Expert welcomes focus on 'the cold hard reality of litigating tax avoidance schemes'
HMRC has hailed three ‘major court successes’ in a month and warned that users of aggressive tax avoidance schemes take a ‘serious risk’ that they will have to pay the tax and interest as well as expensive set up costs.
The three cases involved schemes that were marketed and executed between 2003 and 2005. The judges ruled that the schemes were ineffective, but HMRC pointed out that all three decisions may be subject to appeal.
George Bull, Baker Tilly
HMRC’s Director General of Business Tax, Jim Harra, said: ‘These wins in the courts are a victory for the vast majority of taxpayers who do not try to dodge their taxes. They send a clear message to tax avoiders – HMRC will challenge tax avoidance relentlessly and we will beat you.’
George Bull, Senior Tax Partner at Baker Tilly, noted that HMRC’s press release, issued on Monday, made ‘an important point which experienced, objective professional advisers will readily endorse: if a tax mitigation plan looks too good to be true, it probably is too good to be true’.
Exchequer Secretary David Gauke had said: ‘The government is committed to tackling aggressive tax avoidance schemes and HMRC will pursue their users through the courts where necessary. These three HMRC wins are very welcome, demonstrating that if an avoidance scheme promises results that seem too good to be true, they probably are.’
Bull added: ‘That objective view is a long way removed from the moral and ethical arguments which are so difficult for scheme promoters, politicians and pressure groups to win. It’s beginning to look as though HMRC is stepping back from the subjective debate and concentrating on the cold hard reality of litigating tax avoidance schemes, with considerable success.’
Bull said many more cases were set to be heard by the tribunals and courts over the coming years: ‘HMRC must be very pleased that the courts do not think that the UK tax system is as riddled with loopholes as scheme promoters and politicians alike suggest.’ His firm had observed, on the basis of HMRC’s estimates, that ‘tax avoidance seems to be running at around 0.8% of UK taxes’.
But the BBC News website quoted Mike Warburton, Director at Grant Thornton, as saying that HMRC was not winning every case that came to court. ‘It may be that they are winning at the moment, but that is not always the case and three does not make a trend. Having said that, it is undoubtedly the case that the courts have been finding against complex tax avoidance schemes,’ he said, adding that in the three cases HMRC had won for ‘quite different reasons’.
HMRC’s consultation on a proposed general anti-abuse rule, intended to deter and counter ‘artificial and abusive tax avoidance’, will close on 14 September.
The three decisions reported in July followed what HMRC called the ‘landmark’ decision in Greene King plc v HMRC (and related appeal) TC 2069, summarised in Tax Journal on 28 June, which involved finance provided within a group of companies.
‘The aim was that one group company would get tax relief on payments to another group company, without tax on the second company’s receipt,’ HMRC said this week. ‘The judges said that the appellants had no evident difficulty with getting relief for payment that was not matched by taxation of the receipt. They could not legitimately complain if the scheme failed in its purpose and instead resulted in their paying tax twice.’
The published decision of the First-tier Tribunal noted that David Milne QC, representing HMRC, had suggested to Greene King’s group tax controller that each of the transactions ‘was in truth no more than a tax saving device’. The arrangement was ‘a scheme for making what would otherwise be taxable income vanish into thin air’. It provided the borrowing company within the group with an interest deduction, ‘without the lender being taxed on this interest’.
The first of HMRC’s three ‘major court successes’ in July concerned capital gains tax on a £10m gain realised in 2003/04.
‘The wider tax protected is £90m,’ HMRC said. ‘The taxpayer sold his business, making a profit of about £10m. He used a tax avoidance scheme to create an artificial loss so that he wouldn't have to pay tax on the profit he made when he sold his business. He spent a lot of money on a scheme which, according to the Court of Appeal, did not work. The taxpayer had paid out over £200,000 for this failed scheme, not including the costs relating to the litigation.’
As Tax Journal reported last month, the Court of Appeal decided – in HP Schofield v HMRC [2012] EWCA Civ 927 – that a loss on the disposal of a ‘put option’ could not be set against the gain on the redemption of loan notes. In the Court of Appeal Lady Justice Hallett observed: ‘Under the scheme as a whole, the options were created merely to be destroyed. They were self-cancelling. Thus, for capital gains purposes, there was no asset and no disposal. There was no real loss and certainly no loss to which TCGA [1992] applies.’
