In the recent Autumn Statement, George Osbourne announced several governmental counter-avoidance measures that confirm that the net is closing in on those who subscribe to tax avoidance schemes. A failed tax avoidance scheme marketed by Consulting Overseas Limited has been identified by a recent First-Tier Tribunal case of Boyle v HMRC. HMRC has vowed to pursue all other subscribers to the same scheme that Mr Boyle was involved with and will also target others who have used similar schemes to avoid tax.
Mr Boyle was a contractor who originally worked for a company called Sandfield Systems Limited (SSL) and subsequently worked for Sandfield Consultants Limited (SCL) when a significant fall in his income was noticed by HMRC. It is important to note that Sandfield Consultants Limited (SCL) was a company registered in the Isle of Man. The director of SSL was also the director of SCL and Consulting Overseas Limited (COL) which marketed the tax avoidance scheme. The scheme was marketed by COL to the employees as a remuneration package that could achieve income tax and national insurance contributions (NICs) savings.
The FTT found the conclusions of HMRC’s investigation to be correct. The significant fall in Mr Boyle’s income was explained by the fact that about 2/3 of the income generated by the taxpayer was withheld and then paid to him by way of a ‘loan’ made in Romanian, Byelorussian or Uzebekistani currency. When Mr Boyle entered into a contract of employment with SCL it was agreed that he would be paid a salary but he would also participate in the ‘soft currency loan scheme’ arranged by SCL to receive the remainder of his salary. All employees of SCL used the foreign broker Credex International SA, when taking out the loans in question. It was the currency trades organised by Credex that turned the earnings into what the scheme claimed to be “non-taxable foreign exchange gains”.
The FTT found that the loans were not genuine and also found no evidence to prove that the foreign currency ever existed or that Credex was a genuine dealer independent of SCL. Notably the FTT ruled that the monies which were allegedly paid to Mr Boyle as loans in foreign currency constituted emolument from employment/earnings under s.173 ITEPA 2003. Furthermore, according to s.188(1)(b), as the ‘loans’ that were made were essentially written off, the amount written off is deemed to be treated as earnings from employment for that year and therefore should have been subject to income tax and NICs. They also ruled that Mr Boyle was aware that the loans were a means of receiving his income to avoid tax.
The FTT also stated that even if they were wrong to state that the loans were emoluments of his employment, Mr Boyle should be liable to tax under the transfer of assets provisions so there would not be any further grounds for appeal. The numerous appeals raised by Mr Boyle including his claim that he was entitled to credit for income tax which ought to have been deducted by SCL, were rejected in their entirety. It was found that Mr Boyle was liable to income tax for the years 2001/02, 2002/03 and 2003/04 in respect of monies he received as employment income.
This case demonstrates that efforts to avoid tax using offshore vehicles are being increasingly targeted in the crackdown against tax avoidance. This case also suggests that schemes where employees receive ‘loans’ as a form of payment are also being treated with suspicion. It is estimated that more than 15,000 people have used schemes similar to Mr Boyle and that the pursuit of the outstanding tax and national insurance contributions associated with these schemes will amount to over £400 million.
With the courts continuing to find against avoidance schemes, and the host of new regulations designed to increase the pressure on such schemes, the viability of such schemes is seriously called into question. Genuine tax planning, rather than convoluted schemes, appears to be the way forward and Eaves and Co are here to help.