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Gold bullion tax scheme defeated at tribunal | accountingweb
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Tribunal takes shine off gold bullion tax scheme

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All that glisters was not gold for a bullion tax avoidance scheme that the tribunal found to be contrived for the benefit of the directors.

31st Jan 2023
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A tax scheme involving gold bullion has been defeated at the first tier tribunal (FTT) [TC08679]. While the outcome of the appeal is hardly surprising, the greater shame is that no consideration was given to HMRC’s argument around the general anti-abuse rule (GAAR).

Wired Orthodontics Limited established an employee benefits trust (EBT) in October 2014, to which it undertook to contribute £300,000 within the next 10 years.

The directors of Wired Orthodontics (Susan Bessant and Ian Hutchinson, who were also shareholders and employees) were then awarded £300,000 worth of gold bullion by the company, which was paid for by its immediate sale by the directors.

This, in turn, created credits on the directors’ loan accounts of approximately £300,000. Bessant and Hutchinson subsequently extracted that value through cash drawings from the company, using the cash for various things, such as home refurbishments and purchasing buy-to-let properties. 

At the same time as the purchase of the gold the directors agreed to assume the obligation entered into by the company to pay £300,000 (plus an RPI uplift) to the EBT by 2024.

It’s worth noting that this scheme mirrored other tax avoidance arrangements carried out around this time. HMRC issued a spotlight in May 2016, stating its belief that these sorts of schemes did not work.

Core argument

A core argument put forward for Bessant and Hutchinson was that the arrangements were effectively loans and that the value of the gold purchased for Bessant and Hutchinson was not liable to income tax or national insurance contributions (NICs). Rather, each of them had received the gold subject to the obligation to pay those amounts (plus retail price index) to the trust in the future.

HMRC’s position was that the directors received money or money’s worth as a reward for the provision of their services which constituted “earnings” in relation to their employment with the company, notwithstanding their obligation to pay sums to the trust.

HMRC also argued that there was no real intention that the directors would be required to pay the sums into the trust or any real likelihood of them doing so. HMRC maintained that the real intention on entry into the transactions was that, at the end of the 10 years, the trustee would simply leave the debt outstanding.

As for Wired Orthodontics, which was also included as an appellant, the company argued that the expenses related to the scheme properly reflected expenditure incurred in order to incentivise its employees, and so were wholly and exclusively for the purposes of the company’s trade (in other words, the expenses were deductible for the company).

FTT decision

The FTT determined that the scheme transactions were highly contrived in order to seek to achieve the combination of tax-free income for the directors, as well as a tax deduction for the company.

Finding that the company had made payments of earnings to the directors, the FTT upheld the PAYE and NIC determinations issued to the company, while section 222 ITEPA 2003 was found to apply to Bessant and Hutchinson, as they had failed to make good the income tax on their earnings to the company.

As for the deductibility of expenses that Wired Orthodontics incurred to implement the scheme, the FTT found that the purpose of the transactions was not simply to reward the employees (noting that this could have been achieved in various, much simpler ways).

As securing a corporation tax deduction was a freestanding purpose of the company in entering into the scheme transactions, this meant that there was a duality of purpose and the payments were not made wholly and exclusively for the purposes of Wired Orthodontics’ trade. The relevant payments were not deductible for corporation tax purposes.

GAAR at play – almost

In what could have been an interesting twist, one of HMRC’s arguments was that if its assertions regarding the taxation of the directors and Wired Orthodontics were not correct, the general anti-abuse rule (GAAR) should have applied such that the tax advantages arising from the arrangements should have been counteracted.

This was the first time in which the GAAR had been relied on by HMRC in the FTT. However, as the FTT was able to determine the case on other issues, the FTT did not consider the application of the GAAR, instead saying that it “is more appropriately dealt with by a tribunal as and when its application forms the basis of a decision”.

Notable comments

In its decision, the FTT made a few notable comments.

First, the FTT said it was left with the “very clear impression” that both directors had entered into the scheme with little understanding or knowledge of it beyond the idea that they would receive money tax free and the company would claim a corporation tax deduction for the amounts paid to them.

Secondly, the FTT noted that Hutchinson, when questioned, was unable to say why the now dormant Wired Orthodontics (of which he is now sole director) was pursuing the appeal or who was paying for it to do so.

Replies (4)

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By Justin Bryant
31st Jan 2023 14:11

https://www.accountingweb.co.uk/tax/personal-tax/gold-bullion-tax-avoida...

It seems like focusing on Rangers* was a mistake as that was a redirection case. Here the issue boiled down to whether the transfer of the gold was a benefit and the FTT fails to justify why the obligation to fund the EBT can just be disregarded.

The FTT say it's simply a case of treating the gold cash as earnings and they are free to ignore the obligation.

Para 135 here is germane and which the FtT got wrong in the gold scheme judgement
: https://caselaw.nationalarchives.gov.uk/ukftt/tc/2023/61

The transfer of the gold yielded no profit given the liabilities attached to it. This had nothing to do with the issue of deductions. So the FTT appeared to err in law (para 201).

*And the clear distinction with Rangers is that in Rangers the redirection to the EBT was earnings; at that stage there was no liability. So it was possible to say the gross value was the benefit. Clearly the court was influenced in finding there was redirecting by the immediate loans. And subsequent cases appear to have confined the redirection doctrine to onward loan cases. But here it is more difficult to pinpoint a time when there was any benefit.

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Replying to Justin Bryant:
By Ruddles
31st Jan 2023 16:46

Justin Bryant wrote:
the FTT fails to justify why the obligation to fund the EBT can just be disregarded.

The comments at paras 196 and, particularly, 197 seem quite clear to me.

And you need to explain the thinking behind your reference to para 135 in that other case.

On the whole, the decision looks like the correct one to me.

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Replying to Ruddles:
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By Justin Bryant
01st Feb 2023 09:43

I wouldn't expect you to understand. YMMV and all that.

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By Hugo Fair
31st Jan 2023 16:10

Gliding over the points of legal nicety (which I'm happy this time to leave to Justin and others), I'm nevertheless struck by the final paragraph:
"the FTT noted that Hutchinson, when questioned, was unable to say why the now dormant Wired Orthodontics (of which he is now sole director) was pursuing the appeal or who was paying for it to do so."

Call me naïve (it'd not be the first time), but can an appellant refuse to disclose who's funding an appeal?

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