Guidance

Why someone may receive a warning notice for serial tax avoidance

Published 12 January 2018

Warning notices

Under paragraphs 2, 63 and 64 of schedule 18 Finance Act 2016, HMRC must give a person a written warning notice on each relevant defeat of any avoidance arrangements defeated on or after 6 April 2017, within the period of 90 days beginning with the day of the defeat.

Warning notice requirements

The warning notice must:

• set out the beginning and end dates of the warning period
• specify the relevant defeat that triggered the notice
• explain how the warning period can be extended by a further defeat within the period
• explain the effect of entering into the serial tax avoidance regime (STAR) and the sanctions applying including for group members

‘Arrangements’ for the purposes of STAR includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

The definition of arrangements is broad and sets a low threshold. It’s not intended to be exhaustive, but STAR is limited in its application to arrangements which are or become avoidance arrangements.

Commencement rules

Under paragraphs 63 to 65 schedule 18 Finance Act 2016, a person who does not enter into new avoidance arrangements will not become liable to penalties or have their access to reliefs restricted.

Under the rules for associates, group members and partners, that person will not be named either if they’re not a partner of, or member of the same group as, a person who has incurred a relevant defeat of new avoidance arrangements.

A person will not be subject to STAR or receive a warning notice if they refrain from entering into new avoidance arrangements and have taken one of the following actions in relation to all existing avoidance arrangement:

• settled their tax position by 6 April 2017
• fully disclosed the details of their arrangement before 6 April 2017
• agreed to fully disclose the details of their arrangement before 6 April 2017

If the person settled their tax position

The person must have settled their tax position relating to the existing arrangements, so that such arrangements are resolved or otherwise defeated before 6 April 2017.

If the person fully disclosed arrangement details

The person must have fully disclosed details of the existing arrangements to HMRC before 6 April 2017. ‘Details’ in this connection means information regarding their use of the arrangements entered into.

If the person agreed to fully disclose arrangement details

The person must have given HMRC notice of a firm intention to fully disclose the arrangement details before 6 April 2017 (and later comply with this within a time limit set by HMRC).

Even if a person has taken the steps referred to above to avoid being subject to STAR, under the STAR rules on linked persons that person may still be issued with a warning notice and be required to provide HMRC with information notices under STAR.

These rules require a warning notice to be issued to a person following a relevant defeat of avoidance arrangements entered into or used by an associate, fellow group member or partner of that person.

That person will not suffer penalties or restrictions on reliefs and in most cases will not be named under STAR, provided they refrain from entering into new avoidance arrangements whilst in a warning period.

Warning period

Under paragraph 3 schedule 18 Finance Act 2016, the warning period will remain in place for a period of 5 years beginning with the day after the warning notice is given.

A further relevant defeat within the warning period will extend the warning period. An extended warning period will run to the end of 5 years beginning with the day after the day on which the further relevant defeat occurs.

Where a relevant defeat occurs after a warning period has ended a new 5 year warning period will commence.

A warning period may also be extended by HMRC if a person fails to comply with a requirement regarding information notices.

Where this guidance refers to a warning period, it includes a warning period that has been extended.

When counteraction becomes final

Under paragraphs 12 to 16A schedule 18 Finance Act 2016, counteraction of a sought after tax advantage (in respect of avoidance arrangements which are the subject of a relevant defeat) will be regarded as final when the adjustments made to the taxpayer’s tax position to effect that counteraction, and any amounts arising as a result of those adjustments can no longer be varied on appeal or otherwise.

Counteraction becomes final:

• when the taxpayer reaches agreement with HMRC about the adjustments to that person’s tax position required to effect such counteraction and any amounts arising as a result of such adjustments
• if the taxpayer makes no appeal against the making by HMRC of such adjustments or amounts or the making of any assessment, amendment, determination or National Insurance contributions decision or other action by which the counteraction is given effect, when:
  • the time for making such an appeal expires
  • if later, the time at which such adjustments or amounts are no longer capable of being varied in any way
• if the taxpayer makes an appeal against such adjustments, amounts, assessment, amendment, determination, National Insurance contributions decision or other action, when:
  • the litigation in relation to the relevant counteraction is finally settled in HMRC’s favour, if no agreement is otherwise reached. Litigation is regarded as ‘final’ if the case is decided by the Supreme Court or, in a lower court, where the court’s decision is final with no appeal outstanding or possible, or if the appellant abandons the litigation
  • if later, the time at which such adjustments or amounts are no longer capable of being varied in any way

Where HMRC contends that arrangements that were not notified should have been notified under the disclosure of tax avoidance schemes (DOTAS) regime, Disclosure of Tax Avoidance Schemes for VAT and other indirect taxes regime or VAT Avoidance Disclosure Regime (VADR) rules, STAR only applies if and when the failure to comply condition at paragraph 10 schedule 18 Finance Act 2016 is met.