HMRC reported that in the second case the directors of Sloane Robinson were paid significant bonuses. ‘They considered a number of tax avoidance schemes, modifying the one they had chosen when the legislation was changed to counter that type of scheme. The First-tier Tribunal ruled the modified scheme didn't work either. About £13m of tax was at stake.’
The decision in Sloane Robinson Investment Services Ltd v HMRC TC 2132, published on the Tribunals Judiciary website, concerned an award of shares made to four employees who were also directors of the appellant company. The shares were in two companies (S1 and S2) which were subsequently liquidated, and the employees received the proceeds of the liquidation in cash.
The tribunal judges said: ‘In summary the issue of fact is whether the employees’ emoluments were in cash and then converted into shares in S1 and S2 as the Crown contend, or whether the shares were directly allocated to the employees as the taxpayer contends; the issues of law concern the correct analysis of the facts as either disclosing the payment of emoluments fully liable to PAYE and NIC in the usual way, or as disclosing an award of shares dealt with under [ITEPA 2003] Part 7.’
The Crown argued that the provision of shares in S1 and S2 was ‘nothing more than the mechanism for delivery of bonuses’. The tribunal concluded that S1 and S2 were ‘merely money-box companies serving an essentially mechanical purpose’ and the scheme failed.
HMRC said the scheme in the third case [Nicholas Barnes v HMRC [2012] UKUT 273 (TCC)] aimed to exploit a mismatch between two tax regimes. Those regimes dealt with ‘accrued income’ and ‘manufactured interest’.
‘UK government bonds (gilts) generating an interest coupon were borrowed for one day when an interest coupon was due. A payment representative of that coupon was then made to the lender, for which tax relief was claimed. At the same time the scheme envisaged that no tax would be due in respect of the interest coupon received,’ HMRC said.
‘The scheme has been described by the First-tier Tribunal as a "designed and marketed tax avoidance scheme" which had been taken up by well over 100 individuals. The total tax at stake was around £100m. There was no mismatch but the law was changed in 2005 making this clear and the rules were reformed further in 2008, making this type of scheme unworkable for the future.’
The decision is available on the Upper Tribunal website.
Expert welcomes focus on 'the cold hard reality of litigating tax avoidance schemes'
HMRC has hailed three ‘major court successes’ in a month and warned that users of aggressive tax avoidance schemes take a ‘serious risk’ that they will have to pay the tax and interest as well as expensive set up costs.
The three cases involved schemes that were marketed and executed between 2003 and 2005. The judges ruled that the schemes were ineffective, but HMRC pointed out that all three decisions may be subject to appeal.
George Bull, Baker Tilly
HMRC’s Director General of Business Tax, Jim Harra, said: ‘These wins in the courts are a victory for the vast majority of taxpayers who do not try to dodge their taxes. They send a clear message to tax avoiders – HMRC will challenge tax avoidance relentlessly and we will beat you.’
George Bull, Senior Tax Partner at Baker Tilly, noted that HMRC’s press release, issued on Monday, made ‘an important point which experienced, objective professional advisers will readily endorse: if a tax mitigation plan looks too good to be true, it probably is too good to be true’.
Exchequer Secretary David Gauke had said: ‘The government is committed to tackling aggressive tax avoidance schemes and HMRC will pursue their users through the courts where necessary. These three HMRC wins are very welcome, demonstrating that if an avoidance scheme promises results that seem too good to be true, they probably are.’
Bull added: ‘That objective view is a long way removed from the moral and ethical arguments which are so difficult for scheme promoters, politicians and pressure groups to win. It’s beginning to look as though HMRC is stepping back from the subjective debate and concentrating on the cold hard reality of litigating tax avoidance schemes, with considerable success.’
Bull said many more cases were set to be heard by the tribunals and courts over the coming years: ‘HMRC must be very pleased that the courts do not think that the UK tax system is as riddled with loopholes as scheme promoters and politicians alike suggest.’ His firm had observed, on the basis of HMRC’s estimates, that ‘tax avoidance seems to be running at around 0.8% of UK taxes’.
But the BBC News website quoted Mike Warburton, Director at Grant Thornton, as saying that HMRC was not winning every case that came to court. ‘It may be that they are winning at the moment, but that is not always the case and three does not make a trend. Having said that, it is undoubtedly the case that the courts have been finding against complex tax avoidance schemes,’ he said, adding that in the three cases HMRC had won for ‘quite different reasons’.
