Establishing the Notifiability of Standardised Tax Avoidance Schemes: Root2tax Ltd and Root3tax Ltd v HMRC [2017] UKFTT 696 (TC): First-tier Tribunal (Tax)

Introduction

The case of Root2tax Ltd and Root3tax Ltd v. HM Revenue and Customs (HMRC) ([2017] UKFTT 696 (TC)) centers on HMRC's application to classify certain financial arrangements, known as the "Alchemy scheme," as notifiable tax avoidance schemes under Part 7 of the Finance Act 2004 (FA 2004). The applicants, Root2tax Limited and Root3tax Limited (in liquidation), were identified by HMRC as promoters of these arrangements, which were alleged to facilitate tax avoidance through spread bets and hedging contracts involving employees or employee benefit trusts (EBTs).

The key issues in this case revolve around the definition and criteria for notifiable arrangements, the legality of HMRC's classification of the Alchemy scheme, and the broader implications for tax avoidance regulation.

Summary of the Judgment

Judge Colin Bishopp, presiding over the First-tier Tribunal (Tax), concluded that HMRC's application to classify the Alchemy scheme as notifiable was justified. The tribunal found that the arrangements met the criteria set forth in FA 2004, including being standardised tax products with substantially standardised documentation, designed to enable individuals to obtain tax advantages. Consequently, the tribunal upheld HMRC's preferred application, rendering the arrangements notifiable.

Analysis

Precedents Cited

The judgment references several key precedents that informed the tribunal's decision:

Revenue and Customs Commissioners v Mercury Tax Group Ltd [2009]: While analogous in nature, the case involved different arrangements and an extensively amended law, providing limited assistance to the current case.
Walapu v Revenue and Customs Commissioners [2016]: Offered some guidance on the application of DOTAS provisions in different contexts.
Pilkington Brothers Ltd v Inland Revenue Commissioners [1982] and Snell v Revenue and Customs Commissioners [2007]: Emphasized the importance of assessing the totality of arrangements rather than isolated transactions.
CIR v Parker [1966] and Weight v Salmon (1935): Provided foundational definitions and interpretations of "tax advantage" and "taxable perquisites".
Abbott v Philbin [1961]: Clarified the timing and nature of taxable benefits arising from options and similar arrangements.

These precedents collectively underscored the necessity of evaluating the comprehensive nature of tax avoidance schemes to determine their notifiability.

Legal Reasoning

The tribunal meticulously examined the criteria under FA 2004 sections 314A and 306A, focusing primarily on the former. The Alchemy scheme was analyzed against the statutory definitions of "arrangements" and "tax advantage." Key points in the legal reasoning include:

Definition of Arrangements: The tribunal confirmed that the Alchemy scheme constituted "arrangements" within the statutory sense, encompassing the spread bet, hedging contract, and subsequent novation to the employer or EBT.
Standardised Tax Products: Under the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006, regulation 10, the scheme was classified as a standardised tax product due to its substantially standardised documentation and minimal tailoring for each user.
Tax Advantage: The core purpose of the Alchemy scheme was to enable individuals to receive significant sums with reduced or avoided tax liabilities, fitting the statutory definition of a "tax advantage."
Promoters: The respondents were deemed promoters of the scheme as they were instrumental in refining, marketing, and facilitating its implementation.

The tribunal rejected the respondents' arguments that the arrangements did not yield a tax advantage or that the scheme's implementation methods differed sufficiently to avoid notifiability. The consistent pattern of the scheme's operations and the predominance of tax avoidance motives were pivotal in the decision.

Impact

The judgment has significant implications for the regulation of tax avoidance schemes in the UK:

Clarity on Notifiability: Establishes a clear precedent that standardised tax products, even with varying financial details, can be classified as notifiable if their primary purpose is facilitating tax advantages.
Strengthening DOTAS Provisions: Reinforces HMRC's authority to identify and counteract tax avoidance schemes through enhanced disclosure requirements.
Promotion and Refinement of Schemes: Highlights that entities involved in refining and marketing tax avoidance arrangements can be held liable as promoters, broadening the scope of accountability.
Future Compliance: Encourages financial institutions and advisors to rigorously assess their products and services to ensure compliance with tax legislation, mitigating the risk of notifiability.

Overall, the judgment signifies a robust judicial endorsement of HMRC’s measures to curb tax avoidance, emphasizing the importance of transparency and regulation in complex financial arrangements.

Complex Concepts Simplified

Several intricate legal and financial concepts were central to this judgment. Below are simplified explanations to aid understanding:

Spread Bet: A financial contract where a person bets on the future movement of a particular market index or basket of securities. The outcome is binary—either the person wins or loses based on whether the index meets a certain performance threshold.
Hedging Contract (Call Spread Option - CSO): A financial derivative used to offset potential losses in the spread bet. If the spread bet results in a loss, the CSO ensures that the individual is relieved from that loss by transferring it to another party, typically the employer or an EBT.
Novation: The process by which the original holder of a contract transfers their rights and obligations to a new party. In this context, it refers to the employer or EBT taking over the CSO from the individual.
Notifiable Arrangements: Financial arrangements that meet specific criteria under tax law, requiring disclosure to HMRC to prevent and address tax avoidance.
Tax Advantage: Benefits or reductions in tax liability achieved through specific financial arrangements or schemes.
Standardised Tax Product: A financial product with uniform documentation and minimal customization, designed to be readily adoptable by multiple users for specific financial outcomes.

Conclusion

The tribunal's decision in Root2tax Ltd and Root3tax Ltd v. HMRC serves as a pivotal affirmation of HMRC's authority to classify and regulate tax avoidance schemes. By establishing that the Alchemy scheme constitutes notifiable arrangements under FA 2004, the judgment underscores the importance of transparency and adherence to tax legislation in financial services. This case not only clarifies the application of DOTAS provisions but also sets a precedent for future assessments of standardised financial arrangements aimed at achieving tax advantages. Legal practitioners and financial entities must heed this ruling to ensure compliance and mitigate the risk of similar classifications in their offerings.

Establishing the Notifiability of Standardised Tax Avoidance Schemes: Root2tax Ltd and Root3tax Ltd v HMRC [2017] UKFTT 696 (TC)