In broad terms, it must be determined finally at tribunal that the arrangements are notifiable, or the person responsible for notifying the arrangements must admit in writing to HMRC that the arrangements are notifiable for DOTAS, DASVOIT or VADR.

Conditions A to F - relevant defeats and final counteraction

Under paragraphs 12 to 16A schedule 18 Finance Act 2016, the condition is only met and a relevant defeat incurred when the counteraction becomes final, with the exception of Condition B (follower notices), when the condition is also met when corrective action is taken. The method of counteraction varies between the conditions.

Condition A

For Condition A, a counteraction is final when the adjustments made to effect the counteraction, and any amounts arising as a result of those adjustments, can no longer be varied, on appeal or otherwise.

Condition B

For Condition B, a relevant defeat is incurred when corrective action has been taken against the whole of the denied advantage.

If corrective action is not taken in full, the relevant defeat is incurred when the counteraction is final, which is when the adjustments made to effect the counteraction, and any amounts arising as a result of those adjustments can no longer be varied, on appeal or otherwise.

Conditions C to F

For Conditions C, D, E and F, a counteraction is final when the assessment, adjustments or action in question, and any amounts arising from the assessment, adjustments or action, can no longer be varied, on appeal or otherwise.

Adjustments may be made by an officer of HMRC or by the person to whom the tax advantage would arise. Adjustments to arrive at a final tax position include those made by:

• assessment, determination or National Insurance contributions decision
• modification of an assessment or return
• disallowance or amendment of a claim
• a payment
• entering into a contract settlement
• a payment in respect of a liability to pay National Insurance contributions

Notifiable arrangements under DOTAS, DASVOIT or VADR – when counteraction becomes final

The time that the counteraction becomes final is also the time at which it is to be determined whether or not the arrangements are notifiable arrangements for the purposes of DOTAS or DASVOIT, or a notifiable scheme for the purposes of the VADR regime.

This takes into account that the terms ‘DOTAS arrangements’ and ‘disclosable VAT and other indirect tax arrangements’ include arrangements or schemes that should have been notified but where a person has failed to comply.

So for STAR purposes, arrangements or schemes that should have been notified under DOTAS, DASVOIT or VADR but which were not notified are taken into account in determining whether or not Condition C, Conditions D or E, or Condition F are satisfied, but only when it’s been finally determined that there was a duty to notify and a failure to comply.

This must be before or at the same time that the relevant counteraction has become final.

If there’s a dispute whether arrangements are notifiable for DOTAS purposes they do not fall within the remit of Condition C until either:

• a tribunal has determined that they are DOTAS arrangements
• the person responsible for notifying the arrangements has admitted this in writing and that time is before (or at the same time that) the relevant counteraction in the case in question has become final

Condition A (GAAR)

Under paragraph 12 schedule 18 Finance Act 2016, Condition A will be met and a relevant defeat incurred when all of the following apply:

• a notice of final decision under the GAAR rules (paragraph 12 schedule 43, paragraphs 8 or 9 schedule 43A or paragraph 8 schedule 43B Finance Act 2013) has been issued by a designated HMRC officer to a person, stating that a tax advantage is to be counteracted under the GAAR
• the tax advantage has been counteracted under the GAAR rules (section 209 and sections 209A to 209F Finance Act 2013)
• the counteraction is final

The GAAR guidance explains how a counteraction under the GAAR is made.

Condition B (follower notices)

Under paragraph 13 schedule 18 Finance Act 2016, HMRC will have sent a follower notice to a person because the scheme they have used is the same as or similar to one that HMRC has successfully challenged in court.

