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image of arrows being inflated | accountingweb | Pertemps tycoon face huge tax avoidance bill after scheme marketed by GT failed
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Tycoon fails to claim tax loss inflated by £1.3m

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The boss of Pertemps faces a huge tax avoidance bill after he employed a scheme marketed by Grant Thornton that failed.

4th Jul 2024
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An appeal by Pertemps boss Timothy Watts against the verdict on his 2003 tax avoidance scheme marketed by Grant Thornton has been dismissed by the upper tribunal (UT). In line with the original judgment by the first tier tribunal (FTT), although Watts claimed a loss of £1,349,600, his actual loss was only £6,300 – a 99% difference.

The recruitment firm tycoon had taken tax planning advice from Grant Thornton, which led to a series of events in October and November 2003. 

  • 28 October: Watts borrows £1.5m from Hambros in Jersey.
  • 29 October: Watts establishes the Timothy Watts IIP Settlement, a trust of which he “was life tenant and a beneficiary and Timothy Watts IIP Settlement Ltd was trustee”. He settles £150,000 into the trust.
  • 7 November: Watts spends the borrowed £1.5m on acquiring a gilt strip, which is held by Hambros as nominee. He writes to the trustee offering to grant an option to purchase the gilt strip for a strike price of £150,400. The consideration for purchasing the option would be in the order of £1.35m.
  • 19 November: Hambros lends £1,338,749 to the trustee, which passes this sum to Watts in exchange for the grant of the option.
  • 25 November: the trustee agrees to assign the option to Investec for £1,347,049.
  • 26 November: a flurry of money transfers take place.
    1. Investec to the trustee – £1,347,049 (buying the option)
    2. Trustee to Hambros – £1,338,749 to Hambros (repaying its loan)
    3. Investec to Watts – £150,400 (exercising the option)
  • 12 January 2004: the trustee extends an interest-free loan of £128,000 to Watts.

At a loss

The outcome as envisaged by Grant Thornton was that Watts would realise a loss for income tax purposes, calculated in accordance with paragraph 14A of schedule 13, FA 1996 (as it then stood). The calculation was defined by the statute as the difference between: 

a) the amount paid by him for the strip, and 

b) the amount payable on the transfer or redemption of the strip.

It was not disputed that Watts definitely paid £1.5m to acquire the strip, and that b) was the £150,400 paid by Investec to him when it exercised the option. Hence the income tax loss of £1,349,600 claimed in his tax return.

Long enquiry

In September 2004, HMRC opened a long enquiry into Watts’s tax return. In August 2018 a closure notice was issued disallowing the entire loss. The appeal was heard in 2021 by the FTT and its judgment was not what Watts wanted to hear. 

On a purposive reading of the legislation, the “amount payable” on the transfer and redemption of the strip went far beyond the mere £150,400 paid by Investec to exercise the option. Since the statute focuses on the amount “payable” rather than the amount “receivable”, it is necessary to look at what Investec needed to lay out to acquire the gilt strip. This included the £150,400 to exercise the option, but also the £1,347,049 that it needed to spend in order first to acquire the option – from, it should be noted, a trust of which Watts was the life tenant such that the money was his “by right”. A total of £1,497,449.

Sequence of events

That analysis was all the more compelling when the entire exercise was viewed through the lens of the WT Ramsay principle – as a composite sequence of events which, when considered as a whole, led to a single purpose.

In a 50-page document that examined in some detail the case law on the “purposive” approach to interpreting statutes, alongside a large amount of extra-statutory material introduced by Watts’s counsel, the judge also considered Watts’s own testimony. 

He considered that he had exposed himself to some genuine economic costs. “I wouldn’t call a hundred thousand pounds nil economic loss,” he said. “I wouldn’t call interest on the money nil economic loss. I wouldn’t call putting my family silver and my house at risk nil economic loss.”

Much of that “family silver” consisted of Grant Thornton’s fees of £75,000. Certainly, Watts had not staked £1.5m on the matter. In terms of actual economic loss sustained in the process of disposing of the gilts, the judge was able to identify £2,551 (the difference between £1.5 million and £1,497,449) and £3,749 of costs incurred with Hambros. She therefore ruled that Watts had in fact incurred an income tax loss of only £6,300.

Grounds of appeal

The FTT’s judgment was appealed to the UT on four grounds. 

The first two grounds, regarding the emphasis placed on two of the cases discussed before the FTT, were quickly and simply dismissed as – even if they were true – they revealed “no material error of law in the FTT’s approach”.

A third ground was that the FTT erred in rejecting the relevance of the extra statutory materials on which Watts relied as an aid to statutory construction. Again, this was easily dismissed: “on a fair reading of the decision, it is clear that the FTT did adequately consider the materials cited to it”.

