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Tax Avoidance Schemes, No Matter How Intricate, May Not Be Effective

There is nothing unlawful about tax avoidance schemes but, however intricate and apparently foolproof they may be, their effectiveness can never be guaranteed. A businessman found that out to his cost after one such scheme failed to shield him from a substantial Income Tax liability.

The commercially promoted scheme was designed to enable shareholders in private companies to receive profit distributions free of Income Tax. The businessman was the sole director and shareholder of one such company. Pursuant to the scheme, a single new share, with a face value of £100, was created. A non-UK resident subscribed for the share.

The subscriber entered into a deed of settlement whereby the share was placed in a Jersey-based trust. During the relevant period, the beneficiaries of the trust were the businessman, the subscriber and a hospice charity. The company's board – in effect the businessman as sole director – resolved to pay an interim dividend of £200,000 on the share, of which he received £195,400.

Despite those complex arrangements, HM Revenue and Customs took the view that the scheme did not have its intended effect and that the businessman was liable to pay Income Tax on the entire sum that he had received. His appeal against that decision was rejected by the First-tier Tribunal.

Dismissing his challenge to that outcome, the Upper Tribunal (UT) had no real doubt that the businessman, rather than the subscriber, was the settlor of the trust. He put in place the entire arrangement that constituted the scheme. As the company's only director and shareholder he passed the resolution to create the share, permitted the subscriber to acquire it at its face value and resolved to pay the dividend.

The subscriber had no independent role and was little more than a functionary. She simply carried out the steps required of her under the scheme established by the businessman. Her £100 subscription was, in effect, refunded to her and, by way of remuneration for her role, she stood to receive 1.5 per cent of the dividend.

The UT found that the sum concerned was in any event taxable both under the transfer of assets abroad regime and as a distribution from the company under Section 383 of the Income Tax (Trading and Other Income) Act 2005. Viewed realistically, the distribution truly belonged to the businessman and the precise mechanism by which the money flowed into his hands mattered not.

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