Condition B is met and a relevant defeat incurred when a follower notice has been given to a person (and not withdrawn) by reference to the arrangements and the person has taken corrective action to settle their dispute where the follower notice was given either:

• in connection with an ongoing tax enquiry into a return or claim made by the person in relation to a relevant tax, the person has amended the return or claim to counteract the whole of the denied advantage
• by virtue of a tax appeal made by the person in relation to a relevant tax and that appeal has not yet been determined by the tribunal or court to which it’s addressed, abandoned or otherwise disposed, the person has taken all necessary action to enter into a written agreement with HMRC for the purpose of relinquishing the whole of the denied advantage

Condition B is also met where the denied tax advantage has been counteracted otherwise than as mentioned above and the counteraction is final.

This would include, for example, where the person has not taken corrective action and HMRC has concluded the enquiry by a closure notice, which has become final in the absence of, or on settlement or determination of, an appeal.

For the purposes of Condition B it does not matter whether the denied tax advantage is dealt with wholly by the person taking corrective action or wholly by it being counteracted otherwise, or partly by one means and partly by another.

For example, partial corrective action could include a case where the denied advantage for a particular period under enquiry is £100,000, but the taxpayer only amends their return for £50,000. HMRC would then issue a closure notice to tax the full £100,000.

Where partial corrective action is taken, the remainder of the denied advantage must be finally counteracted for Condition B to be met and a relevant defeat incurred.

In practice, the date of the relevant defeat will be when the counteraction by means other than corrective action, for example by HMRC making adjustments, has become final.

Where follower notices have been issued in respect of a person’s use of arrangements over several periods, the date of the relevant defeat of the arrangements will be the earliest date at which the denied advantage for one of those periods has been fully dealt with.

This is because under paragraph 11(2) schedule 18 Finance Act 2016, the relevant defeat in relation to arrangements takes place at the time the condition (Condition A,B,C,D, E or F) is first met.

The ‘denied advantage’ means the amount of the tax advantage that is asserted to result from the arrangements denied by the application of principles or reasoning in the judicial ruling on the basis of which the follower notice was issued.

Condition B is also met if a partnership follower notice is issued by HMRC in respect of a partnership return for a period when the taxpayer was a member of the partnership and either corrective action is taken in relation to the relevant tax advantage or that tax advantage is otherwise counteracted and such counteraction becomes final.

The legislation relating to follower notices and partnership follower notices was introduced in part 4 and schedule 31 Finance Act 2014, and in section 4 and schedule 2 National Insurance Contributions Act 2015.

There’s more information in the ‘Compliance checks: tax avoidance schemes - partnership follower notices - CC/FS25b’ guidance.

Taxpayer emendations

Condition C relates to DOTAS arrangements, and Conditions D, E and F relate to disclosable VAT and other indirect tax arrangements. Each of these conditions uses the term ‘taxpayer emendations’.

A person whose relevant tax affairs are not under enquiry or about to be enquired into (for VAT we would say that their tax affairs are being examined rather than under enquiry) can make sure that they do not enter STAR by virtue of Condition C, D, E or F.

They can do this by making a full disclosure to HMRC and having their relevant tax avoidance arrangements settled by adjustments known as taxpayer emendations.

Taxpayer emendations in relation to Conditions C and D

In relation to Conditions C and D, taxpayer emendations include adjustments made by a taxpayer when the taxpayer knew of no enquiry and had no reason to believe that HMRC were about to enquire into their affairs relating to the tax in question.

They also include an adjustment made by HMRC to the taxpayer’s tax position (by way of an assessment or otherwise) as a result of a disclosure by the taxpayer where both of the following apply:

• the disclosure was a full and explicit disclosure of an inaccuracy in a return or other document or a failure to comply with an obligation
• the disclosure was made at a time when the taxpayer had no reason to believe that HMRC had begun or were about to enquire into their tax affairs relating to the tax in question

Taxpayer emendations in relation to Condition E

In relation to Condition E ‘taxpayer emendations’ cover:

• adjustments made by the supplier at a time when neither the purchaser nor the supplier had reason to believe that HMRC had begun or were about to begin enquiries into the VAT affairs of either the purchaser or the supplier
• an adjustment made by HMRC with respect to the supplier’s VAT affairs (by way of assessment or otherwise) as a result of disclosure made by the supplier where both the following apply:
  • there was a full and explicit disclosure of an inaccuracy in a return or other document or a failure to comply with an obligation
  • the disclosure was made at a time when the neither the supplier nor the purchaser had reason to believe that HMRC had begun or were about to enquire into the VAT affairs of the supplier or the purchaser

Taxpayer emendations in relation to Condition F

In relation to Condition F, taxpayer emendations include adjustments made by a taxpayer when the taxpayer knew of no enquiry and had no reason to believe that HMRC were about to enquire into their affairs relating to the tax in question.

