What constitutes a change in a scheme or arrangement so that it is no longer substantially the same is a matter which should be considered on each occasion.
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4.2 Where the LPP exception applies
Where the LPP exception applies, your client must make the disclosure within 5 days of entering into the first transaction forming part of the scheme.
4.3 Where you are an in-house tax lawyer
If you are an in-house lawyer and there is no promoter for the purposes of the DOTAS regime, your employer as the user of the scheme must disclose the scheme to HMRC within 30 days of entering into the first transaction forming part of the scheme.
Weekends, Bank Holidays, Good Friday and Christmas Day are ignored for the purpose of calculating these time limits.
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5. Scheme reference numbers
The scheme reference number (SRN) system is a means of identifying the users of disclosed schemes, allowing HMRC to prioritise and co-ordinate enquiries into users' returns.
The allocation or notification of a scheme reference number does not indicate that HMRC accept that the scheme achieves or is capable of achieving any purported tax advantage.
If you are a promoter and have disclosed a scheme to HMRC and received a SRN from HMRC you must:
- provide it to your client to whom you provide, or have provided, services in connection with the disclosed scheme or any scheme that is substantially the same
- do so using the prescribed form AAG 6 which is available on the HMRC website. There are different forms for SDLT schemes, AAG 6 (SDLT) and IHT schemes, AAG 6 (IHT);
- provide the SRN to your client within 30 days of either receipt of the SRN or becoming aware of any transaction that forms part of the scheme, whichever is later.
If you have been provided with more than one scheme reference number in relation to any given scheme, you only need provide one of those numbers to your client.
If you have given your client a SRN and they have implemented the scheme, they must:
- include the scheme reference number on their tax return or form AAG 4 or AAG 4 (SDLT),
- state the last day of the year of assessment, tax year, accounting period or earnings period (as the case may be) in which, or the date on which, they expect the advantage to be obtained.
For IHT schemes your client must, within 12 months of the end of the month in which they first entered into a transaction forming part of the notifiable arrangements
- include the SRN number on their IHT account (form IHT100) or on form AAG 4 (IHT), and
- state the tax year in which or date on which they expect the advantage to be obtain
The SRN for IHT schemes should never be entered on any other inheritance tax account form or Self Assessment tax return.
Form AAG4(IHT) should be used where:
- no IHT account is required,
- the statutory date for submitting an IHT100 is after the time limit for reporting the SRN to HMRC,
- the IHT account has already submitted without the SRN,
- more than one SRN must be reported. One SRN is included in IHT100 which is submitted within the time limits for reporting the SRN. Additional SRNs must be reported on form AAG 4 (IHT).
The HMRC website gives guidance as to what information should be included on the AAG 4. Even if you complete this on your client's behalf, your client retains responsibility to HMRC for the accuracy of the form and must sign the declaration.
SRN notification forms must be sent to:
Anti-Avoidance Group (Intelligence)
HM Revenue and Customs
1st Floor, 22 Kingsway
London
WC2B 6NR
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6. The requirement to provide client lists
Among the changes to the DOTAS regime introduced in the Finance Act 2010 is a requirement for 'promoters' of notifiable tax avoidance schemes who are 'subject to the reference number information requirement' to provide HMRC with prescribed information about their clients and the particular schemes in which they were involved.
If you have notified a scheme to HMRC and have been provided with SRN then you must provide HMRC with the SRN and a list of the clients (giving their names and addresses) to whom the scheme has been made available every quarter.
This obligation will only apply to you where:
- you have notified a scheme to HMRC because you fall within the definition of promoter and the LPP exception does not apply;
- HMRC has provided you with a SRN (note: HMRC are not obliged to provide a SRN even when a scheme has been notified to them);
- you have provided your client with the SRN in relation to the scheme.
This obligation also applies where you should have disclosed but failed to do so.
This obligation will usually apply where you have conceived a tax avoidance scheme speculatively, without a client, and have then made a 'firm approach' to someone about the proposal (whether that person is an existing client on other matters or not a client at all).
In these circumstances, there is no client for the scheme at the moment of the 'firm approach' (which is the relevant time) and as such the privilege exception will not apply.
