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Schofield decision sinks PwC scheme

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25th Jul 2012
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In its recent decision in Schofield v HMRC [2012] EWCA Civ 927 the Court of Appeal quashed a tax avoidance strategy devised by PwC to help a client reduce the amount of tax due on a £10m capital gain.

The scheme involved creating an allowable capital loss for the taxpayer, Howard Schofield, by setting up a sequence of put and call options before he emigrated to become non-resident for five years.

With tax avoidance hitting the top of the news agenda, the decision has raised considerable interest because of the potential amounts HMRC could recoup from the wider application of the Ramsay principle.

HMRC won arguments in the first tier and upper tribunals that the decision made by Lord Wilberforce in Ramsay (WT) Ltd v Inland Revenue Commissioners [1982] applied to Schofield’s arrangement. The Ramsay principle is that a tax loss created at one stage of an “indivisible process” that is later cancelled out does not constitute a loss for tax purposes: the transaction must be taken as a whole.

In December 2002, Schofield received £10.7m in return for shares in a consulting company and received advice from PwC on the potential advantages of entering a series of transactions with Kleinwort Benson Private Bank prior to leaving the UK for Spain before the beginning of the next tax year. Two balancing options were exercised on 4 April 2003, and two more on 7 April 2003, ending up with Schofield paying out £65,589 more than he had received.

But as the arrangers’ promotional documentation made clear, the staggering of the transactions were designed to avoided the capital gains tax on his £10.7m windfall. When he attempted to deduct an £11.3m loss from that gain in his 2002-3 self assessment return, HMRC opened an enquiry and disallowed the deduction.

After considering the documentation and Ramsay-related arguments from a series of cases since 1982, the appeal court dismissed Schofield’s appeal for the third time - although the way is still open for him to appeal to the Supreme Court.

Endorsing the court’s decision, Lady Justice Hallett called the appeal “a thinly disguised attempt to undermine the Ramsay principle”. Once it was accepted that the principle remains valid and the facts established at the first tier tribunal were accepted, it was bound to fail.

“The relevant transaction here is plainly the scheme as a whole: namely a series of interdependent and linked transactions, with a guaranteed outcome. 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,” she wrote.

PwC was unwilling to comment further on client-related issues, but said in an official statement:  “PwC provides tax advice to a wide range of clients with a wide range of commercial circumstances. That advice is always provided in accordance with the law and with appropriate disclosure to tax authorities. 

“We aim to provide balanced, informed advice which takes into account not only current tax legislation but also current practice and case law. The [Schofield] case relates to tax planning undertaken some years ago and planning of this nature would no longer be recommended to our clients.”

In her tax podcast this week (23 July edition), Anne Fairpo said she felt “a little sorry” for Mr Schofield, as he has ended up being the legal guinea pig for around 200 people who took advantage of the PwC scheme and will be permanently linked in the court records to this example of aggressive tax avoidance.

In spite of the court’s occasionally awkward grammar, the principle remains that capital gains tax applies to things, not arithmetic losses. “Broadly, any loopholes that exist in Ramsay are likely to be slammed shut,” she said.

A Gabelle tax analysis article expanded on how the Schofield decision extends the Ramsay principle: “It was thought by some that Ramsay allowed the courts only to purposively construe legislation where there was some ambiguity and the legislation referred to commercial concepts. The Court of Appeal has held that this is not the case - the Ramsay principle can apply to even the most unambiguous legislation.

“The Court of Appeal did not comment on where the limits to a purposive construction lie. Without any limits, it seems that the courts have effectively enacted a ‘smell test’ through the back door. Likewise, there is nothing in the judgement to limit its application to ‘aggressive’ tax schemes so whether this principle will apply to less contentious tax planning remains to be seen.”

Replies (5)

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By thomas34
25th Jul 2012 15:58

PWC

This was an excellent result for all fair-minded people and we must hope that the decision is not overturned by the Supreme Court if it is appealed.

PWC's mealy-mouthed response finished with the words "the Schofield case relates to tax planning undertaken some years ago and planning of this nature would no longer be recommended to our clients".

It probably ceased when HMRC decided in December 2004 to commence their enquiry but it didn't stop PWC spending the next 7 years racking up more fees in defending the appalling scheme.

In the case of the accountancy profession, it certainly seems that the rot starts at the top.

Tom Egerton

 

 

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By johnjenkins
26th Jul 2012 11:23

One wonders how much of the

£10.7m will be left.

These schemes aren't really tax avoidance are they? They should be called mythical adventures into the unknown.However it would appear that these myths are no longer with us or are they, just in a different guise.

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By DMGbus
26th Jul 2012 11:34

Creative accounting

" The scheme involved creating an allowable capital loss for the taxpayer, Howard Schofield, by setting up a sequence of put and call options before he emigrated to become non-resident for five years. "

Artificial transactions CREATED for no purpose other than avoiding a tax liability - CREATIVE INDEED.   Not entered into for any genuine commerccial reason.

 

 

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By justsotax
26th Jul 2012 11:41

had to laugh at Anne's comment about

feeling a little sorry for Mr Schofield - that is a tough circle to square, a marginal rate significantly below his income tax rate on 10.7 mill before the scheme....and eyes wide open going into the scheme (because anybody at any level knows that you don't get anything for nothing in this life - i am sure an astute business man like him would know that)....pay £mill of tax, or pay us £1,000s...a saving of £mil.......the only question.....whats the catch?  

 

 

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By GuestXXX
17th Mar 2015 15:39

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