Redbox Tax Associates Llp
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 August 2021 |
| Neutral Citation | [2021] UKFTT 293 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 293 (TC)
Judge Ian Hyde, Julian Stafford
Christopher Stone, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the applicant
Keith Gordon, counsel, instructed by RPC appeared for the respondent
DOTAS regime – Application under FA 2004, s. 314A whether notifiable – Yes – Whether arrangements – Yes – Whether premium fee – Yes – Whether standardised tax product – Yes – Whether a loss scheme – Yes – Application granted – FA 2004, Pt. 7 – Tax Avoidance (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543), reg. 8, 10, 12.
The First-tier Tribunal (FTT) granted HMRC's application that the Volatility structure promoted by Redbox Tax Associates LLP were notifiable arrangements under the DOTAS regime.
HMRC applied under FA 2004, s. 314A that the Volatility structure promoted by Redbox Tax Associates LLP (the respondent) were notifiable arrangements within the meaning of FA 2004, s. 306(1) for the purposes of the disclosure of tax avoidance schemes (DOTAS) rules in FA 2004, Pt. 7.
Under the Volatility structure, each user entered into a forward purchase contract for the purchase of securities from asset management group Schroders and, simultaneously, a forward sale contract for the sale of securities to Schroders (a transaction). The price payable and the type of security to be purchased or sold depended on whether the value of the FTSE 100 index at a date, normally between 10 and 15 days later, fell within upper and lower barriers. If the FTSE 100 remained within the barriers, small gains would arise to the users, but if it fell outside the range, substantial gains and losses would arise with the user making matching gains and losses but the loss was always in shares (in the capital gains tax (CGT) version) or in certificates of deposit (in the miscellaneous income (MI) version). Users often participated in repeated transactions until a material tax loss was generated which they could then set against gains/miscellaneous income. The users entered into an introductory services agreement with the respondent under which, in respect of only the first transaction, the user agreed to pay the respondent commission, a contribution to a fighting fund and a sum to a financial adviser. The user also entered into an engagement letter with Schroders under which the user would pay Schroders a fee for each transaction.
The FTT ruled as follows:
- The sequence of paired contracts amounted to arrangements as defined by s. 318. The nature of the structure was such that it made no economic sense for a user to drop out until he or she made an allowable loss.
- HMRC's application satisfied the conditions in s. 314A(2) by specifying the arrangements which were notifiable.
- The arrangements enabled any person to obtain a tax advantage pursuant to s. 306(1)(b)). The test is not that there would be a tax advantage but that might be expected to enable … any person to obtain [a tax] advantage, and applied to the arrangements as a whole not separately to each pair of contracts.
- The arrangements were such that the main benefit, or one of the main benefits, that might be expected to arise was the obtaining of that advantage pursuant to s. 306(1)(c)). The economics of the arrangements together with the way in which it was structured and marketed pointed strongly to the tax advantage being the main benefit, or one of the main benefits, that might be expected to arise from the arrangements and it appeared plain that users participated in order to obtain a tax advantage. The economic gains were limited and it was not credible to suggest that it was a conventional investment product with the purpose of generating economic returns.
- The arrangements met the premium fee hallmark in SI 2006/1543, reg. 8. Applying the hypothetical test of a notional promoter and a sophisticated notional user the FTT found that the nature of the arrangements were such – and in particular the value of the potential tax advantage to users – that the promoter would be able to charge a premium fee.
- The arrangements met the standardised tax product hallmark in reg. 10. The documents used in implementing Volatility, taken as a whole, were standardised as were the transactions entered into and while the forward purchase and sale contracts originated from Schroders, their form was either industry standard or tailored to the respondent's instructions to enable the implementation of Volatility.
- The arrangements met the loss schemes hallmark in reg. 12. The respondent clearly intended and expected more than one individual to participate in substantially the same arrangements and an informed observer could reasonably conclude that the main purpose was to enable users to obtain losses to reduce their income tax or CGT. The FTT accordingly concluded that the Volatility arrangements were notifiable under s. 314A.
