HMRC Says It Defeats Tax Avoidance Scheme For Wealthy Individuals

Robbie Lawther

23 October 2017

UK tax collector has defeated a tax avoidance scheme used by wealthy individuals to reduce their tax bills, which the department expects to protect £325 million ($429 million) in unpaid tax.

The decision on the scheme, known as Clavis Liberty Fund 1 Limited Partnership, affected £18 million of taxpayers’ money, but it will have wider implications for hundreds of other users of Liberty schemes, HMRC said in a statement.

The scheme, promoted to high earners by Mercury Tax Group, was designed to create artificial tax losses that were later claimed against scheme users’ other income to reduce their tax bills.

The Clavis Liberty Fund 1 Limited Partnership involved a limited partnership that was registered in Jersey and was claiming to carry out trade in the UK. Each of the users of the scheme contributed a sum which was used, with a large bank loan, to acquire rights to dividends declared by a company registered in the Cayman Islands.

The partnership claimed a deduction for the cost of purchasing the dividend rights but tried to exclude the dividends received from its trading results, creating a loss which was used to reduce users’ tax bills.

The case was taken to the Upper Tribunal after the First-tier Tribunal’s decision on the scheme was that the dividend transaction was artificial and uncommercial. The Upper Tribunal endorsed and upheld the decision of the First-tier Tribunal.

“This is a brilliant victory that will bring in millions of pounds,” said Penny Ciniewicz, HMRC’s director general for customer compliance. “We have repeatedly warned people about the financial consequences of using tax avoidance schemes. More and more people are coming forward and settling what they owe because they know the game is up. Our message is clear – steer clear of tax avoidance schemes or, like Liberty’s users, you’ll face a hefty consequence.”

There has been a demand for a crackdown on tax avoidance schemes over the last few years, and in January, this publication reported that HMRC had responded to a report by the Public Accounts Committee of the House of Commons, which said the UK's wealthiest people get preferential treatment and are not properly pursued for outstanding tax bills. The report, which examined HMRC’s specialist unit, found there were around 6,500 high net worth individuals in 2015-16, accounting for about one in every 5,000 standard taxpayers. However, “the amount of tax paid by this very wealthy group of individuals has actually fallen by £1 billion since the specialist unit was set up” in 2009.

In 2016, the HMRC through its consultation, which was entitled Strengthening Tax Avoidance Sanctions and Deterrents, proposed penalties including fines of up to 100 per cent of tax avoided as well as "naming and shaming" for tax professionals who enable clients to avoid tax through planning methods HMRC regards as "defeated".

And in 2015, the UK government within its 2016 Finance Bill introduced a “strict liability” offence for those who have income or gains outside of the UK and evade their UK income tax or capital gains tax responsibilities. Individual found guilty and liable can serve a term of imprisonment of up to six months for mistakenly not declaring taxable income.

In the case of certain anti-avoidance schemes, authorities have sought to crack down on those where there is no underlying economic benefit or purpose and where the sole aim is to reduce tax. Even so, the assault on such programmes shows how the lines have become blurred between tax evasion, which is a criminal offence, and avoidance, which traditionally hasn't been treated as an offence and in some cases, even encouraged as a matter of public policy.