All bets are off: HMRC scuppers innovative avoidance scheme

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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.”

About Francois Badenhorst

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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20th Oct 2017 09:24

That scheme is so contrived I am surprised it even got off the ground. In this case, I have to say well done HMRC!

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20th Oct 2017 09:39

Well done HMRC, and I don't say that very often!

Just how many more of these mickey taking schemes are there out there? If each one that's busted yields £110m then another nine will be a significant contribution to the Exchequer. Perhaps even enough for HMRC to stop chasing mobile hairdressers over additional private use of shampoo!

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20th Oct 2017 10:05

I don't think HMRC can get a non-disclosure penalty here as the promoter would have relied on the barrister's opinion to show it was non-DoTAS'able (based on the arguments they asserted in the case), so they had a reasonable excuse per the Mercury case. This case is a month old now BTW. See:https://www.accountingweb.co.uk/any-answers/interesting-dotas-case

Also, was there a misvaluation of the CSO? Otherwise why was this a true hedge if the spread bet was more likely to win than the CSO lose even though they were equal in amount and why not have the employer simply place the spread bet and novate this to the employee without the additional transaction cost of the CSO (the so-called hedge making no sense of course per the judgment and presumably just a mechanism to make the scheme work in the 1st place due to this misvaluation)?

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to Justin Bryant
20th Oct 2017 10:54

FFS Justin. All these schemes rely on a dodgy barrister's opinion. So what? We all know the game, bung em £10k and get them to look at it after a liquid lunch. Its worthless.

As a rule of thumb ANY prompted scheme with the opinion of a barrister is bunk. If something is legitimate you don't need a tax barrister to tell you so.

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to ireallyshouldknowthisbut
25th Oct 2017 09:50

You clearly have not read the Mercury case, which shows the barrister's opinion is far from worthless re mitigating potential DoTAS non-disclosure penalties (which was my only point).

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to Justin Bryant
20th Oct 2017 12:23

What if an individual with a gambling background had been using same method to transfer funds to family to reduce IHT, reduce savings/assets for home care or nursing home care purposes AND had not heard of or used route2.
how does this decision affect that individual if at all?
also if CFD'S were used in company / by sole trader attracting tax relief but spread bets by family members

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20th Oct 2017 10:49

This scheme was extensively promoted at places such as AVN and 2020 Group events, which would have given it some credibility with many firms. I wonder what the fall out is going to be for firms who recommended it to their clients? Anyone out there brave enough to share their experience?

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20th Oct 2017 10:49

I've seen so many of these, there appears to be an entire industry of people dreaming them up and flogging them, the only reason for their existence is the money they make out of it. All the while HMRC is spending a fortune trying to crack them, the only losers are the mugs who put money into them and the honest taxpayer.

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to evanowen
20th Oct 2017 13:56

I agree that people who rely on dubious tax loopholes to avoid tax are mugs, but then so is everyone who does not try to reduce our excessive taxes. In 2015 HMRC reported that legal tax avoidance was worth 2.7bn… in 2013 after analysing government expenditure the tax payers alliance concluded that the Government was guilty of needlessly wasting 120bn per year (98% of income tax receipts).

Tax avoidance does not impose any burden on taxpayers, the burden comes from the financial incompetence of the government

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20th Oct 2017 14:32

Les, it's the public sector that wastes that money. People associates 'Government' with the political party that is in power (who then get the blame) when it is the public sector that wastes the money- admittedly sometimes at the behest of some scheme the political party dreamed up.

I'm hearing about more and more of these type of schemes with a 'barrister's opinion' attached in relation to properties which promise the earth for a cut of the action.

I don't touch them with a barge pole and neither do my clients- keep it simple, keep the tax charge reasonable and stop looking at it in a negative way.

I recently had a conversation with a client about his taxes, where he started the conversation worried about paying more tax as he was making more profits. I explained he was looking at it the wrong way around. He is paying more tax because he is making more money, so he should be happy his bill is going up as it shows he is being successful (and now we'll work on reducing it).

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to Ian McTernan CTA
22nd Oct 2017 16:43

Ian - the remains that roughly 95-98p of every £1 paid in income tax is wasted, and hence pointless. You are right that schemes relying on loopholes and barristers opinions are high risk, but there are other ways to considerable reduce a businesses tax burden without relying on such schemes. We have been designing business structures that reduce/remove tax for clients for over 20 years (e.g mini "googles")… admittedly we are specialists in international tax, knowledge that many accountants do not have to hand, but telling a client to be happy paying more tax would, to us, be an admittance of failure.

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20th Oct 2017 16:18

Wow that's... incredibly rubbish! How can anyone think such a scheme wouldn't be picked up by HMRC?? To me this looks and sounds like a duck, so therefore it must be... I attended one of these tax avoidance seminars and they all seem to be dreamed up by dodgy barristers who've worked out these things are just about legal (at the moment), then of course when they go pop, the only one who loses is the taxpayer with fines, interest and of course the "agent" fee which no doubt is pretty hefty. My hat is off to HMRC on this occasion.

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By istacey
to jamiea4f
23rd Oct 2017 10:28

Considering the full facts of the scheme were disclosed on the Company Tax Return and on the Individual Tax Return there was never any attempt to hide it from HMRC - they didn't have to do too much work to pick it up with the full disclosure made.

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25th Oct 2017 11:53

What we are all missing, me included, is that it's the investors who are having the last laugh here. My recollection is that because Root2 got top tax counsel's opinion that the scheme would work, the tax benefits were fully covered by insurance! As far as the accountants and their clients are concerned the scheme worked fine - a salutory lesson for the rest of us.

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