Hyrax Resourcing Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 March 2019 |
| Neutral Citation | [2019] UKFTT 175 (TC) |
| Date | 05 March 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 0175 (TC)
Judge Barbara Mosedale
Mr R Venables, QC and Mr O Marre, Counsel, instructed by RPC, appeared for the appellant
Mr A Nawbatt QC and Ms G Hicks, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Application for order that certain arrangements are notifiable or to be treated as notifiable – Arrangements notifiable – First respondent a promoter – Application allowed in respect of first respondent – FA 2004, s. 306, 306A, 307, 314A – Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543), reg. 8, 10 and 18.
The First-tier Tribunal (FTT) allowed HMRC's application for an order that specified contractor loan scheme arrangements were notifiable under the DOTAS regime.
HMRC applied under FA 2004, s. 314A (and s. 306A) that arrangements that arose when a person became employed by Hyrax Resourcing Trust (HRT) were (or, in the alternative, were to be treated as) notifiable arrangements within the meaning of FA 2004, s. 306(1) for the purposes of the disclosure of tax avoidance schemes (DOTAS) rules.
HMRC submitted that the arrangements (the Hyrax arrangements) were the current iteration of a contractor loan scheme previously known as K2/Lighthouse. And that shareholders and/or directors of Hyrax Resourcing Ltd, Bosley Park Ltd and Peak Performance Head Office Services Ltd (the three respondents) had since 2004 set up companies to carry out tax planning schemes for their “clients”. Under the schemes, owner-directors and consultants, substituted for the remuneration they would otherwise have received, a small salary at the national minimum wage (NMW) and a large interest-free loan, which they would not expect to repay in their lifetime. As the law changed over time, new schemes evolved out of the earlier ones, each designed to circumvent the changed tax laws and allow the loan to be paid and received tax free (apart from a charge to reflect the lack of interest). HMRC submitted that these arrangements were notifiable as they fell within the premium fee, standardised tax products and employment income provided through third parties hallmarks as set out in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543), reg. 8, 10 and 18.
The FTT agreed with HMRC that Hyrax was the latest iteration of a scheme that had been around for many years, just tweaked to avoid further anti-tax avoidance legislation. In these circumstances, the FTT decided that it was legitimate to take the marketing of the earlier scheme as likely to reflect how the Hyrax arrangements were marketed. However, the FTT did not agree with HMRC that it should infer Hyrax was notifiable because the earlier iterations had been notified.
The FTT noted that an application under FA 2004, s. 314A had to specify the proposal or arrangements in respect of which the order was sought, and the promoter. And for an order under s. 314A, HMRC had to prove (on the balance of probability) that s. 306(1)(a)–(c) applied to the arrangements the subject of the application. So, the arrangements had to:
- have fallen within any description prescribed by the Treasury by regulations;
- have enabled, or might have been expected to have enabled, any person to obtain an advantage in relation to any tax that was so prescribed in relation to arrangements of that description, and
- were such that the main benefit, or one of the main benefits, that might have been expected to have arisen from the arrangements was the obtaining of that advantage.
In relation to condition (b) the FTT found that the scheme gave, or was expected to give, rise to a tax advantage because it was intended to avoid or reduce the charge to tax on salary which would otherwise have been received by scheme users, had they not adopted the scheme and received equivalent sums in an economically similar, but legally distinct form, of small salary and large loans which were not expected to be repaid (at least not in their lifetime). The FTT therefore found that condition (b) of s. 306 was fulfilled.
In relation to condition (c) the FTT found that the main benefit that might be expected to have arisen from the arrangements was the obtaining of that advantage. From the evidence it was clear that the scheme was marketed and sold on the basis of its tax advantage. In any event, there was no other rational reason why anyone would implement a convoluted and expensive set of arrangements which left them with a legal (if economically unreal) obligation to repay a sum that they would otherwise have received as salary, save for the expected tax advantage. The FTT therefore found that condition (c) was fulfilled.
In relation to condition (a) the FTT found that the arrangements fell within the premium fee, standardised tax products and employment income provided through third parties hallmarks per SI 2006/1543.
