Tax scheme promoters resist search warrant
Philip Fisher reports on a Crown Court case which should be of interest to all accountants and tax advisers, and may send a chill down your spine.
At first sight, the Anthony Ashbolt and Simon Arundell v HMRC case might seem esoteric as it centres on a judge’s decision to grant HMRC a warrant to search and seize documents under the Police and Criminal Evidence Act 1984 (PACE).
However, the underlying issues relate to tax avoidance schemes involving the conversion of remuneration into loans, which the promoters erroneously believed to be legal when they offered them to clients.
Who is the mastermind?
It was perhaps unfortunate for the claimants, Ashbolt and Arundell, that the mastermind behind the scheme in question was Paul Baxendale-Walker (aka Paul Chaplin).
For those who don’t know the name of this colourful, struck-off solicitor and tax avoidance guru, a headline from the Scottish Sun says it all “IN THE RED: Porn star who ‘dreamt up’ Rangers’ controversial Employment Benefit Trusts system declared bankrupt”. In March 2020 the High Court in London imposed 10-year bankruptcy restrictions against him.
What was the scheme?
The underlying transactions featured an initial attempt to reclassify remuneration as a loan, enhanced by attempts to ensure that this would remain effective after the introduction of the disguised remuneration loan charge on 5 April 2019.
The case turned on whether Judge HHJ Mairs had validly issued a warrant allowing HMRC to search premises and obtain specific documents
Jonathan Fisher QC, representing the claimants, disagreed that the remuneration trusts used in the scheme were necessarily caught by the loan charge.
His problem came with the second Baxendale Walker LLP scheme that sought to "rebrand" the purported loans as something that falls outside the scope of income tax and the new loan charge. It is this "rebranding" that may have been criminal and was central to HMRC's case. The rebranding was only necessary if the remuneration trust arrangements were caught by the loan charge, as Fisher was driven to accept.
Fiduciary receipts agreement (FRAs) submitted to HMRC were documents "on which they have knowingly made false representations in order to circumvent legislation brought in to make loans received through these types of scheme taxable. The total estimated amount of tax evaded by the suspects [the claimants and other individual taxpayer users] is believed to be £3,018,000."
HHJ Mairs explained that "what is in truth taxable income and was previously mis-described as a purported loan is now being called a ‘fiduciary arrangement’ or similar. This investigation concerns attempts, through the submission of fraudulent documentation [the FRAs and memorandum of fiduciary receipts], to retrospectively re-describe the purported loans as fiduciary receipts, in doing so evading the tax which is to become due under the loan charge."
Helpfully, the case notes summarise the arrangements.
A remuneration trust was established by deed with the purpose of providing discretionary benefits to owners or key employees of businesses. The scheme user (aka director/employee) lends the remuneration trust £100 per month on an ongoing basis to establish himself as a provider of services and a potential beneficiary.
A personal management company (PMC) is set up, usually in the UK, of which the scheme user is a director and shareholder. The scheme user makes annual contributions usually equivalent to the profit from their business for that year to the remuneration trust. The contribution is treated as a business expense, reducing or eliminating the scheme user's liability to pay income or corporation tax and, in the case of self-employed users, national insurance contributions as well.
The assets of the remuneration trust are passed to a holding company. All rights are given to the scheme user's PMC under the terms of a fiduciary services agreement. The scheme user then takes a loan from the PMC in their capacity as a provider of services or as a beneficiary of the remuneration trust.
As the loan is taken in the scheme user's capacity as provider of services/beneficiary of the trust and not as owner/director of the business, the transaction (it is argued) is not subject to income tax.
The loan is initially for a 10-year term but is renewable thereafter for successive 10-year periods. HMRC's understanding is that the loan term renewals are intended to be repeated indefinitely and that the loans will not be repaid in the scheme user's lifetime. Accordingly, these arrangements are designed to disguise and avoid tax on remuneration.
As so often, these arrangements founder as result of flawed implementation, rather than necessarily the underlying construction put together so carefully by expert barristers.
In this case, certain documents were sloppily constructed and completed, while some were created long after the event and backdated. It was suggested that this was “with the sole purpose of circumventing the loan charge and evading the tax that would become due on those loans at 5 April 2019”.
How were the claimants involved?
Ashbolt and Arndell were independent financial advisers involved in trust and tax planning, as well as introducers of the Baxendale-Walker scheme, who must be expected to have a detailed understanding of the arrangements.
It was therefore alleged that “they have knowingly and dishonestly made a false representation (of the facts, namely retrospectively re-describing purported loans as fiduciary arrangements) in order to avoid paying the loan charge, thereby causing a loss to the UK Treasury”. There was also a fear that they might destroy, conceal or fabricate documents unless a seizure was permitted.
Why this matters
The technicalities surrounding the legal claim regarding search warrants are intricate and unlikely to be of general application. What should interest you is the knowledge that HMRC has won yet another case involving arrangements to reclassify “remuneration” in an effort to reduce income tax and NICs.