All bets are off: HMRC scuppers innovative avoidance scheme
Tax avoidance schemes are always a gamble. In some cases, literally.
HMRC has scuppered a tax avoidance scheme aimed to extract profits from owner-managed companies or Employee Benefit Trusts (EBT) by betting on the stock market.
Under the scheme, the individual would place a bet with a gambling company that a stock’s value would increase. Simultaneously, the individual’s company or the EBT would place a mirror bet: that the same share’s value would decrease.
The idea being that the company would lose and the individual would win, thereby receiving the money via the gambling company. In the end, the individual would be better off at the expense of the company or the EBT, but no payment had been made, directly or indirectly from the comapny or EBT to the individual.
If the individual lost the bet, then the parties simply went through numerous iterations until the ‘right’ result was arrived at. But the odds were calculated in a way that made it very likely that the individual would ‘win’.
Winnings from a bet are not taxable, so the individuals were able to swerve paying income tax and NIC.
But the tax authority got wind of the scheme and started to peel back the layers. When HMRC inquired about why it hadn’t been declared under DOTAS, they were unsatisfied by the scheme promoter’s explanation, and so took the case to the First-tier Tribunal.
DOTAS requires promoters to tell HMRC about tax avoidance schemes they design and sell. Root2 (the name of the scheme promoter) contended that their scheme, marketed as ‘Alchemy’, was not a tax avoidance scheme and thereby not subject to DOTAS rules. The FTT disagreed with Root2’s assessment.
This is a particularly damning loss for Root2 and the individuals involved in the scheme since, under DOTAS rules, there is no right of appeal against this particular tribunal decision. The users of the scheme will now be on the receiving end of Accelerated Payment Notices (APNs).
HMRC hailed the victory as a “landmark case” (TC/2016/03247) against a tax avoidance scheme promoter, and it could lead to the recovery of £110m in back taxes.
In a statement on the case, Penny Ciniewicz, Director General of HMRC’s Customer Compliance Group, said: “Most tax avoidance schemes don’t work. The DOTAS rules ensure that HMRC is notified of schemes so that we can investigate and challenge them.
“Designers and promoters of avoidance schemes should come forward now if they haven’t already disclosed a scheme to us. We will take action and nobody should think they can get away with not disclosing their avoidance schemes and misleading users about the need to report them.”