Root2 Tax Ltd and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 September 2017 |
| Neutral Citation | [2017] UKFTT 696 (TC) |
| Date | 11 September 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0696 (TC)
Judge Colin Bishopp
Aparna Nathan, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the applicants
Patrick Way QC and Imran Afzal, counsel, instructed by Reynolds Porter Chamberlain LLP, appeared for the respondents
Income tax – Disclosure of tax avoidance schemes – Application for order that arrangements notifiable or to be treated as notifiable – FA 2004, s. 314A and 306A – Spread bet and hedge entered into simultaneously by employee – Hedge later novated to employer or EBT – Whether standardised arrangements – Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543), reg. 10 – Yes – Whether tax advantage – Yes – Arrangements notifiable – In the alternative – To be treated as notifiable.
The First-tier Tribunal (FTT) made an order for the Alchemy avoidance scheme to be notified for the purposes of the DOTAS rules on the basis that it was a tax arrangement falling within the standardised tax products hallmark.
HMRC applied to the FTT for an order that certain arrangements, known as “the Alchemy scheme”, were notifiable for the purposes of the Disclosure of Tax Avoidance Schemes (DOTAS) provisions in FA 2004, Pt. 7. In case this application failed HMRC also applied in the alternative for an order that the Alchemy scheme be treated as notifiable.
The Alchemy scheme was designed to replace a key employee or director's taxable earnings with tax free spread betting gains. Under the scheme an individual entered into a spread betting contract with an established spread-betting business based on the performance of a basket of hedge funds. At the same time, the employee entered a hedging contract with the same spread-betting business. The hedging contract mirrored the spread bet so that, if the employee won on the spread bet he would lose on the hedging contract, and vice versa. The figures did not quite match because built into the arrangements was a “fee” for the spread-betting business for participation in the arrangements. Either the individual's employer or an employee benefit trust (EBT) took over the hedging contract by way of novation when the outcome of the two contracts was unknown and therefore the potential liability of the contract was low. This was a taxable benefit on which appropriate tax was paid. If the individual won the spread bet (as was likely) his winnings would be tax free and the loss on the mirror contract would be paid by the employer or EBT to the spread-betting business.
A disclosure would be required under DOTAS if the arrangements fell within the definition of “notifiable arrangements” in FA 2004, s. 306(1), i.e: the arrangements:
- fell within any description prescribed by the Treasury by regulations;
- 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 arise from the arrangements was the obtaining of that advantage.
It was not seriously disputed that the steps undertaken in the scheme were arrangements both in the ordinary sense and under FA 2004, s. 318, though there was disagreement about when the arrangements stopped, with the respondents arguing that they stopped at the time of novation.
The FTT also found that based on the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543), reg. 10, as applying at the time, the arrangements were standardised and therefore potentially within DOTAS. The respondents argued that the DOTAS provisions were not engaged because the arrangements did not give rise to a tax advantage: the user could not have undertaken the transactions in any other way, and the tax to which they gave rise had been declared and paid. The FTT, however, found that the right question was whether the “informed observer [would] conclude that the main purpose of the arrangements was to enable a client to obtain a tax advantage” (emphasis added by the FTT). The FTT did not think it was seriously arguable that the arrangements in this case did not meet that description. It found that the only reasonable conclusion to which the hypothetical informed observer could come was that the purpose of the scheme was to extract money from a company or EBT without incurring the tax charge which would be incurred were that money to be paid as employment income, and thereby to secure a tax advantage. Whether the scheme succeeded in that aim was beside the point.
To conclude on HMRC's preferred application, the FTT was satisfied that:
- the Alchemy scheme amounted to arrangements in the statutory sense;
- the scheme enabled, or might have been expected to enable, a person to obtain a tax advantage;
- the main benefit, or one of the main benefits, of the scheme (if it worked) was the obtaining of that advantage;
- the arrangements were in a standardised form and had substantially standardised documentation, in a form determined by the respondents, requiring minimal tailoring for each user;
- the arrangements had been made available for use by more than one person; and
- the respondents were the promoters of the scheme in the statutory sense.
