I see no one has answered you so I'll try to help. Sounds like your dog has a bad bacterial skin infection. You should be on anti-biotics and medicated baths - probably for an extended period of time to clear this up. Your vet will have to do this for you.
The happy tail does not have anything to do with the skin infection. some dogs just bank their tail on walls and furniture and once they get a break in the skin and a bloody wound it is next to impossible to cure. I would first try everything to save the tail, but often you do have to amputate. NOT a easy surgery in a large mature dog. But that may be the eventual cure!
You mean HYPO allergenic shampoo and that's okay (medicated shampoos would be better), but I'd recommend just a high quality food for now because problem is most likely NOT food allergy. No need for this dog to be on vegetarian diet unless that is a personal choice for you. Dogs are not vegetarians!
Finally, nothing is going to happen until you get the skin infection under control. Make every attempt to fix the tail, but know you may have to remove it in the long term.
There was a posting from another pet under the topic: Beyond Pet Allergies. I think that it is pertinent to your dog's situation. It discusses pet allergies. I have copied and pasted it below as follows:
Skin issues are so complex that it usually takes a combination of many medications and protocols simultaneously to achieve results. The primary allergen and the results or damage to the skin of that allergen as well as secondary invaders must all be treated together or effective treatment will fail.
Immunotherapy can sometimes take a year to a year and a half before some relief is noted.
We have been seeing allergies to the infections of the skin and to normal skin flora, such as skin Staph and skin yeasts in patients where the traditional atopy regimens have failed. Some laboratories can develop immunotherapies for particular patients using their own skin inhabitants but it can still take a long time to produce results.
Then there are the other complicating factors. I have already listed one complicating factor, which is an allergy to skin inhabitants. Other complicating factors including thyroid disease, other endocrine disorders, T-Cell deficiencies which can result in the inability of the body to eliminate Demodex mites, and ectoparasite infestation and allergies to those ectoparasites.
It sounds as if your dog has been on many of the recommended treatments but perhaps these have failed because he was not on them simultaneously.
You should continue with immunotherapy and I recommend doing the following:
1. Use Revolution topical once every 2 weeks for 2 months to eliminate Scabies mites and Fleas.
2. After a culture and skin sensitivity use an appropriate antibiotic for 6 weeks to 2 months.
3. Give fish oils, or other form of Omega 3 Fatty acids at double doses twice daily.
4. Use Prednisone in a gradually tapering dose for one month.
5. Use Atopica once per day while your dog is on prednisone, than begin decreasing to every other day once prednisone is finished, long term.
6. Use Ketoconazole with the Atopica long term.
7. Bathe your dog with Malaseb shampoo 2 times per week for several months.
8. Have your dog tested for Thyroid disease and other endocrine disorders. If it turns out that your dog has endocrine disorders, treat for them.
9. Have multiple skin scrapings performed on your dog's skin. If it turns out that your dog has Demodex Mites than treat for them.
10. Consider a doggie tranquilizer if the itching cannot be eliminated at first. The tranquilizer can usually be eliminated later in the course of therapy once the other medications begin to become effective.
11. Treat the ears if they are also affected.
12. Consider a novel protein diet with absolutely no cheating for 2 months, or until the Atopica kicks in.
Atopica medication also treats food allergies!
When all else fails try seeking help from a holistic vet. There are also many Chinese Veterinary Herbal Remedies that are very effective for skin disease.
About Happy Tail Syndrome. Taking just a bit off the tail surgically is probably a good option. The tail would have to be docked above the split, of course. If the split is not too far up your dog would not lose much of the tail.