HMRC has won a significant First Tier Tribunal case involving a tax avoidance promoter, Root2 Tax Ltd, that used an avoidance scheme designed and promoted by themselves.
The result could lead to the recovery of £2.4 million in tax and National Insurance Contributions (NICs) in this case, with a further £110 million in related cases.
The firm’s Alchemy scheme involved an employee entering a high-risk form of gambling, known as spread betting. The scheme’s intended result was a tax-free betting win for the individual employee, which was taken instead of taxable employment income, and a tax-deductible expense for the company.
HMRC defeated the avoidance scheme at the First Tier Tribunal, arguing that the scheme’s main purpose was to provide tax-free employment income that should have been subject to PAYE and NICs. The tribunal agreed with HMRC, and decided that the payment made by the company represented income from the employment of the employee, and should have been taxed accordingly.
The judge also agreed with HMRC’s argument that disguised remuneration legislation would apply to the arrangements. This legislation was introduced in 2011 to challenge PAYE avoidance schemes. The judge found that it would apply as an alternative to the income from employment decision.
Mary Aiston, Director of the Counter Avoidance directorate, said:
This was an excellent win against a promoter who used their own avoidance scheme to try to take their profits tax free. The defeat of the Alchemy scheme shows that the department will tackle the people who sell these schemes head-on, ensuring that they do not escape paying the tax they owe.
There should have been no doubt that this convoluted scheme – where employment income came as a tax-free betting win – was too good to be true. Our message to people tempted by a tax avoidance scheme is, if something looks too good to be true, then it almost certainly is.
HMRC previously succeeded in litigation against Root2 Tax Ltd for the non-disclosure of the Alchemy scheme under the Disclosure of Tax Avoidance Schemes rules.