They also include an adjustment made by HMRC to the taxpayer’s tax position (by way of an assessment or otherwise) as a result of a disclosure by the taxpayer where both of the following apply:

• the disclosure was a full and explicit disclosure of an inaccuracy in a return or other document or a failure to comply with an obligation
• the disclosure was made at a time when the taxpayer had no reason to believe that HMRC had begun or were about to enquire into their tax affairs relating to the tax in question

Conditions C, D and F – requirement to ‘rely on’ arrangements

For Conditions C, D or F to apply, the taxpayer must ‘rely on’ the DOTAS arrangements or the disclosable VAT or other indirect tax arrangements as defined in paragraphs 8A, 9 and 9A schedule 18 Finance Act 2016.

This means that they must act, or fail to act, on the assumption that the tax advantage arises. A person ‘relies on’ the arrangements if the person either:

• makes a return, claim, election, application, or (in the case of Condition C only) a partnership return is made, on the basis that the tax advantage which the arrangements might be expected to enable them to obtain arises
• fails to discharge an obligation which the arrangements might be expected to have the effect of removing, and there is reason to believe that the person’s failure to discharge that obligation is connected with the arrangements

For example:

• a taxpayer who submits a claim for a loss arising from DOTAS arrangements has relied on the arrangements
• a person using arrangements, which purport to make their supplies outside the scope of or exempt from VAT, to avoid registering for VAT, will have relied on the arrangements.

This is because they have failed to discharge their obligation to register for VAT which would have arisen if the arrangements had not been entered into.

• a person who buys goods in a shop where the retailer is using arrangements which purport to reduce the amount of VAT that would normally be charged will not have relied on the arrangements

Condition C (DOTAS arrangements)

Under paragraph 14 schedule 18 Finance Act 2016, Condition C is met and a relevant defeat incurred when:

• a person has relied on the DOTAS arrangements
• the arrangements have been counteracted
• the counteraction is final

Arrangements are counteracted for the purposes of Condition C where:

• adjustments, other than adjustments described as taxpayer emendations are made in respect of the person’s tax position on the basis that the whole or part of the tax advantage above does not arise
• adjustments, other than adjustments described as taxpayer emendations, are made in respect of person’s tax position on the basis that the disputed obligation does (or did) arise
• HMRC makes an assessment to tax or takes any other action, on the basis that the whole or part of the tax advantage does not arise, or the disputed obligation does (or did) arise
• HMRC enters into a contract settlement with the person, on the basis that the whole or part of the tax advantage does not arise, or the disputed obligation does (or did) arise

Obligation in this context refers to a tax obligation such as the requirement to deduct and account for PAYE tax.

Condition D - disclosable VAT arrangements

Under paragraph 15 schedule 18 Finance Act 2016, Condition D is met and a relevant defeat incurred when all of the following apply:

• the person is a taxable person (registered or required to be registered for VAT)
• the arrangements are disclosable VAT arrangements to which the person is a party
• the person has relied on the arrangements
• there has been a final counteraction of those arrangements

Arrangements are counteracted for the purposes of Condition D if one of the following applies:

• adjustments (other than adjustments described as taxpayer emendations) are made in respect of the person’s tax position on the basis that the whole or part of the tax advantage above does not arise
• adjustments, other than adjustments described as taxpayer emendations are made in respect of the person’s tax position on the basis that the disputed obligation does (or did) arise
• HMRC makes an assessment or takes any other action, on the basis that the whole or part of the tax advantage does not arise, or the disputed obligation does (or did) arise

Condition E - disclosable VAT arrangements relating to the supplier’s tax position

Condition E covers disclosable VAT arrangements where a person (the purchaser) expects to benefit from arrangements relating to another person’s (the supplier) tax position.

