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Tax Barrister Loses Case Against HMRC

By Amanda Banks, Tax-News.com, London

16 April 2013


A tax tribunal in the UK has rejected a tax avoidance scheme devised by a leading tax lawyer, in a decision hailed by HMRC as an "important success" which "may well have repercussions for other similar tax avoidance schemes."

HMRC's Director General for Business Tax, Jim Harra, stated that: "Some people make the mistake of thinking that a complex avoidance scheme backed by a senior lawyer is safe from HMRC's challenge. That would be a big mistake, as this outcome proves. People should always ask themselves whether a proposed scheme is too good to be true."

The lawyer, a QC, entered into what the tribunal judge described as a "convoluted scheme." In early 2003 he acquired transferable loan notes worth GBP500,000 from a third party company on forty-year terms as Relevant Discounted Securities. Added conditions were a call option, that after nine days the notes could be redeemed for 99.9% of the issue price, and that for several days after that they could be redeemed at 5%.

During the period when the redemption rate was 99.9%, the call option was used to transfer the debt liability of GBP499,500 from the company to a trust, and as soon as the redemption rate was 5%, amounting to GBP25,000, the lawyer transferred the notes to a second trust. The barrister unsuccessfully argued that this had created a loss against income of GBP475,000, under a provision for "discounted securities" loss relief which has since been abolished.

Following precedent, the judge took the view that the transactions needed to be considered together, purposively and realistically, rather than individually. She agreed with HMRC that the effect of the planned series of transactions was that lawyer had in reality paid just the GBP25,000 to acquire the loan notes, and that he had given away the rest of the money to the trust. As a Lloyd's "Name," the lawyer genuinely wished to move the money into a trust to avoid liability from potential creditors, but the way he had done it had not created any real loss. Further, there was never any risk that the call option would not have been exercised, and the lawyer left with loan notes worth just GBP25,000 redeemable with the third-party company.

The Exchequer Secretary to the Treasury, David Gauke, added that the case highlighted the work HMRC is doing to tackle avoidance. UK Prime Minister David Cameron and Chancellor George Osborne have both identified tax avoidance as a priority issue, and HMRC believes the crack-down will raise an extra GBP4.6bn in the next five years as a result.

TAGS: tax | investment | tax avoidance | law | United Kingdom | HM Revenue and Customs (HMRC) | HM Revenue and Customs (HMRC) | individual income tax

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