DOTAS explained: when tax avoidance schemes must be disclosed to HMRC

The internet is swarming with "mentors," "gurus," and self-proclaimed property investment experts promising the moon—quick riches, high returns, and, conveniently, very low taxes. Unfortunately, we are increasingly seeing the same thing happening in the accounting services market, especially among Polish firms operating in the UK, including here in Edinburgh, where we run TaxOne.

While we are no longer surprised by the creativity of online mentors who invent increasingly complex (and ultimately illegal) tax schemes, we are alarmed by the level of ignorance often displayed by some accounting firms. We are not even talking about highly complex tax structures here. We are talking about errors at the level of basic knowledge that any reliable tax advisor should know like the back of their hand.

We sometimes see clients who have spent years following the advice of accountants who clearly struggle to distinguish between tax optimization and blatant tax evasion. Artificially splitting businesses to avoid VAT, or owners acting as both directors and contractors for their own companies—these types of absurd ideas not only expose clients to massive financial penalties but can also result in years-long investigations by HMRC.

The worst part is that by the time these clients realize they have been misled, it is often far too late to avoid serious consequences.

In this article, we will show you how to recognize when someone is leading you into a tax dead-end, what to watch out for, and why "tax optimization" performed by pseudo-experts is a direct path to massive problems with the British tax authorities.

What is DOTAS and what does it mean in practice?

In our work at TaxOne, we increasingly encounter clients who have come to us after years of following the "advice" of people who should never have been giving tax guidance in the first place. One of them was Łukasz—he had been investing in rental properties for several years and using solutions suggested to him by a self-proclaimed "property expert." The problem arose when Łukasz received a letter from HMRC asking for an explanation regarding his participation in a scheme covered by the DOTAS system. Previously, no one had told him that what he was using could even be considered a tax scheme – let alone that it had to be disclosed.

DOTAS, or Disclosure of Tax Avoidance Schemes, is a mechanism created by HMRC designed to identify and monitor questionable "tax plans." These are arrangements that may provide taxpayers with benefits such as lower tax liabilities—for example, by deferring tax payments, reducing the amount owed, or avoiding taxation entirely.

If such a plan meets specific criteria—including that its main purpose is to obtain a tax advantage, and it possesses so-called hallmarks (i.e., specific features considered suspicious by HMRC) – must be reported. The person promoting such a scheme (the so-called promoter) is required to register it with HMRC and, in return, receives a Scheme Reference Number (Scheme Reference Number), which they must then pass on to the client.

In practice, however, an SRN is not a "certificate" of any kind – quite the opposite. The appearance of an SRN on a tax return signals to HMRC that the taxpayer may be using aggressive tax planning and that their return warrants closer scrutiny.

It is often at this point – as in Łukasz’s case – that the tax authority begins to ask questions the client never expected to hear.

Many taxpayers do not realize that the responsibility for participating in such a scheme falls on them – not on the promoter who sold it, not on the course creator, and not on the accounting firm owner, but on the person who implemented the scheme.

HMRC is not interested in whether someone acted unknowingly – what matters is that someone obtained a tax benefit in a way that required disclosure.

Who is responsible for these Tax Schemes? Not the promoter, but you!

One of the most common mistakes we see among clients who come to us for advice is the belief that if someone else came up with a tax solution, that person is responsible for it. We often hear:

"but my accountant told me to do it this way," "I was at a course, everyone does it," "it was part of the training package, surely they know what they're doing."

Unfortunately, that is not how it works.

In practice, it is not the person who devised or promoted the solution who has to face the consequences, but you – the taxpayer who applied it. HMRC does not settle accounts with the promoter of a "tax structure," but with the person who benefited from it and entered specific figures into their tax return. It is your signature on the declaration. It is your name that appears in the records.

We have unfortunately seen many examples of such situations. Clients who have operated for years according to "instructions" sent by email from an accountant or a training provider often only find out about the problem when they receive a letter from HMRC or are subjected to a tax audit. In Edinburgh, we know of at least a few firms that have been handling accounts for years in a way that can only be described as irresponsible.