It followed that the FTT found that the Hyrax arrangements were notifiable arrangements within s. 306(1). However that did not conclude the application in HMRC's favour because HMRC's application had to specify both “the arrangements” and “the promoter” and therefore it seemed to the FTT that it was implicit in s. 314A(2) that it must be satisfied that at least one of the respondents actually was a promoter, otherwise the requirements of that sub-section would not have been fulfilled as HMRC's application would not have specified “the promoter”.
Based on the definition of promoter in s. 307, the FTT found that Hyrax (the first respondent) was a promoter of the Hyrax arrangements and therefore HMRC's application correctly specified the promoter. The FTT did not find that either Bosley Park Ltd or Peak Performance Head Office Services Ltd (the second and third respondents) were promotors.
The FTT therefore allowed HMRC's application, on the basis that the application correctly specified the first respondent as the promoter. It was not allowed in respect of the second or third respondent.
Had the FTT not made the order sought by HMRC under s. 314A, it would have made the order sought under s. 306A.
Like in the recent case of Curzon Capital Ltd [2019] TC 06949, the FTT considered that the arrangements were notifiable. But, unlike in Curzon, the FTT was able to order that the arrangements were notifiable, because HMRC's application had correctly specified “the promoter” as required by FA 2004, s. 314A.
[1] On 2 June 2017, HMRC made an application under s 314A (and s 306A) of Finance Act 2004 (“FA 2004”) that the arrangements that arise when a person becomes employed by Hyrax Resourcing Trust (“HRT”) are (or, in the alternative, are to be treated as) notifiable arrangements within the meaning of s 306(1) FA 2004.
[2] The application was served on the three respondents on the basis that, in HMRC's view, as stated in the application, they were promoters of the arrangements.
[3] The first paragraph of the application was set out at paragraph 1 of this decision notice. A summary of the arrangements was set out at paragraph 5–8 of the application and was as follows (in brief):
- The arrangements were the current iteration of a contractor loan scheme previously known as K2/Lighthouse and were first implemented in tax year 14/15;
- Under the arrangements, a director/contractor is employed by Hyrax Resourcing Limited as trustee of HRT. The services of that director/contractor are then sub-contracted to an end user being the entity wishing to engage the contractor/director. HRT invoices the end user for the services of their employee. HRT pays their employee a national minimum wage (NMW) and gives him/her interest-free loans. The benefit of repayment of the loan is assigned to an offshore employer-financed retirement benefits scheme. The loans are, in reality, never expected to be repaid.
- The employee declares the NMW for PAYE and NIC. The interest free loan is declared as a beneficial loan on the employee's tax return but is excluded from it for PAYE purposes. The tax on the beneficial loan is far lower than if the loan sum was taxed as employment income.
[4] A more detailed summary was given in paragraph 23, which included reference to documents in an appendix.
[5] The application set out that arrangements which it called the K2/Lighthouse arrangements, and which it described in outline, had been notified to HMRC and were allocated a DOTAS. It explained the reasons for HMRC's belief that the Hyrax arrangements (being those described at paragraph 3 above) were the successor to them. In brief, those reasons included:
- K2/Lighthouse scheme employees were moved to HRT on 6/4/14; earlier on 31 March 2014, a company at the heart of the K2/Lighthouse scheme had transferred its business to Hyrax Resourcing Ltd (as trustee of Hyrax Resourcing Trust) on 31 March 2014;
- The documentation used in both schemes was similar;
- Significant overlap between persons responsible for design, management, promotion and implementation of the two schemes; and
- Promotional documentation used for the Hyrax scheme suggested that the product had been available for many years in an earlier form.
[6] The application set out the two schemes in the form of steps. The K2/Lighthouse arrangements comprised steps a to h; the Hyrax scheme was said to comprise steps a to i. The steps were very similar (although the identity of the companies/trustees varied) save that, as the application made clear, K2/Lighthouse involved an offshore employer (with an onshore company to which its employees were sub-contracted) making loans to the employee while Hyrax arrangements involved an onshore employer making loans, the benefit of which was then transferred to an EFRBS.
[7] The application then set out why HMRC believed that the Hyrax arrangements were notifiable arrangements under three prescribed descriptions (premium fee...
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