Under paragraph 16 schedule 18 Finance Act 2016, Condition E applies where:

• the arrangements are disclosable VAT arrangements to which the purchaser is a party and the following apply:
  • the arrangements relate to the VAT position of another person (the ‘supplier’) who has made supplies of goods or services to the purchaser
  • the arrangements might be expected to enable the purchaser to obtain a tax advantage in connection with those supplies of goods or services
  • there’s been a final counteraction of the arrangements

Arrangements are counteracted for the purposes of Condition E if either:

• HMRC assess the supplier to VAT or take any other action on a basis which prevents the purchaser from obtaining (or obtaining the whole of) the tax advantage in question
• any adjustments (other than adjustments described as taxpayer emendations) are made in relation to the supplier’s VAT position on a basis which prevents the purchaser from obtaining (or obtaining the whole of) the tax advantage in question

As for Condition D, for Condition E to apply to undisclosed arrangements, it must have been determined that there has been a failure to comply before or at the same time that the counteraction of the arrangements in question becomes final.

The taxpayer emendations for Condition E are emendations relating to the VAT position of the supplier, because the person making the supplies is responsible for ensuring the correct VAT liability is applied.

Condition E can apply where the person expecting to benefit from the arrangements is not a taxable person (so not registered or required to be registered for VAT).

For example, it will apply where a business which makes only exempt supplies and so is not registered for VAT arranges for a supplier to use disclosable VAT arrangements so that the business does not suffer the non-recoverable VAT.

Condition F (disclosable indirect tax arrangements)

Under schedule 18 Finance Act 2016, Condition F is met and a relevant defeat incurred when all of the following apply:

• the arrangements are disclosable indirect tax arrangements
• the taxpayer has relied on those arrangements
• the arrangements have been counteracted and that counteraction is final - arrangements are not to be treated as counteracted if there has been a taxpayer emendation

Annual information notices

Under paragraphs 17 and 63 to 65 schedule 18 Finance Act 2016, a person enters STAR on the issue of a warning notice.

This puts them into a warning period, which requires them to submit annual information notices about arrangements they use or to which they’re a party.

Requirement to send information notices

Information notices must normally be submitted annually for the duration of the warning period and give details of DOTAS arrangements and disclosable VAT and other indirect tax arrangements that the person has used in that year.

It must also give details of any disclosable VAT arrangements to which that person is a party which relate to the VAT position of a supplier from which that person might be expected to obtain an advantage.

The person is required to state whether, since the end of the reporting period, they have sent a return that they should have sent to HMRC during the reporting period, where the return was made on the basis that they obtain a tax advantage from the use of either DOTAS, VADR or DASVOIT arrangements.

That person is also required to state in the information notice whether or not they have failed altogether to deliver any return which was required to be delivered in that year.

Information notice reporting periods

The first reporting period in any warning period begins with the first day of the warning period and ends with a day specified by HMRC, which for arrangements involving Income Tax or Corporation Tax will usually be based on the usual filing date for the relevant tax return. This will be 31 January for Income Tax returns, or 31 December for a Corporation Tax return.

For arrangements involving VAT or taxes other than Income Tax or Corporation Tax the first reporting period end date is likely to be either 12 months from the date of the notice, or a date tied to a specific point such as the filing date for the prescribed accounting period ending on the tax year end.

HMRC may choose a different end date if they think it appropriate.

The remainder of the warning period is divided into further reporting periods, each of which begins immediately after the end of the preceding reporting period and is 12 months long, except for the last one, which, if shorter, ends at the end of the warning period.

A person will not have more than one set of reporting periods in any warning period. If a person has relevant defeats in different tax regimes, for example an individual incurs a defeat on disclosable VAT arrangements followed by a defeat for Income Tax related DOTAS arrangements, HMRC will decide on a single set of annual reporting periods appropriate to the circumstances.

The taxpayer must give HMRC their information notice no later than 30 days after the end of the reporting period to which it relates.

The 30 days deadline also applies to the final reporting period, which in most cases will be less than 12 months long.

Example

An individual incurs a relevant defeat on 12 August 2017 and is given a warning notice on 15 September 2017 specifying 31 January 2018 as the end of the first reporting period.