Splitting a business into two – one for my wife and one for me – to avoid VAT; owners who are simultaneously directors and subcontractors for their own companies – these are not complex structures, but actions that smell of abuse at first glance.

And while it may sound harsh, it is worth stating clearly: Your accountant's ignorance does not protect you from penalties. No one will investigate whether your decision was based on trust in the professionalism of such a firm or a lack of awareness. If you used a solution that led to underpayment of tax, it is you whom HMRC will hold accountable.

That is why, before you trust anyone who promises you "ways to lower your taxes," it is worth asking one question: does this person actually know what they are doing, or do they just talk a good game? Are they qualified? Are they a member of a relevant professional body?

"Legal optimization" or tax scheme? Where is the line?

One of the biggest misconceptions we regularly encounter in conversations with new clients is the confusion between: tax planning, optimization, and, on the other hand, actions that actually fall under artificial arrangements designed to circumvent the law. In theory, everything looks great:

someone shows you a model where your income is transferred to a company that pays lower tax, you become a "contractor" for your own firm, VAT miraculously disappears, and all the money stays in the family. Sound familiar?

The problem is that this is no longer optimization—it is a classic example of an action that can be deemed by HMRC as an attempt to circumvent tax regulations. Furthermore, in many cases, you don't even need complex structures— the mere fact that a person starts acting as both a company director and its self-employed "service provider" is enough. Such practices may seem clever, but from a regulatory perspective, they are childishly easy to challenge.

In our work, we often meet clients who were convinced that everything was fine because "that's what their accountant advised." And then it turns out that what was supposed to be a legal form of optimization is simply a scheme that was doomed to be challenged by HMRC from the start.

The problem is that many accountants – especially in firms that were set up simply becausethere was demand– lack the sufficient knowledge or training to distinguish an acceptable solution from a structure that has long been deemed illegal by HMRC. As a result, it is the clients who are left with back taxes, interest, penalties, and often the question: how is it possible that no one told them the truth sooner?

This is the line that, if crossed, can cost far more than you might expect—not just financially, but also in terms of stress and reputation. Legal optimization is real and achievable, but it has nothing to do with solutions based on unknowingly balancing on the edge of the law.

Example 1: Less Tax 4 Landlords – a hybrid structure that was supposed to work like "magic"

One of the more well-known cases from recent months that has landed on HMRC’s radar is a solution promoted by the company Less Tax 4 Landlords. Many were convinced they were using a legal, well-thought-out tax model. In reality—as HMRC’s position has shown—this model was a classic example of aggressive tax planning, which is now officially covered by the DOTAS regime.

What was the idea behind it?

A property portfolio owner would set up an LLP (limited liability partnership) with the property owner as one partner and a limited company they established as the other. They would then transfer the so-called beneficial interest in the properties—the right to rental income—into this structure. The majority of the income was allocated to the company, which pays a lower income tax rate (Corporation Tax at 19%–26.5% instead of 40%–45% for individuals). Additionally, according to the promoters, the company would have the full right to deduct mortgage interest—something that has not been possible for individual landlords since 2020.

As if that weren't enough, the whole thing was presented as offering inheritance tax benefits by allowing access to Business Property Relief (an inheritance tax relief available for businesses engaged in trading activities). The problem is that property rental is not considered a trading activity, and an LLP-based structure did nothing to change that fact.

In its official publication Spotlight 63 , HMRC stated unequivocally that these types of solutions do not work. The structure was assigned a DOTAS number, meaning that anyone using it should have disclosed it and can expect action from the tax authorities.

As a result, many landlords who used this solution may now face the prospect of paying not only backdated income tax but also Capital Gains Tax (CGT), Stamp Duty Land Tax (SDLT) on property transfers, and potential inheritance tax (IHT) liabilities. And on top of that, there are penalties and interest.

We have already seen cases of clients who were genuinely surprised—after all, everything looked professional, was based on a contract, consulted with an accountant, and even "coincidentally" appeared on webinars hosted by investment education firms. Unfortunately, a professional-looking structure does not mean that everything was done in accordance with the law.

