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Court shuts down £400m tax avoidance scheme

by Alex Steger on Feb 28, 2013 at 10:48

Court shuts down £400m tax avoidance scheme

A £400 million tax avoidance scheme devised by advisers who also created schemes used by Jimmy Carr and Chris Moyles has been shut down, according to The Times.

The Highlands scheme hit the headlines last year when it was revealed that 305 investors used it to claim £391.8 million of tax relief.

It was shut down after a judge ruled that ‘it was a tax avoidance scheme with no underlying purpose whatsoever’.

According to The Times the scheme was devised by NT (No Tax) Advisors and created by SG Hambro, the private bank owned by Société Générale.

The Times reported that SG Hambro set up and controlled the offshore companies involved in Highlands through a charitable trust and then created tax relief for investors by arranging a series of transactions involving dividend purchase.

Treasury Minister David Guake told the paper: ‘These schemes are an affront to the vast majority of businesses and people who pay what they owe.’

17 comments so far. Why not have your say?

John Phillips

Feb 28, 2013 at 11:18

Haven't times, and Judges, changed?

James Avon Clyde, Lord Clyde Lord President of the Court of Session

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

Lord Clyde gave this famous quote in the case of: Ayrshire Pullman Motor Services v Inland Revenue [1929] 14 Tax Case 754, at 763,764:

The ability to do whatever you possibly can ‘legally’ to minimise your exposure to taxes is an inherent part of a capitalist society.

Lord Tomlin in the 1936 case of IRC v Duke of Westminster was eloquently quoted as saying the following:

“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

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alan macfarlane

Feb 28, 2013 at 11:32

John

I think the use of the phrase "so far as he honestly can" tells its own story.

The Treasury Minister is spot on.

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levelplayingfield?

Feb 28, 2013 at 11:44

Times do change as the law, both statute and precedent, does evolve over time.

We now have purposive construction of the statutues, cases like Ramsey and successors have all chipped away at the reviously more rigid interpretation of the statute.

What all this creates is complexity and uncertainty, a boon to the state apparatus when pressing citizens for ever more taxation. Costs of compliance increase due to the complexity, economic activity is stymied due to the uncertainty.

Ultimately a brave political leader will be required to cut through the accumulated mess of the past 30 odd years tax legislation. A visionary in the Thatcher mould (but not necessarily with the same philosophy!).

Personally, I don't see anyone of such a mould on the horizon, let alone in Government or opposition today.

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John Phillips

Feb 28, 2013 at 11:52

Alan,

The point is that it is up to Government & HMRC to put an end to these schemes by employing the right people to re-write the legislation so as not to allow us to "arrange our affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be".

I would agree some schemes take the proverbial and boarder on theft from the coffers of the treasury. However who can blame people for trying, when so much of our taxes are squandered and misappropriated by government. Morality starts at the top and when you consider what has happened over the last decade, let alone since records began, why would you want to pay more than is necessary into the pot.

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Smithling

Feb 28, 2013 at 12:07

John Philips, times have indeed changed... by nearly a century!!

I'm afraid to say that despite what the law will tell you, I think it would also hold a dim view of you shooting a welshman with a bow and arrow.

Loopholes are an unintended consequence of a poorly designed tax system that has been tweaked beyond recognition. They are not left there as special little treats for anybody clever enough to spot them. What you're after is a Wordsearch puzzle or maybe Soduku. In the meantime, if you could play by the rules that the vast majority of the rest of us do then that'd be simply spiffing!

In response to your second post. I agree with the first part, however, HMRC will never be able to get the best brains to put it all right. They can't afford them. Similar to bankers outwitting the FSA. If you're paid £50k by HMRC to try and outwit people being paid £500k by private industry then it's not a huge surprise that the brainpower ends up elsewhere.

Therefore, I vote for a few custodial sentences to be handed out with these victories. I mean if it's all above board then presumably these schemes will be designed and submitted to HMRC for approval right? At which point HMRC will get them signed off or decided in court right? At which point the scheme fees will be significantly lowered due to a far lower reliance on defence right? Which would reduce the amount accountants and introducers get paid right? Which means.... ohhhhhh. Never mind.

I also think the whole "but so much of it is squandered that I feel morally justified" is a similar argument to "but he started it". Morality starts at the top? I truly truly hope that there are not many people out who agree with that statement.