Assuming no extension of the warning period, their reporting period ends and deadlines for information notices are as follows:

Reporting period end	Information Notice due
31 January 2018	2 March 2018
31 January 2019	2 March 2019
31 January 2020	1 March 2020
31 January 2021	2 March 2021
31 January 2022	2 March 2022
15 September 2022	15 October 2022

Content of annual information notice

An information notice must state whether or not the taxpayer:

• has in the reporting period delivered a return, or made a claim or election, on the basis that a relevant tax advantage arises
• has since the end of the reporting period delivered a return that they were required to deliver before the end of that period, on the basis that a relevant tax advantage arises
• has failed to take action during the reporting period which was required under tax legislation (for example, failing to register for VAT) but for particular DOTAS arrangements or disclosable VAT or other indirect tax arrangements to which they’re a party
• has failed to deliver a return which they were required to deliver by a date falling within the reporting period
• has become a party to arrangements during the reporting period to which both of the following apply:
  • they relate to the position with respect to VAT of another person, the ‘supplier’, who has made supplies of goods and services to the taxpayer
  • they might be expected to enable the taxpayer to obtain a relevant tax advantage (‘the expected tax advantage’) in connection with those supplies

Relevant tax advantage

The relevant tax advantage above means a tax advantage which particular DOTAS arrangements or disclosable VAT or other indirect tax arrangements enable, or might be expected to enable, the taxpayer to obtain.

Example

An individual has the reporting periods shown in the reporting period example.

They send their Income Tax return for the year ended 5 April 2019 (which should have sent in by 31 January 2020, assuming they files their returns online) on 15 February 2020.

The information notice for the period ending 31 January 2020 is due on or before 1 March 2020.

If the individual had sent their Income Tax return in on time it would have been received by HMRC in the reporting period (by 31 January 2020).

If the individual sends in their information notice after 15 February when they sent in their late Income Tax return, the notice should state whether the return sent in late was made on the basis that a relevant tax advantage arises.

If they fail to send in their Income Tax return by the due date of 31 January 2020 and has still not sent it in by the time they send in their annual information notice, they must report on their information notice that they’ve failed to deliver their Income Tax return.

If they did not send their Income Tax return in on time, HMRC may then give them a supplementary information notice.

If the taxpayer has made a return, claim or election in the reporting period on the basis that the DOTAS arrangements or disclosable VAT or other indirect tax arrangements are effective and that consequently a relevant tax advantage does or is expected to arise, or has failed to take action that would otherwise be required to be taken, then the information notice must:

• explain the taxpayer’s understanding of how the DOTAS arrangements or disclosable VAT or other indirect tax arrangements enable them to obtain the tax advantage or result in their not being required to take the action in question
• state the amount of the relevant tax advantage or the amount of any tax advantage which arises from the taxpayer not being required to take the action in question

Where the taxpayer has become a party to disclosable VAT arrangements which relate to a supplier’s VAT position but might be expected to enable the taxpayer to obtain a relevant tax advantage in relation to those supplies the information notice must:

• state whether or not in the taxpayer’s view the expected tax advantage arises to them
• if that is the taxpayer’s view, explain how the arrangements enable them to obtain the tax advantage and state the amount of the tax advantage

Supplementary information notice

A taxpayer may also be required to provide information when they have failed to submit a tax return. If a taxpayer fails to deliver a return that is due within a reporting period, HMRC may give them a written notice requiring them to provide HMRC a written supplementary information notice.

This must set out any matters which the taxpayer would have been required to set out in an information notice, if they had delivered the return in that reporting period.

The notice from HMRC requiring the supplementary information notice will state the period within which the taxpayer must comply with the notice.

Failure to comply and extension of a warning period

HMRC may by written notice extend the warning period if the taxpayer fails to comply with the information notice requirements regarding the submission of information notices or supplementary information notices.

The extended warning period will end on the last day of the period of 5 years beginning with the earliest of the:

• day by which the information notice or supplementary information notice should have been given
• day on which the taxpayer gave the defective information notice or supplementary information notice to HMRC
• time when the warning period would have expired were it not for the extension

Information notices for corporate groups

Where a taxpayer is a member of a group of companies HMRC may permit information notices given by members of the same group to be combined.