Alchemy Tax Scheme Fails To Work Magic At Tribunal

Lisa Smith, BA (Hons), CeFA
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A tax avoidance scheme has lost a landmark case that could see HM Revenue & Customs claw back more than £110 million from linked cases.

Root2 Tax Limited challenged HMRC’s view that their Alchemy tax avoidance scheme was illegal at the First Tier Tribunal.

The scheme involved an employee spread-betting, with winnings paid as tax-free employment income for the employee and treated as a tax deductible expense by the company.

HMRC argued that the scheme was designed to give a tax-free income that should have been subject to PAYE and national insurance contribution rules.

The tribunal agreed and rejected the Root2 Tax appeal.

Excellent win, says HMRC

Mary Aiston, Director of HMRC’s Counter Avoidance directorate, said: “This was an excellent win against a promoter who used their own avoidance scheme to try to take their profits tax free. The defeat of the Alchemy scheme shows that the department will tackle the people who sell these schemes head-on, ensuring that they do not escape paying the tax they owe.

“There should have been no doubt that this convoluted scheme – where employment income came as a tax-free betting win – was too good to be true. Our message to people tempted by a tax avoidance scheme is, if something looks too good to be true, then it almost certainly is.”

She also said that the tribunal win could lead to the recovery of £2.4 million in tax and national insurance contributions,  and a further £110 million in related cases.

The tribunal heard that Root2 Tax devised and promoted the tax avoidance scheme mainly to company directors, including the company’s own staff.

Rangers case helped kick Alchemy into touch

This is the first time HMRC has litigated using the findings established by the Supreme Court in the high profile “Rangers” case, and applying those findings to non-loan arrangements.

“Rangers” provided final clarity on PAYE avoidance that typically utilised Employment Benefit Trusts as part of the arrangements. This new decision builds on the findings in “Rangers”, applying the principles into PAYE avoidance that utilised the directors’ use of their own company for avoidance purposes.

The disguised remuneration legislation was introduced in 2011 to challenge contrived PAYE avoidance schemes. It takes HMRC significant amounts of time to investigate these complex avoidance schemes and prepare for litigation, and this is the first time this legislation has been used in a tribunal case.

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