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alan macfarlane

Feb 28, 2013 at 12:48

John

I don't think that is the point because it will never happen. Even the best legal wordsmith cannot draft wording which cannot be misconstrued. The problem is deliberate misinterpretation of the legislation leading on to a contrived scheme which is (possibly) within the letter but completely against the spirit of the law.

I agree with Smithling that we should be looking for criminal charges to be brought against those who deliberately bend the rules for the benefit of their no doubt wealthy customers to the detriment of everyone else. Common sense dictates that it should be easy to prove that a "scheme" involved a deliberate misconstruction of the legislation to gain a tax advantage that the legislation never intended.. However, I appreciate that the Law is indeed an ass.

I also agree with Smithling that your moral justification smacks of "whataboutery". I can assure you that you would end up incarcerated in an establishment wholly at her majesty's pleasure if you follow that lione to its logical conclusion. Assuming you get caught of course.

Oh, and I claim no moral high ground here - just saying.

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Michael Brown

Feb 28, 2013 at 13:26

It is quite simle is it not?

Any tax scheme has to be agreed with HMRC berfore it is offered. Therefore these schemes will never come about.

If HMRC pass it and the GVT does not like it it can then change the law to get rid of it.

simple is it not?

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Eden W

Feb 28, 2013 at 13:41

Thanks, Smithling. Morality (even more than charity?) definitely begins at home in my view. We get the politicians we deserve because we elect them (or abstain from voting), fail to oppose or stand against them - we don't even discuss policitcal and social matters in our own social circles until something really significant happens to us. The very fact that it makes "sense" using "us" and "them" to describe the relationship with politicians is really the heart of the point........most of them are not "us", are not "of us" and do not represent "us" or our best interests or core views on matters.

A judge from 1929 wishing to be seen as siding with an individual and against those acting on behalf of the whole society to collect taxes to be used by represetatives of, within and on behalf of that whole society was no less wrong then that he seems to be now.

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Tom

Feb 28, 2013 at 14:01

So at what stage does a "..tax avoidance scheme with no underlying purpose whatsoever" become tax evasion?

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alan macfarlane

Feb 28, 2013 at 14:27

Tom

Great question. Answer - it doesn't.

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John Phillips

Feb 28, 2013 at 14:28

As soon as you write it!! DGT, G&L Trust etc etc. According to the majority on this subject it's shut up and pay up!!

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Smithling

Feb 28, 2013 at 15:21

John,

Hand on heart, do you honestly think that a DGT falls into the same bracket of integrity and morality as somebody paying 1% tax because they published a short story despite having nothing to do with writing or publishing, or invested in some film feature that fell apart despite having never shown any interesting in acting or film?

Really?

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John Phillips

Feb 28, 2013 at 16:14

Smithling

So there are schemes that have no commercial value or purpose that you deem acceptable? One rule to hammer the rich and one for the acceptable middle classes. How much revenue does the Comedian with his entourage of agents, dressers, makeup artist etc etc take from the system and how much does he or she put in? Not including those employed in the entertainment world who run the theaters and venues and the staff they need to employ.

A MP on £67,000 per annum pays less in than the many showbiz types that pay reduced rates via such schemes. The easy way forward would be to reduce taxation for those who create jobs and wealth for others.

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Smithling

Feb 28, 2013 at 16:52

Well to address each point.

Firstly, I am neither a lawyer nor an employee of HMRC. What I do know is that I am courted on a monthly basis by people pitching their wares and the wonderful new "tax scheme" that seems all a bit unsavoury until they drop the "but you'll get 5% of their income for introducing them" carrot on the table. It is these to which I refer. It's not complicated, if an accountancy firm is charging you 10% of your £500k a year to ensure you pay 1% tax then you can follow a simple logic chart. Why is this accountant asking for £50k a year in fees when just getting my tax return done normally costs £1k? The answer, as we all know full well, is because something about it isn't right. It is at that point that any sane human being knows they are stepping outside the usual boundaries and into another one. One where somebody has convinced them that £30k of that £50k goes towards a top end QC who will fight you corner blah blah blah. If you are paying upfront fees for QC input, then you know. You deserve not only to get your scheme revoked but also a decent penalty for being a chancer.

Secondly, what's it got to do with the rich and the middle class? One is a measurement of wealth and the other is (apparently) a measurement of class. Let's not get wrapped in that one.