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7. Practical examples
Each of the examples below is designed to illustrate how the Law Society considers the application of the legal professional privilege exemption to disclosure works under the DOTAS regime in common situations where tax planning is relevant.
For this purpose only, it is assumed that the scheme or arrangements in the examples would be disclosable but for legal professional privilege.
These illustrations are not intended to suggest that this is the case and you should consider whether in fact any such advice is otherwise disclosable within the legislation and the regulations. You should therefore consider whether your activities in relation to a specific matter would actually bring you within the definition of a promoter and whether you are dealing with notifiable proposals or arrangements.
Example 1
You advise a client about a commercially motivated transaction and suggest some restructuring of the transaction or the insertion of steps that will improve the tax treatment for the client.
Solicitors will often be notified by a client about the features of a proposed transaction in confidence with a view to obtaining legal advice in relation to the transaction.
A pre-condition of a claim to legal professional privilege is that a document or communication is confidential. Where the information that would be required to be disclosed under the regime forms part of the substance of confidential communications that have passed between you and your client for the purpose of enabling you to advise your client about the transaction, the view of the Law Society is that the information is subject to legal professional privilege.
In these circumstances, you are entitled to rely on section 314 of the Finance Act 2004 and the information should not be disclosed to HMRC.
It is recognised however that the facilitation of a commercial transaction may include a number of different steps involving a number of persons.
You could for example draft structure papers that are sent to other professional advisers of your client including your client's bankers and accountants. A structure paper and draft agreements will often also be sent to the other side and their advisers.
Legal advice privilege unlike litigation privilege only attaches to communications between a solicitor and a client; it does not extend to communications between client and third parties or between lawyer and third parties.
Issues may also arise about whether privilege in information or documents has been waived.
As stated above, a pre-condition to a claim of legal professional privilege is that a document or communication is confidential. Information can be confidential as between some people and not others and provided that only a select group of recipients has received the information on a confidential basis, privilege although lost against the group, will not be lost as against the whole world.
Thus in the course of a commercial transaction, where a limited group of your client's advisers or the other side's advisers receive information subject to an implied or express obligation of confidence, the view of the Law Society is that disclosure of the information to this group is unlikely to involve a waiver of privilege as against the whole world, including HMRC. In such circumstances the information should not be disclosed to HMRC.
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Example 2
You advise a bank on a tax motivated structured finance transaction.
There may be a number of circumstances in which you advise a bank on a tax motivated structured finance transaction. For example the bank could be entering into the transaction itself or it could be selling such a transaction to your client, in which case the bank's role may only be minor such as entering into a loan or an interest rate or currency swap.
If you advise a bank about a tax-motivated structured finance transaction which the bank intends to take part in itself, you could be a promoter of the proposal if you are to any extent responsible for the design of the proposal, or make the proposal available for implementation by the bank.
Where you communicate in confidence with the bank for the purpose of giving legal advice on the proposed transaction, the view of the Law Society is that the substance of those communications is privileged.
For example, you might advise the bank about the key features of the transaction. If you subsequently disclose the substance of those features to HMRC this is likely to involve a breach of privilege.
Sometimes a bank may provide a proposed tax-motivated structured finance transaction to a client of the bank. In these circumstances you will have advised the bank about the transaction and your opinion about the transaction (sometimes referred to as a marketing opinion) may be passed by the bank to its client(s).
Here the same analysis as set out in example 1 above would apply. Only confidential communications that have passed between you and your client bank for the purpose of enabling you to advise the bank about the transaction will be privileged.
However, if the marketing opinion has been provided by the bank to its client subject to an implied or express obligation of confidentiality, privilege will be lost as against the client of the bank but not as against the whole world.
Where privilege has not been generally lost by the disclosure of the opinion to the bank's client, the Law Society is of the view that once again disclosure by you of the features of the transaction to HMRC is likely to involve a breach of privilege.
The exception in section 314 can therefore be relied upon and you should not disclose the privileged information to HMRC.
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Example 3
You advise a client who has purchased or intends to purchase a tax-motivated structured finance product from a third party.
If you suggest changes to a product as proposed to take account of the client's individual circumstances, you could be a promoter within the terms of the disclosure regime by virtue of being to some extent responsible for the design of the proposed product.
