The end of the road for the tax avoidance loan schemes?
Have you had a chance to check out our blog of April 1st? It was on the topic of Loan Charge Tax Avoidance. I wrote about how HMRC was intent on closing the loophole whereby companies were avoiding tax for themselves and their employees by paying them in the form of loans, rather than conventional taxable salaries. These loans, of course, would never be repaid. Well – for one large company in particular, chickens are coming home to roost.
The company is Hyrax Resourcing Ltd. HMRC recently won a case against them at First Tier Tribunal (FTT) over a loan scheme they were promoting. It seems as though Hyrax are facing having to pay back around £40m in unpaid taxes. More than that, they’ll have to reveal the names and addresses of the 1,180 high earners who were part of the scheme.
Failure to provide this information could well incur a further penalty of at least £6m, as well as £5,000 per day until they do disclose the necessary information. It’s a tidy sum – one which should make any business think twice before they consider exploiting the same loophole.
Here’s how the scheme worked
Hyrax paid the individuals just enough to cover the statutory National Minimum Wage. The rest of their pay consisted of loans. These were transferred to a Jersey offshore trust. The individuals didn’t declare the loan amounts as income received on their tax returns. The result? They paid negligible amounts in tax or National Insurance.
Hyrax organised the entire scheme, including employment and service contracts. They then charged the individual scheme users 18% as a promoter fee.
The Hyrax scheme was launched as a successor to the K2 arrangements, which had been notified under the Declaration Of Tax Avoidance Schemes. K2 scheme users transferred from K2 to Hyrax with the significant difference that Hyrax wasn’t notified under DOTAS. The excuse Hyrax gave was that their scheme wasn’t about Tax Avoidance but Tax Mitigation. They argued that their scheme came under Employer-Financed Retirement Benefits (EFRBS) and was therefore subject to an exemption.
The judge, it seems, was unimpressed
He declared, ‘The evidence is quite clear that Hyrax was the latest iteration of a scheme that had been around for many years; users of previous iterations were transferred seamlessly into Hyrax.
‘Hyrax was promoted as being the same as the previous iterations bar being tweaked to avoid being caught by HMRC’s latest round of anti-avoidance legislation.
‘In these circumstances, it is legitimate to take the marketing of the earlier scheme, and in particular, its immediate predecessor K2, as likely to reflect how the Hyrax arrangements were marketed.’
The First Tier Tribunal found that the scheme had been promoted and sold entirely on the basis of tax benefit.
What should companies do if they’ve been following the same path
So – what should companies do if they’ve been following the same path as Hyrax? Let’s hear the advice of the Financial Secretary to the Treasury, Mel Stride –
‘HMRC is cracking down on the unscrupulous promoters who sell these highly contrived tax avoidance loan schemes.
‘Promoters need to take note of this decision and make sure they contact HMRC urgently about schemes they haven’t yet disclosed.’
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This legal information is not the same as legal advice and you may not rely on our post as a recommendation of any particular legal understanding. Please, consult an attorney if you’d like to get advice on your interpretation of this article.