The scheme was marketed by Consulting Overseas Limited to independent contractors as a remuneration package that would save them substantial amounts of income tax and national insurance contributions.
To avoid tax, contractors signed up as employees of an Isle of Man company, Sandfield Consultants Ltd, and agreed to receive about two thirds of their income as loans in Romanian lei, Byelorussian roubles or Uzbekistani soums. They then entered into currency trades that were supposed to turn these earnings into non-taxable foreign exchange gains.
The First-tier Tribunal dismissed all the arguments put forward by the contractor, Philip Boyle, in his appeal against HM Revenue and Customs’ (HMRC’s) assessments.
The judge found that the loans were “in substance and reality income from his employment, bearing in mind in particular that Mr Boyle had no need for a loan, there was an entirely artificial exchange rate; the reality is that there was no borrowing by Mr Boyle and he never believed that the ‘loans’ were other than a means of receiving his income without suffering tax on that income”.
The judge also decided that the loans were not genuine: “No evidence has been provided at any stage during HMRC’s lengthy investigation of the scheme, despite many requests for such evidence, to show that the foreign currency ever existed.”
David Gauke, Exchequer Secretary to the Treasury, said:
I am delighted the tax tribunal threw out this contrived scheme, designed to avoid tax.
The unprecedented package of counter-avoidance measures announced in the Autumn Statement, combined with HMRC’s record of winning over 80% of all avoidance cases taken to court, shows the writing is on the wall for the minority who are prepared to use marketed tax avoidance schemes to get around the rules.
The impact of the ruling
About 15,000 people used schemes similar to that used by Philip Boyle, where contractors receive “loans” as a form of payment. Of the 348 users of this scheme, 226 have settled with HMRC and paid approximately £5 million. HMRC is continuing to pursue others.
The First-tier Tribunal decision is available on the Finance and Tax Tribunals website.