In the Law Society's view, information that forms part of the substance of communications that have passed between the solicitor and the client for the purpose of enabling the solicitor to provide legal advice about the product will usually be privileged.
This includes descriptive information about the nature of the product. Section 314 of the Finance Act 2004 will come into play and the information should not be disclosed to HMRC.
Where the solicitor copies his or her advice to the client to other advisers of the client and those advisers receive the information under an implied or express obligation of confidence, the disclosure of the information to the other advisers is unlikely to involve a waiver of privilege as against the whole world including HMRC.
NB Section 308 (4) of the Finance Act 2004 deals with the situation where there is more than one promoter in relation to the same notifiable proposal or arrangement.
Compliance by any of the promoters will discharge the notification obligations of the others. As a result where another adviser of your client is a promoter and has notified HMRC about a notifiable proposal or arrangement, there is no obligation on you to also notify and issues of a potential breach of legal professional privilege will not arise.
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Example 4
You give advice to one client about his tax affairs which involves devising a scheme of arrangements. Subsequently you consider that the scheme you have devised is something that could be marketed to other clients. Do you breach your original client's privilege if, having marketed the scheme to others, you have to disclose the details to HMRC?
The Law Society's view is that work that you have undertaken to implement a tax scheme for client A following instructions from them to advise them how to structure their affairs in a way that mitigates the tax due will be privileged and protected from disclosure to HMRC by section 314 of the Finance Act 2004. When you act for subsequent clients they are benefiting from that knowledge of tax law and experience, your intellectual property, which is derived from acting for other clients. If you devise a scheme that is based on such experience, albeit a scheme that mirrors the details of the steps implemented for client A, you are marketing your intellectual property. In other words, you will be acting as a principal or entrepreneur by marketing the scheme to others from whom you have no general retainer to give tax advice. You will therefore have to make a disclosure to HMRC of the details of the scheme. However, there is no obligation on you to notify HMRC that this scheme was implemented by client A or for you to give client A any SRN HMRC may issue to you.
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Example 5
As part of your business development strategy you pitch ideas for work to existing and potential new clients and this involves discussing tax planning ideas
It is the Law Society's view that communications with existing and potential clients which include the discussion of tax planning ideas will be protected under section 314 and do not have to be disclosed to HMRC where:
- an existing client has invited you to pitch for the work relating to a new transaction,
- a potential new client has asked you to pitch for the work on a new transaction, and
- you have approached an existing client with whom you have an actual or clearly implied ongoing retainer to advise on tax matters about an entirely new scheme.
In the first two situations, because it is the existing or potential client who has initiated the contact, the communications are effectively a 'beauty parade' and therefore privileged. In the third, there is a specific professional retainer to make such communications and so they take place within an existing solicitor/client relationship.
As in example 1, information can be confidential as between some people and not others and provided that only a select group of recipients has received the information on a confidential basis, privilege although lost against the group, will not be lost as against the whole world. Thus any communications you have with a person that your client has identified as a potential counterparty for a scheme (new or repeat) and they receive information about the proposed scheme subject to an implied or express obligation of confidence, it is the Law Society's view that disclosure of the information to this person is unlikely to involve a waiver of privilege as against the whole world, including HMRC. In such circumstances the information should not be disclosed to HMRC.
However, it is the Law Society's view that communications with existing or potential clients will not be protected by section 314 where:
- you have no ongoing retainer with an existing client of the firm to advise on tax matters and you have approached them about an entirely new scheme, and
- you initiate the approach to a former client or a potential new client about a new scheme.
In these circumstances, if you fall within the definition of promoter as set out in section 3.1 because you have made a firm approach to another person with a view to making a scheme available for implementation by that person or others, then you must disclose the scheme to HMRC and provide a client lists as appropriate.
NOTE - whether you have an existing retainer to advise a client generally on tax, so that when you approach them with a new scheme you are not acting as principal/entrepreneur, is one which would have to be clearly evidenced.