Commercial vs legal

The final ground argued that the FTT erred by concluding that “the amount payable on the transfer” was a commercial concept rather than a closely defined term of tax statute.

The UT accepted that the FTT’s decision might perhaps have made more of the dichotomy between commercial and legal concepts, but that was hardly fatal to its conclusions. While “it may have been preferable [for the FTT] to express its analysis in another way”, nonetheless “even if it could be said that some of the matters on which we might differ in approach to the FTT might be regarded as errors of law, in our view, they did not lead the FTT into material error. Indeed, we agree with the FTT’s conclusion.”

Hail Mary

Something of a “hail Mary” appeal, but perhaps understandable given the numbers involved. The UT solidly upheld the principle that an appeal on the grounds that the FTT “erred in law” will only succeed if the error is material. Sometimes the answer is more important than the workings.

Replies (17)

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By Justin Bryant
04th Jul 2024 14:52

Apart from GT's £75k fees, there was no downside here to this tax planning and he would have known this (and these appeals) was a punt, so no major harm done by the look of things.

Thanks (1)
Replying to Justin Bryant:
By Ruddles
04th Jul 2024 19:47

Not to mention legal costs (including potentially those of the other side), which I guess were not insignificant.

Thanks (2)
Replying to Justin Bryant:
Stepurhan
By stepurhan
05th Jul 2024 09:44

Justin Bryant wrote:

Apart from GT's £75k fees, there was no downside here to this tax planning and he would have known this (and these appeals) was a punt, so no major harm done by the look of things.

Sounds like a good reason for implementing penalties for such clearly abusive schemes. I wonder if the new government will implement something like that.
Thanks (11)
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By cbp99
04th Jul 2024 16:09

14 years (2004-2018) from opening an enquiry to issuing closure notice?

Thanks (1)
Replying to cbp99:
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By FactChecker
04th Jul 2024 17:07

In those days HMRC staff considered themselves to have a career (if not quite a job-for-life), so the slow churn required an equally slow variant of 'pass the parcel'?

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By richard thomas
05th Jul 2024 06:38

A good summary of a complicated decision caused by being faced with a quite extraordinarily convoluted argument by the appellant.

The only quibble I have is in the part headed “commercial vs legal”. My view is that the UT considered the FTT might have made less not more of the Hoffmann distinction which has really been sidelined by later decisions of the SC.

I should add that I am somewhat parti pris in this, as I was responsible in IR for the amendments in FA 1999 and 2003 and I wrote the Explanatory Notes discussed in the decisions.

Thanks (10)
Replying to richard thomas:
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By Justin Bryant
08th Jul 2024 16:10

Possibly you don't know how right you are re later SC decisions. See para 40 here for example:
https://caselaw.nationalarchives.gov.uk/ewca/civ/2024/720?query=hmrc

So much so, it seems that legislative anti-tax avoidance penumbras are now a reality.

Thanks (1)
Replying to Justin Bryant:
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By richard thomas
08th Jul 2024 17:53

I did know as I read Altrad on 28 June. We have now finally got to where Learned Hand was in the 30s in Gilbert and also in Helvering v Gregory.

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Replying to Justin Bryant:
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By richard thomas
08th Jul 2024 17:54

.

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David Ross
By davidross
08th Jul 2024 09:09

and this was not fraud?

Thanks (3)
Replying to davidross:
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By AS44NG
08th Jul 2024 15:56

No, the claimant was rich therefore fraud-exempt.

Thanks (1)
Ray McCann
By Ray McCann
08th Jul 2024 09:12

No Gilt Strip, no DOTAS. The bad old days. His fee costs will be huge.

Thanks (1)
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By petestar1969
08th Jul 2024 09:33

Excuse me while I look for my violin.

Thanks (2)
Replying to petestar1969:
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By roger.meyts
08th Jul 2024 11:45

your mouse played it last, presumably

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By Mr J Andrews
08th Jul 2024 12:14

Artificial steps.....no commercial purpose- other than saving tax........ Who in Grant Thornton came up with this scheme ? Probably thought Ramsay was a football manager.

Thanks (1)
Donald MacKenzie
By Donald MacKenzie
08th Jul 2024 12:48

If I have this right, Grant Thornton took £75k in fees for advising in something that is a pretty clear abuse of the rules.
The scheme CREATED the notional loss but Mr Watts did not make a loss at all.
If I bought a commercial building for £5million then "sold" it to someone for £1million who also sold it to someone for £1million who sold it to my friend for £1million have I made a loss. Of course not.
There should be stronger penalties for such abusive schemes. How many slipped through unnoticed?

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By dwgw
09th Jul 2024 18:21

Not at all surprising to see the Ramsay principle mentioned.

Where was the uncertainty in this convoluted structure?

Glad to see these tortuous constructions consigned to history. The punters knew the risks and, if they really didn't, it's their advisers they need to be pursuing.

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