Accordingly the arrangements were notifiable and the FTT therefore made the preferred order sought by HMRC.
Although, given the above, the FTT did not need to consider HMRC's alternative application, it decided to comment in case it was found to have made an error in respect of the preferred application. The FTT was satisfied that HMRC: (a) had taken all reasonable steps to establish whether the proposal or arrangements were notifiable; and (b) had reasonable grounds for suspecting that the proposal or arrangements might have been notifiable, and therefore had it not made the above order it would have made the alternative order.
The tribunal's order that the arrangement was notifiable under DOTAS paves the way for HMRC to issue accelerated payment notices (APNs) to the scheme users.
[1] This decision relates to two applications by HM Revenue and Customs, or HMRC. The first is for an order that certain arrangements are notifiable for the purposes of Part 7 of the Finance Act 2004 (“FA 2004”), the Disclosure of Tax Avoidance Schemes, or DoTAS, provisions. The second, made as an alternative should the first fail, is for an order that the arrangements are to be treated as notifiable. Applications of this kind are rare, but not quite novel: in 2009 HMRC made an application similar to the first of those before me to a Special Commissioner, whose decision is reported as R & C Commrs v Mercury Tax Group Ltd (2009) Sp C 737. The arrangements in issue in that case were, however, very different from those with which I am concerned and the relevant law has since been extensively amended; accordingly I am able to derive little assistance from that case. The current provisions have been considered, in different contexts, in other cases, notably by the Administrative Court in Walapu v R & C Commrs [2016] BTC 14. The issue in that case, too, was rather different from that before me but some assistance can be derived from the judgment, as I shall later explain.
[2] In much of the documentation produced for the hearing the arrangements are described as “the Alchemy scheme”, a name derived from some of the material produced by those who devised or marketed it. I will use the terms “the Alchemy scheme” or “the scheme” as convenient shorthand, while intending them to be neutral.
[3] The essential structure of the Alchemy scheme is straightforward. An individual (“the user”), typically but not invariably a director or key employee of a small company, enters into a spread bet contract with a counterparty, an established spread-betting business at arm's length, though aware that it is entering into a pre-conceived arrangement. The bet relates to the performance of a basket of hedge funds over a given period: if the funds rise in value to a stated level or above by the end of the period, the user wins, and if not he loses the bet. In the “vanilla” version there is that simple binary outcome; more complicated variants allow for sliding scales of gains and losses but the principles are identical and there is no need to say any more about those variants. At the same, or about the same, time as he enters into the spread bet the user enters into a hedging contract, commonly but not always a call spread option (“CSO”), with the same counterparty. The hedging contract mirrors, though not always exactly, the spread bet; the critical and invariable feature is that the outcome of the CSO is also dependent on the performance of the same basket of hedge funds, but in reverse: thus if the user wins on the spread bet he is certain to lose on the CSO, and vice versa. The spread bet and the CSO are arranged so that they mature at the same time.
[4] The sizes of the bets differ from user to user, as do their precise terms. Thus, to take one simple example, the identity of the securities in the basket will differ from one iteration to another. In a hypothetical but illustrative example a user might enter into a spread bet by which he could win £95,000 if the basket rises in value to the requisite level, or lose £11,000 (the amount of his “stake”) if it does not, and into a CSO by which he could lose £106,000 offset by the payment to him by the spread betting house of a premium, for the grant of the CSO, of £6,000. Thus in that example if the basket of funds rises in value to the agreed extent the user gains £95,000 but loses £100,000 net, making an overall loss of £5,000. If the basket does not rise, the user loses £11,000 on the spread bet, but gains £6,000 on the CSO, again a loss overall of £5,000. He is, therefore, in a small net loss situation, while the spread betting house is...
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