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Example 6
You develop a tax avoidance scheme. It is substantially designed and you market the scheme to several existing and potential clients, at your own initiative and without any retainer to advise generally on tax matters. At this stage there is no LPP and you disclose details of the scheme to HMRC and receive an SRN. Subsequently one of these potential clients contacts you and you provide them with a more detailed explanation of how the scheme works. The client then commissions you to implement the scheme for him.
Where a potential client responds to such marketing activity and seeks more information from you about a particular pre-developed scheme, it is the Law Society's view that discussions with your potential client that are limited to providing a detailed explanation of the existing scheme will not be covered by LPP. An explanation of the mechanics of an existing scheme, which you developed as principal, will not equate to giving legal advice, i.e. as to what should prudently and sensibly be done in the relevant legal context following a request for such advice from a client. If the scheme is implemented without substantial alteration from that marketed, you must give your client the SRN for them to include on their tax return. You must also include your client's details on the next client list.
If following your detailed explanation, your client asks you to adapt the scheme to suit their particular circumstances and you give legal advice relating to the adaptation, then this will be advice covered by LPP. If the scheme is substantially altered from that marketed (which will be a question of fact) then you will not need to give your client the SRN or disclose the client name on the client list.
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8. Penalties
The penalties for failure to comply with a DOTAS obligation without reasonable excuse are provided for in section 98C Taxes Management Act 1970, as amended by Finance Act 2010.
Broadly, DOTAS penalties fall into three categories:
1. disclosure penalties - these apply to a failure to disclose a scheme. There are variations in cases where a Tribunal has issued a disclosure order.
2. information penalties - these apply to all other failures to comply with DOTAS except for those covered by 3 below.
3. user penalties - these apply to a failure by a scheme user to report a SRN to HMRC.
More information about penalties can be found on the HMRC website.
8.1 Tribunal penalty proceedings
HMRC will apply to a tribunal to impose a penalty on a specified person (or persons) for breach of a specified DOTAS obligation. You will find more about the tax tribunal system on the HMRC website.
Applications will normally be subject to a hearing involving HMRC and the specified person at which each will put their case.
8.2 Appeals
There is a right of appeal against any penalty imposed by HMRC or determined by a tribunal. In the case of a penalty imposed by HMRC, the appeal will be to the First-tier Tribunal.
In the case of a penalty determined by a First-tier Tribunal, the appeal will be to the Upper-tier Tribunal. Appeals against penalties determined by the First-tier Tribunal may be made both on points of law arising from the Tribunal decision and against the amount of the penalty. See guidance on the appeals system on the HMRC website.
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9 More information
9.1 Legal and other requirements
Income tax, corporation tax, capital gains tax, inheritance tax and stamp duty land tax
Primary legislation
Secondary legislation
National insurance contributions
Primary legislation
Secondary legislation
Value Added Tax
Primary legislation
Secondary legislation
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9.2 Further products and support
9.2.1 Practice Advice Service
The Law Society's practice advice service provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays.
Visit the Practice Advice Service website.
9.2.3 HMRC Guidance
Disclosure of tax avoidance schemes guidance on the HMRC website.
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9.3 Status of this practice note
Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.
For queries or comments on this practice note contact the Law Society's Practice Advice Service.
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9.4 Terminology in this practice note
Must - a specific requirement in the Solicitor's Code of Conduct or legislation. You must comply, unless there specific exemptions or defences provided for in the code of conduct or relevant legislation.
Should - good practice for most situations in the Law Society's view. If you do not follow this, you must be able to justify to oversight bodies why this is appropriate, either for your practice, or in the particular retainer.
May - a non-exhaustive list of options for meeting your obligations. Which option you choose is determined by the risk profile of the individual practice, client or retainer. You must be able to justify why this was an appropriate option to oversight bodies.
DOTAS - disclosure of tax avoidance schemes
HMRC - Her Majesty's Revenue and Customs
IHT - Inheritance tax
Notifiable arrangement - an arrangement which enables or might be expected to enable someone to obtain a tax advantage, and where the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage.
Notifiable Proposals - a proposal for arrangements which would be a notifiable arrangement if entered into.
SRN - Scheme reference number
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9.5 Acknowledgements
The Society acknowledges the contributions of members of the Tax Law Committee and Capital Taxes Sub-committee in developing this practice note.
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