HMRC’s consultation on a proposed general anti-abuse rule, intended to deter and counter ‘artificial and abusive tax avoidance’, will close on 14 September.
The three decisions reported in July followed what HMRC called the ‘landmark’ decision in Greene King plc v HMRC (and related appeal) TC 2069, summarised in Tax Journal on 28 June, which involved finance provided within a group of companies.
‘The aim was that one group company would get tax relief on payments to another group company, without tax on the second company’s receipt,’ HMRC said this week. ‘The judges said that the appellants had no evident difficulty with getting relief for payment that was not matched by taxation of the receipt. They could not legitimately complain if the scheme failed in its purpose and instead resulted in their paying tax twice.’
The published decision of the First-tier Tribunal noted that David Milne QC, representing HMRC, had suggested to Greene King’s group tax controller that each of the transactions ‘was in truth no more than a tax saving device’. The arrangement was ‘a scheme for making what would otherwise be taxable income vanish into thin air’. It provided the borrowing company within the group with an interest deduction, ‘without the lender being taxed on this interest’.
The first of HMRC’s three ‘major court successes’ in July concerned capital gains tax on a £10m gain realised in 2003/04.
‘The wider tax protected is £90m,’ HMRC said. ‘The taxpayer sold his business, making a profit of about £10m. He used a tax avoidance scheme to create an artificial loss so that he wouldn't have to pay tax on the profit he made when he sold his business. He spent a lot of money on a scheme which, according to the Court of Appeal, did not work. The taxpayer had paid out over £200,000 for this failed scheme, not including the costs relating to the litigation.’
As Tax Journal reported last month, the Court of Appeal decided – in HP Schofield v HMRC [2012] EWCA Civ 927 – that a loss on the disposal of a ‘put option’ could not be set against the gain on the redemption of loan notes. In the Court of Appeal Lady Justice Hallett observed: ‘Under the scheme as a whole, the options were created merely to be destroyed. They were self-cancelling. Thus, for capital gains purposes, there was no asset and no disposal. There was no real loss and certainly no loss to which TCGA [1992] applies.’
HMRC reported that in the second case the directors of Sloane Robinson were paid significant bonuses. ‘They considered a number of tax avoidance schemes, modifying the one they had chosen when the legislation was changed to counter that type of scheme. The First-tier Tribunal ruled the modified scheme didn't work either. About £13m of tax was at stake.’
The decision in Sloane Robinson Investment Services Ltd v HMRC TC 2132, published on the Tribunals Judiciary website, concerned an award of shares made to four employees who were also directors of the appellant company. The shares were in two companies (S1 and S2) which were subsequently liquidated, and the employees received the proceeds of the liquidation in cash.
The tribunal judges said: ‘In summary the issue of fact is whether the employees’ emoluments were in cash and then converted into shares in S1 and S2 as the Crown contend, or whether the shares were directly allocated to the employees as the taxpayer contends; the issues of law concern the correct analysis of the facts as either disclosing the payment of emoluments fully liable to PAYE and NIC in the usual way, or as disclosing an award of shares dealt with under [ITEPA 2003] Part 7.’
The Crown argued that the provision of shares in S1 and S2 was ‘nothing more than the mechanism for delivery of bonuses’. The tribunal concluded that S1 and S2 were ‘merely money-box companies serving an essentially mechanical purpose’ and the scheme failed.
HMRC said the scheme in the third case [Nicholas Barnes v HMRC [2012] UKUT 273 (TCC)] aimed to exploit a mismatch between two tax regimes. Those regimes dealt with ‘accrued income’ and ‘manufactured interest’.
‘UK government bonds (gilts) generating an interest coupon were borrowed for one day when an interest coupon was due. A payment representative of that coupon was then made to the lender, for which tax relief was claimed. At the same time the scheme envisaged that no tax would be due in respect of the interest coupon received,’ HMRC said.
‘The scheme has been described by the First-tier Tribunal as a "designed and marketed tax avoidance scheme" which had been taken up by well over 100 individuals. The total tax at stake was around £100m. There was no mismatch but the law was changed in 2005 making this clear and the rules were reformed further in 2008, making this type of scheme unworkable for the future.’
The decision is available on the Upper Tribunal website.