Example 2: Property 118 – overly creative planning and fictitious director loans

Another high-profile case that has caught the attention of HMRC is the model promoted by the company Property 118. Here, the structure was more complex and, consequently, even more tempting for taxpayers—everything appeared well-thought-out, based on regulations, and compliant with the law. This is precisely why many clients decided to use it before seeking help—usually only after letters from HMRC arrived in their mailboxes.

The main premise of this solution was the application of relief under Section 162 of the Income Tax Act (Section 162 Incorporation Relief), which, under certain circumstances, allows for the transfer of a business to a limited company without the immediate payment of Capital Gains Tax. It sounds fair, as it is, after all, a legitimate existing provision.

The problem is that a so-called Substantial Incorporation Structure (SIS) was built around this relief—a model in which an agreement to transfer properties to a company was made, but the transaction was not fully finalized. Additionally, a mechanism involving a short-termbridging loanwas introduced, intended to "generate" a virtual balance in the company director's account—the so-called director’s loan account—from which money could then be withdrawn tax-free.

In short: the model assumed that one could legally extract cash from a company without paying income tax, dividends, or National Insurance Contributions.

HMRC examined the matter very closely. Two separate DOTAS numbers were issued—one for the SIS structure and another for the mechanism involving the director's loan. This is a clear signal that the authority considers these actions to be a model of aggressive tax avoidance that requires special attention.

In the autumn of 2023, HMRC began sending out so-called nudge letters to individuals who had used this model in the 2017/18 tax year and claimed S162 relief. In the letter, taxpayers were asked to verify their filings and make any necessary corrections. For now, the authority has covered the oldest possible tax year, but there is no indication that it will end there—it is highly likely that subsequent years will be subject to the same procedure.

Individuals who used the model promoted by Property 118 may now be exposed to significant liabilities for Capital Gains Tax (CGT), income tax, Stamp Duty Land Tax (SDLT), and potentially penalties for the improper use of S162 relief.

What is concerning about all of this is how easily these solutions were promoted—often in a very persuasive manner, with the right narrative and an aura of "professionalism." In practice, however, this is yet another example of how an overly creative approach to taxes can end in a massive problem.

Serial Tax Avoidance Regime – when HMRC no longer gives a second chance

Many taxpayers assume that if they have used a solution that is later challenged by HMRC, they will at most pay the back taxes and the matter will be closed. The problem is that the UK tax authority—observing an increasing number of tax avoidance attempts—has introduced a tool that allows it to react much more harshly toward those who do not learn from their mistakes. This is the so-called Serial Tax Avoidance Regime.

If HMRC determines that an individual has benefited from a tax arrangement that has been officially challenged, it may issue a so-called warning notice (warning). This is a formal letter informing the taxpayer that any subsequent implementation of similar arrangements within the next five years, if unsuccessful in a dispute with the tax authority, will result in an additional financial penalty.

And it's not just any penalty.

For the first instance – 20% of the value of the 'saved' tax.

For the next one – already 40%.

For the third and every subsequent one – up to 60%.

But that's not all.

If, within these five years, the taxpayer implements at least three different schemes, which HMRC deems impermissible and which are successfully challenged, the authority may publicly disclose their personal information (I also once wrote an article about HMRC's blacklist).

This could include their name, company name, or even details of the methods used. This is a real, public shaming that for many can be as severe as a financial penalty.

In the most extreme cases, the taxpayer may also lose the right to certain tax reliefs – e.g., those related to investments or asset transfers. This can apply for up to three years, and its financial impact is often far greater than the penalty itself.

From our experience, we know that some taxpayers were completely unaware that successive "ideas" implemented with the help of their advisors could be considered by HMRC as repeated attempts to circumvent the law. Sometimes, just two or three ill-conceived moves are enough for the Serial Tax Avoidance system to be triggered – and then there's no room for excuses.