This decision leaves the scheme promoter liable to significant penalties under TMA 1970, s. 98C. The effectiveness of the Volatility structure was tested in Padfield [2021] TC 07983, in which the FTT concluded that the losses created were not, under the Ramsay principle, allowable losses for capital gains tax or income tax purposes.
[1] This appeal concerns whether certain financial structures involving paired forward contracts to purchase and sell certain securities promoted by the Respondent are notifiable under the Disclosure of Tax Avoidance Scheme legislation in Part 7 of Finance Act 2004 (known as “DOTAS”) or should be treated as so notifiable.
[2] HMRC made an application to this Tribunal for an order under section 314A that the structures described as Volatility and set out in more detail in this decision are notifiable under DOTAS. In the alternative HMRC seek an order under section 306A that Volatility should be treated as notifiable.
[3] As we are concerned with the setting up and participation in Volatility, rather than the actual tax effect of the structure, we have where relevant for simplicity of expression described the intended tax effect without reference to whether it was effective or not. References in this decision to obtaining tax losses or other tax results should be interpreted on that basis.
[4] We will use the term “structure” in this decision to refer neutrally to any scheme or arrangement which may or may not be notifiable under DOTAS.
[5] All references to legislation in this decision are to Finance Act 2004 (“FA 2004”) and to regulations are to the Tax Avoidance (Prescribed Descriptions of Arrangements) Regulations 2006 unless stated otherwise (“the Regulations”).
[6] Relevant legislation and regulations are set out in the Appendix to this decision.
[7] In a separate appeal, Padfield [2021] TC 07983, the Tribunal considered the tax treatment of the participation by four lead taxpayers in Volatility This appeal was heard on 24, 25, 26 and 27 November 2020 before Judge Beare in this Tribunal and the decision in that appeal, dismissing the taxpayer's appeals was released on 23 December 2020, after the hearing in this appeal.
[8] Following the release of the decision in Padfield we directed the parties to make submissions as to the relevance of Padfield to this appeal.
[9] HMRC submitted that Padfield was relevant. Judge Beare's conclusion at [276]–[277] that “he only main purpose of the arrangements” was “securing the allowable loss” was clearly relevant to this Tribunal in considering the main purpose and main benefit of the arrangements. Further, Judge Beare would be regarded as a “reasonable observer” who has made a study of the arrangements.
[10] The Respondent argued that the Padfield appeal was brought by different taxpayers in respect of entirely different issues, namely the substantive tax effects of Volatility not whether it amounts to “arrangements” that fall to be disclosed under DOTAS. The statutory regimes and relevant tests are entirely different. In any event the decision in Padfield is not binding on this Tribunal
[11] In our view notwithstanding the relevant facts in this appeal and Padfield are presumably identical, save for the choice of test appellants in Padfield and sample participants in this appeal, this decision concerns separate issues arising under the DOTAS regime and different evidence as to the facts was put before the two Tribunals. It is tempting to adopt Judge Beare's findings, reached as they were after a four day hearing and in a clear and thorough decision, but the evidence was in many respects different and has not been the subject of detailed submissions by the parties in the context of the different issues we need to consider in this appeal. In this decision we have therefore noted aspects of the decision in Padfield where we consider it relevant but have otherwise come to our own conclusions.
[12] We heard witness evidence from Mr David Hole and Mr Paul Grainger.
[13] Mr Hole is an officer in HMRC's Counter-Avoidance Directorate and a specialist investigator in HMRC's DOTAS enforcement team. Prior to May 2015 a Mr Alan Bell was the lead investigator but he retired. Mr Hole was then the lead investigator into Volatility from May 2015 to October 2016 but did not engage with the Respondents during this period. In October 2016 Mr Hole's colleague, a Mr Wood, took over as lead investigator but consulted Mr Hole from time to time. At the time of preparing witness evidence for this appeal Mr Wood was about to retire and so would have been unable to give evidence at the hearing. Accordingly Mr Hole reacquainted himself with the matter and gave evidence based on his historic knowledge and from the documents on the official files. Subject to that limitation, we accept Mr Hole's evidence.
[14] Mr Grainger had no prior connection either with the Respondent or the structures which are the subject of this appeal. Mr Grainger has 30 years...
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