In 2017 we reported on a finding at the First Tier Tribunal that the Root 2 Alchemy Tax Scheme (the Scheme) had been found to be a disclosable tax avoidance scheme under the DOTAS rules (the DOTAS Decision). You can see this article here.

The following 12 months has resulted in a number of strategic steps between Root 2 and HMRC.  This culminated with HMRC and Root 2 appearing before the FTT in June 2018 for a test case on the efficacy of the Scheme (the Test Case), this time with regard to the substantive use of the Scheme.  Whilst the judgment on the Test Case remains outstanding, HMRC have proceeded to issue Follower Notices to the users of the Alchemy Scheme.  The Follower Notices have been based on the Rangers Football Club Supreme Court ruling in July 2017.  

In turn, many participants of the Scheme responded by appealing the Follower Notices and continuing to challenge HMRC. HMRC’s position remains that for the period tax is unpaid, interest (and potentially penalties) will continue to accrue.

The Scheme

The Scheme was based around spread betting.  The idea was that an employee (usually the owner of an owner managed business) entered into a spread bet against a specific index of shares (known as the “basket”).  The bet was taken initially by a company called Heronden, subsequently by a company called Capital.  Once set up, the bet was novated (moved) from Heronden/Capital, to the employee’s company – at no or very limited charge.

If the basket performed well, the employee won the “bet” and the employer was required to pay out the winnings.  This was considered “gaming winnings” and therefore was not subject to income tax.  Frequently, the amounts usually paid out by the employer corresponded to the profits in the business that the employee now received without having to pay income or dividend tax on.

If the basket performed poorly and the employee lost the “bet” then the general approach was to simply re-run the process again, but for an increased figure to make up for losses on the first bet.

Perhaps unsurprisingly, HMRC considers this to be a “disguised remuneration scheme” – being a tax scheme designed to allow employees, typically directors, to extract money form a company without payment of, or mitigating, Income Tax and NICs.

On the back of the DOTAS Decision, HMRC’s Director General of Customer Compliance Group, Penny Ciniewicz, said: “This is a great victory that sends a clear message to tax avoidance scheme promoters that we will pursue you if you don’t play by the rules…”.

Root 2 would argue that the Scheme does play by the rules.  Ultimately the Court will determine if the “rules” have been complied with.  The tax payers who participated in the Scheme will be alive to the issues around the Scheme and how it may impact them – with many contemplating how to best protect their position, rather than ending up with a situation where the dispute rumbles on for a number of years (in a similar fashion to that of the Rangers FC case).

What Can You Do

If you were involved in the Scheme and now find yourself caught up in; the appeal of the DOTAS Decision; waiting for the outcome of the Test Case; filing appeals against Follower Notices from HMRC; receiving correspondence from Root 2 about Judicial Reviews; we are able to provide an unbiased opinion on your position and options.

We are assisting clients in negotiating with HMRC to settle their ongoing tax liabilities and – where relevant – pursuing the professional advisers who put client in this position in the first place.  Not all clients want to settle with HMRC, and we have issued tribunal proceedings against HMRC where necessary.

A lot of the clients who were advised to enter the Scheme (and similar type schemes) did not know the extent of the risks involved with what they were doing.  If that risk was not properly profiled, there is the potential for bringing a claim against the professional for a contribution toward the settlement with HMRC.

If you are interested in bringing a claim against your advisors (including former advisors), as there are strict time periods for bringing professional negligence claims, it is sensible to assess the position sooner rather than later.

Get in Touch

If you would value an unbiased appraisal of your involvement in the Scheme and want to discuss further please do get in touch with our team.

About the author

Matthew Goodwin Associate - Solicitor-Advocate

Matthew regularly acts for corporates and individuals, dealing with a variety of disputes relating to investments, negligent tax planning, tax avoidance schemes, pensions and HMRC enquiries and negotiations. In addition, Matthew advises financial institutions and FCA regulated firms on their regulatory obligations.