HMRC will look to collect over £40m in unpaid taxes following legal case win against tax avoidance scheme promoter Hyrax Resourcing Ltd (Hyrax) at First Tier Tribunal (FTT).
The FTT has ruled in favour of HMRC, determining that Hyrax breached Disclosure of Tax Avoidance Schemes (DOTAS) rules requiring promoters to inform HMRC about the schemes they sell. The win for HMRC means that Hyrax will be required to divulge details of the ‘Hyrax’ scheme along with names and address of 1,180 scheme users. A failure to comply could result in a penalty of nearly £6m (£5,000 per client), and further penalties of £5,000 per day for not disclosing the scheme.
There is no right of appeal against the FTT decision but Hyrax can pursue a judicial review. This is unlikely as they did not serve any evidence nor call any witnesses to the hearing.
Hyrax was a contractor loan scheme and successor to the infamous K2 scheme. K2 was an offshore wealth management scheme in which salaries of individuals in the UK, including comedian Jimmy Carr, were channelled through shell corporations in Jersey.
The Hyrax scheme was not notified under DOTAS as the promoters claimed that the arrangement did not involve tax avoidance and instead it was tax mitigation which relied on a specific exemption for Employer-Financed Retirement Benefit Schemes (EFRBS).
How the scheme worked
The Hyrax scheme operated as follows:
- Employees of UK companies quit their jobs and signed a new contract with a UK trust.
- The trustees, of the UK trust, would then “rehire” their new employee with their previous employer.
- Earnings of the new employee would be paid to the trust who would take an 18% fee.
- The trustees would pay the new employee the minimum salary required to comply with National Minimum Wage rules from the remaining 82%.
- The remainder of the “earnings” paid to the trust would be paid to the employee in the form of “loans”.
- The trustees’ then novated their rights to be repaid the loan to an offshore trust in Jersey.
- The amount of the loan would not be included on the employee’s tax return and no income tax or national insurance would be paid on this amount.
The FTT’s decision
The FTT found that these transactions constituted a notifiable arrangement under the DOTAS rules. They considered the DOTAS ‘hallmarks’ and held that the 18% fee constituted a premium fee which users would have to pay Hyrax to use the scheme and the scheme was a standardised tax product. It was determined that the scheme gave rise to a tax advantage which was the main benefit of using the scheme.
The FTT commented, “There is no other rational reason why anyone would implement a convoluted and expensive set of arrangements which left them with a legal (if economically unreal) obligation to repay a sum that they would otherwise have received as salary, save for the expected tax advantage”.
Whilst Hyrax were held to be promoters, the other respondents Bosley Park Limited & Peak Performance Head Office Services Limited were not under DOTAS rules.
What happens next?
Hyrax must provide the required information to HMRC or face heavy penalties under the DOTAS rules. Hyrax could face further penalties of up to £1m if action is taken by HMRC under the Promoters of Tax Avoidance Schemes (POTAS) legislation. If Hyrax provides this information to HMRC, users of the scheme will be faced with enquiries from HMRC and potentially hefty tax bills.
What can you do if you used the scheme?
If you have used this scheme or something similar and are concerned about your tax affairs, then you should take advice as soon as possible. We represent a growing number of clients in negotiating complex settlements with HMRC and may be able to help.
We are also assisting clients in pursuing the professional advisers who put the client in this position in the first place. A lot of the clients who were advised to utilise schemes did not know the extent of the risks involved in what they were doing. If that risk was not properly explained to them, there is a potential to bring a claim against the professional for the damage suffered (this is the difference between the position the client is now in versus where they would be had they undertaken appropriate tax planning).