What could this cost? Penalties that truly sting

For schemes that should have been reported under DOTAS but weren't, HMRC leaves no room for negotiation. The penalty for a promoter or user can be as much as £600 per day for each day the disclosure is delayed – calculated from the date the disclosure should have been made.

If the authority determines that the basic penalty is not a sufficient deterrent, it has the right to impose a fine of up to £1,000,000. What's more, if a taxpayer – despite receiving a formal SRN – fails to include it in their tax return, they face a penalty of £5,000 for the first offence, £7,500 for the second and £10,000 for each subsequent one within three years.

And all this is regardless of how much additional tax, plus interest, will need to be paid. These are no longer just accounting issues – these are real, personal, and painful financial consequences.

How to recognise if it might be Tax Avoidance Scheme? Red flags to watch out for

In our daily work at TaxOne, we increasingly encounter individuals who confidently describe a scheme they are using – and which, they believe, allows them to pay less tax 'fully legally'. The problem is that just a few questions are enough to reveal that the structure is built on very shaky foundations – and that sooner or later it could land on HMRC's radar.

How to recognise that it's not optimisation, but rather a tax arrangement that requires particular caution – and perhaps even reporting under DOTAS?

Below, we've compiled a few warning signs that should raise a red flag for anyone receiving an offer of a 'favourable tax solution':

– Confidentiality and lack of transparency – if someone says that the details of a solution cannot be documented, that 'it's between us' or that HMRC shouldn't find out about it, then this is one of the strongest signals that something is wrong.

– A complicated structure that no one can clearly explain to you – a structure involving several companies, agreements, funds, loans, and every answer to your question is: 'you don't need to worry, everything is legal' – that's not professionalism, that's a smokescreen.

– "Tax-free payouts" – any mechanism that allows you to 'legally' withdraw money from a company without paying income tax, dividends, or National Insurance is immediately suspicious. HMRC has been scrutinizing such schemes for years.

– "Magic" VAT savings – artificial splitting of companies, leases, subcontracting between companies owned by the same person, billing for services that were never actually performed – none of this is creativity, but rather a clumsy attempt to circumvent regulations.

– Lack of documentation or operating "on trust" – 'don't sign anything, we'll handle everything by email' is a recipe for disaster. If someone cannot provide formal documents or evades responsibility, it's wise to back out before it's too late.

These are just a few examples. In practice, if you have even a shadow of doubt – it's worth verifying. HMRC doesn't need proof of ill intent to hold a taxpayer accountable. It's enough for them to determine that a tax benefit was achieved using a scheme that should have been disclosed – and you failed to do so.

How to invest legally and safely, yet still pay less tax

Many people believe there's only a choice between two extremes: either you pay full taxes and 'nothing pays off,' or you have to scheme to get something out of it. This is a completely mistaken approach. In reality, the British tax system offers quite a few opportunities for legal optimization, which you can – and should – take advantage of. There's only one condition: you need to do it smartly and with the support of people who genuinely understand the regulations.

What do we focus on when working with clients who want to invest, earn, and sleep soundly?

Firstly – a sound legal structure. A UK limited company can be a very beneficial solution for individuals investing in real estate or running a business, but only if it's backed by a real strategy, compliance with regulations, and a well-thought-out profit distribution method. Creating a company 'just because someone else does it' is a recipe for disaster.

Secondly – previously Furnished Holiday Lettings (FHL). If a property qualified as a holiday let, you could benefit from a wide array of tax preferences: from full deductibility of financing costs, through lower CGT rates, to more advantageous inheritance tax treatment. Of course, provided specific criteria were met. While the rules have changed, there are still other avenues to explore.

Thirdly – pension planning. Pension contributions can be not only an investment in the future but also a real tool for reducing current tax liabilities – both for the self-employed and business owners.

Fourthly – smart use of reliefs and allowances. Personal allowance, dividend allowance, marriage allowance, rent-a-room relief – these are all elements that can be legally woven into a tax strategy, without resorting to schemes or risking consequences.

When working with clients, we always reiterate: it's not about avoiding taxes – it's about paying the right amount. No more, no less. That's all there is to it – and it's crucial.