Tribunal ruling to protect up to £400mn in tax

Wednesday 15 January 2014

Up to £400 million in tax has been protected by a tribunal ruling that deemed an income tax avoidance scheme marketed to contractors as illegal.

A first-tier tribunal dismissed arguments that the scheme was a legitimate tax planning measure, thereby preventing millions of pounds going unpaid to HM Revenue and Customs (HMRC).

The case involved a tax avoidance scheme marketed by Consulting Overseas Limited to independent contractors, in which individuals were sold a remuneration package that was supposedly capable of saving them large amounts of income tax and national insurance contributions.

It worked by getting contractors to sign up as employees of Sandfield Consultants Ltd, a company located in the Isle of Man. Contractors agreed to receive around two-thirds of their income as loans in Romanian, Belorussian or Uzbekistani currency.

A currency trade was then supposed to turn earnings into non-taxable foreign exchange gains.

Contractor Philip Boyle was the subject of the case at the tribunal but his argument that his involvement in the scheme was a legitimate tax avoidance measure was quashed.

The judge ruled that the loans received by Mr Boyle were income from his employment.

"Mr Boyle had no need for a loan, there was an entirely artificial exchange rate; the reality is that there was no borrowing by Mr Boyle and he never believed that the ‘loans’ were other than a means of receiving his income without suffering tax on that income," the judge said.

The tax tribunal also ruled that the loans were not genuine and at no stage during the HMRC investigation had evidence been provided to show the foreign currency ever existed.

The outcome of the case means that other individuals using the scheme are also in violation of UK tax rules. Of the 348 users deemed to be avoiding tax, 226 have settled with HMRC, paying approximately £5 million. The remaining individuals are being pursued by the government department.

David Gauke, exchequer secretary to the Treasury, said: "I am delighted the tax tribunal threw out this contrived scheme, designed to avoid tax.

"The unprecedented package of counter-avoidance measures announced in the Autumn Statement, combined with HMRC’s record of winning over 80 per cent of all avoidance cases taken to court, shows the writing is on the wall for the minority who are prepared to use marketed tax avoidance schemes to get around the rules."

However, HMRC has come under criticism for failing to chase big firms that employ tax avoidance measures - accusations that the tax body vehemently rejects.

The Public Accounts Committee, chaired by Margaret Hodge, claims HMRC pursues easier targets and does not use the full range of sanctions at its disposal.

Nevertheless, the tax body claims the findings of the committee are "selective and misleading", with the report highlighting figures that show an increase in money not collected, opposed to the percentage of uncollected tax. This is a number that has decreased in the 2012-2013 financial year.

HMRC’s spokesman said: "HMRC seeks to collect the tax that is due from all taxpayers, so that everyone pays their fair share in accordance with the tax laws passed by parliament. We have secured more than £50 billion of additional tax from our compliance work since 2010, including £23 billion from large businesses.”

Matt Fryer, Brookson's Tax Specialist commented: "This case is further evidence of HMRC cracking down on avoidance schemes marketed to contractors, as is the case in many of these schemes it is the contractor and not the provider of the scheme who become liable for unpaid taxes.  This further underlines the need for contractors to engage with compliant advisors when seeking guidance on how to operate their contracting business.  If a solution is marketed as a tax avoidance scheme, which seems too good to be true, it probably is and whilst contractors have got away with this in the past, they are unlikely to do so in the future."

By Victoria McDonnell

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