In HMRC v Hyrax Resourcing and others [2019] UKFTT 175 (5 March 2019), the FTT granted HMRC an order that arrangements were notifiable (FA 2004 s 314A).
The case concerned arrangements which, according to HMRC, were ‘the current iteration’ of a contractor loan scheme previously known as K2/Lighthouse, which had been first implemented in 2014/15.
HMRC had lodged three applications under FA 2004 s 314A for an order that the arrangements were notifiable under DOTAS. It contended that shareholders and/or directors of the three respondents had, since 2004, set up companies to carry out tax planning schemes to enable their ‘clients’, owner-directors and consultants, to substitute for the remuneration they would otherwise have received, a small salary and a large interest-free loan, which they would not expect to repay in their lifetime.
HMRC argued that, as legislation was coming into force which was perceived as taking away the tax advantage of the previous iteration, a new iteration was introduced which was intended to avoid the new legislation. The FTT accepted that this was what had happened and referred to a webinar for K2, which did mention that the ‘life expectancy’ of each scheme was about four years due to the risk of it being blocked by new legislation. The tribunal also noted that the various iterations were put forward to potential users as a single but evolving scheme. Finally, the FTT added that the promoters of the scheme facilitated the transfer of end users from one scheme to the next.
However, it would not agree with HMRC’s point that, because the previous iterations of the scheme had been notifiable (and had indeed been notified), the new iteration was necessarily notifiable too. The FTT therefore proceeded to review the workings of the scheme in detail. It found, inter alia, that the loans were unlikely to be repaid.
The FTT accepted that Hyrax was ‘a “scheme” on any meaning of the word’, so that it was an ‘arrangement’ for the purpose of s 318; and it rejected Hyrax’s contention that the legislation required HMRC to establish tax avoidance. In the view of the FTT, Parliament had deliberately not used the expression ‘tax avoidance’ in the operative part of the provisions, and simply used the term colloquially in the title. The issue was therefore whether the arrangements conferred ‘an advantage in relation to any tax’ (s 306).
The FTT found that the scheme gave rise to a tax advantage because it was intended to avoid or reduce the charge to tax on salary. In addition, the arrangements fell within three of the hallmarks prescribed by the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations, No 2006/1543. Firstly, Hyrax took a cut (amounting to half of the tax saving) on the contract price when sub-contracting services to the end user. This meant that it was able to obtain a premium fee. Secondly, it sold ‘standardised tax products’; the scheme documentation was standardised and not tailored to reflect the particular circumstances of end users. Thirdly, under the scheme, employment income was provided by a third party, a trust set up by Hyrax.
Finally, the FTT found that Hyrax was a promoter because it made the notifiable proposal available for implementation by the scheme users and because it agreed to be the counter-party to all the necessary contracts. However, the other two respondents were not promoters as they were not able to implement the scheme. HMRC’s application was therefore granted in relation to Hyrax only.
Why it matters: This lengthy decision considers all the criteria for arrangements to be notifiable; from the features of the arrangements to the hallmarks and the identification of promoters. In particular, the FTT clarified the meaning of ‘tax advantage’ for this purpose: ‘The natural and ordinary meaning of “tax advantage” in s 318 is that it refers to a contrast in tax liability between one position and another that would otherwise have existed.’ According to the FTT, the wide breadth of this definition is balanced out by the three conditions in s 306.
In HMRC v Hyrax Resourcing and others [2019] UKFTT 175 (5 March 2019), the FTT granted HMRC an order that arrangements were notifiable (FA 2004 s 314A).
The case concerned arrangements which, according to HMRC, were ‘the current iteration’ of a contractor loan scheme previously known as K2/Lighthouse, which had been first implemented in 2014/15.
HMRC had lodged three applications under FA 2004 s 314A for an order that the arrangements were notifiable under DOTAS. It contended that shareholders and/or directors of the three respondents had, since 2004, set up companies to carry out tax planning schemes to enable their ‘clients’, owner-directors and consultants, to substitute for the remuneration they would otherwise have received, a small salary and a large interest-free loan, which they would not expect to repay in their lifetime.
HMRC argued that, as legislation was coming into force which was perceived as taking away the tax advantage of the previous iteration, a new iteration was introduced which was intended to avoid the new legislation. The FTT accepted that this was what had happened and referred to a webinar for K2, which did mention that the ‘life expectancy’ of each scheme was about four years due to the risk of it being blocked by new legislation. The tribunal also noted that the various iterations were put forward to potential users as a single but evolving scheme. Finally, the FTT added that the promoters of the scheme facilitated the transfer of end users from one scheme to the next.
However, it would not agree with HMRC’s point that, because the previous iterations of the scheme had been notifiable (and had indeed been notified), the new iteration was necessarily notifiable too. The FTT therefore proceeded to review the workings of the scheme in detail. It found, inter alia, that the loans were unlikely to be repaid.
The FTT accepted that Hyrax was ‘a “scheme” on any meaning of the word’, so that it was an ‘arrangement’ for the purpose of s 318; and it rejected Hyrax’s contention that the legislation required HMRC to establish tax avoidance. In the view of the FTT, Parliament had deliberately not used the expression ‘tax avoidance’ in the operative part of the provisions, and simply used the term colloquially in the title. The issue was therefore whether the arrangements conferred ‘an advantage in relation to any tax’ (s 306).
The FTT found that the scheme gave rise to a tax advantage because it was intended to avoid or reduce the charge to tax on salary. In addition, the arrangements fell within three of the hallmarks prescribed by the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations, No 2006/1543. Firstly, Hyrax took a cut (amounting to half of the tax saving) on the contract price when sub-contracting services to the end user. This meant that it was able to obtain a premium fee. Secondly, it sold ‘standardised tax products’; the scheme documentation was standardised and not tailored to reflect the particular circumstances of end users. Thirdly, under the scheme, employment income was provided by a third party, a trust set up by Hyrax.
Finally, the FTT found that Hyrax was a promoter because it made the notifiable proposal available for implementation by the scheme users and because it agreed to be the counter-party to all the necessary contracts. However, the other two respondents were not promoters as they were not able to implement the scheme. HMRC’s application was therefore granted in relation to Hyrax only.
Why it matters: This lengthy decision considers all the criteria for arrangements to be notifiable; from the features of the arrangements to the hallmarks and the identification of promoters. In particular, the FTT clarified the meaning of ‘tax advantage’ for this purpose: ‘The natural and ordinary meaning of “tax advantage” in s 318 is that it refers to a contrast in tax liability between one position and another that would otherwise have existed.’ According to the FTT, the wide breadth of this definition is balanced out by the three conditions in s 306.