Thirdly, the argument you use is no better than Starbucks threatening to pull out the UK. It's deplorable. You are saying that because somebody employs a few people and keeps the swing swinging that they are entitled to preferential tax treatment? So I employ 6 staff, does that mean that because I employ 6 staff I should be let off tax because well done me for keeping 6 people off the streets? That's just plain ridiculous. I employ 6 staff because I need to pay other people to take on a workload I can't or don't have time to do myself. Obviously I don't want 6 salaries coming out of my profits if I could help it.

I doubt very much that Jimmy Carr employs a makeup artist because he feels duty bound to keep makeup artists of the street. It's more likely he simply does not want to learn how to and do his own makeup, he can afford to pay somebody to do that.

When people say "yes but think how many jobs starbucks creates by being here." So bloomin what? Without those staff there is no Starbucks, they make zero money and they go bust. The staff are there because the company needs them to be and couldn't give a stuff what the PAYE treatment is of the relevant country to the employees, not their problem.

So please stop this utter rubbish that because somebody employs others that we should view it as an overall "contribution to society". That's just total tosh and I sincerely hope you know that.

Fourth, so what what an MP pays? If an MP breaks the rules then he/she should be held accountable accordingly like anybody else. The difference is it will/should also cost him/her their career at the same time. THAT should be the disincentive for MP's.

I'll do you a deal. I'll agree with your last sentence if you can find me a single employer who employs somebody that they don't actually need to and doesn't provide any use to their business just because they want to "contribute tax to the system and create wealth for others".

You honestly think anybody employs a £20k staff member unless they need to? They are not creating wealth for others from some altruistic desire. They are employing people because that £20k member of staff results in more than £20k coming into the business. If that individual does NOT result in £20k coming in to the business then they get rid of them because they are now a cost. It's called a sales team.

I am astonished anybody could honestly sit there and say otherwise.

Anyway, clearly I'm a little overly passionate about this topic so my apologies if I've offended anywhere along the way. I just get frustrated that people can sit there with a straight face and say some of the things you're saying, what scares me more is that I think you may actually believe it too.

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John Phillips

Feb 28, 2013 at 19:08

Smithling

I haven't had a straight face all afternoon but I have enjoyed the debate. I have proffered ideas and thoughts for open debate and never take offense when someone bothers to join in with valued input.

Most of the recent spotlight and stigma attached to cheating the tax system is to move our attention away from the real crooks of this world the Financial Wizards who have managed to near bankrupt the global economy with their financial products, such as the now infamous Mortgage Backed Securities, that CEO’s of the Banks who invest our money in when they couldn’t even explain how they worked!

I’m sorry but I’m unable to lambast anyone who uses any and every legal and legitimate means to reduce their tax burden. By the very nature of the costs associated with hiring the professionals to manage the HMRC, when they come after them, the individuals concerned generate high levels of wealth that filter down to those not so fortunate or so lucky. By lucky, in most cases, it is all about the people who find that the harder they work the luckier they get.

I am fortunate that the majority of my clients choose to employ people in the UK when they could easily use overseas companies to fill the jobs they are creating. Why would the likes of Starbucks choose to base their company in a higher tax jurisdiction if there is no requirement for them to do so. Why should an internet based company, like Google, do likewise when they could just as easily be based in a totally tax free environment. Low corporation tax brings in employment; full employment reduces debt. I would advocate a 10% rate of Corporation Tax rather than chase companies and entrepreneurs away with draconian legislation and penal taxation. But that is just my Humble opinion and thankfully we live in a country where we are free to put voice to such.

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Sascha K

Mar 01, 2013 at 09:36

"I'll do you a deal. I'll agree with your last sentence if you can find me a single employer who employs somebody that they don't actually need to and doesn't provide any use to their business just because they want to "contribute tax to the system and create wealth for others".

Queen's Park Rangers.

More the second part than the tax bit, but you get the point.

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Smithling

Mar 01, 2013 at 13:38

John,

Couldn't agree more about the banks etc. I also appreciate your sentiment about the laffer curve.

I don't think any of that can be used as an excuse to blatantly the micky though.

But we can pick up this conversation on another thread...

http://www.citywire.co.uk/new-model-adviser/hedge-fund-managers-film-scheme-investment-comes-unstuck/a662568?re=22709&ea=322536&utm_source=BulkEmail_NMA_Daily_PM&utm_medium=BulkEmail_NMA_Daily_PM&utm_campaign=BulkEmail_NMA_Daily_PM

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