UK HMRC Wins Case Against Hyrax’s Tax Avoidance Scheme

UK HMRC Wins Case Against Hyrax’s Tax Avoidance Scheme

The UK’s HMRC has won a £40 million case against Hyrax Resourcing Ltd., for failing to disclose to the tax authority its tax avoidance scheme’s details.
 
As reported by the Financial Times, Hyrax, which started selling this scheme back in 2014, offered its clients the possibility of receiving payment “in loans that they did not pay income tax and national insurance on.”
 
Customers contributed 18 percent of their income to the company and received the rest as a monthly basic salary and loans that were never returned.
 
More specifically, as outlined by HMRC, Hyrax’s tax avoidance scheme, which is a newer version of the notorious K2 scheme spotlighted back in 2012, worked in the following way:
 
  1. “UK earners quit their job;
  2. They sign a new contract with a UK trust;
  3. The UK trustees ‘rehire’ their new employee to their previous employers or previous customers but take their earnings and their 18% fee;
  4. From the remaining 82% the trustees pay the employee just enough salary each month to comply with National Minimum Wage rules and the rest is paid in the form of ‘loans’;
  5. The trustee transfers its rights to be repaid the loan to an offshore trust in Jersey – with the intention that the loans are never repaid, and;
  6. The amounts loaned are not included on the employees tax returns in an attempt to avoid paying Income Tax and National Insurance.”
The court in charge of the case decided that Hyrax had contravened the Disclosure of Tax Avoidance Schemes (DOTAS) procedure, which has been in place since 2004 and requires financial service providers to disclose their tax avoidance schemes to the UK government.
 
As part of this decision, Hyrax will now have to release the names and addresses of close to 1,200 individuals who benefited from its loan-based tax avoidance scheme.
 
As explained by an HMRC press release, failure to comply could result in a £6 million fine, plus an additional daily penalty of £5 thousand.
 
Furthermore, customers need to settle the amount owed in back taxes by April 5th or be slammed with a loan charge, which “forces those who were paid in loans from as far back as April 1999 to pay tax on all outstanding loans in a single tax year.”

Many have called for a repeal of the loan charge, which is viewed as unfair.
 
Earlier this week, the All-Party Parliamentary Loan Charge Group (APPG) said “the loan charge represents a change in the tax law for past years [and] offends against the rule of law,” while being “retrospective” and setting “a dangerous precedent as an attack on long-standing taxpayer protections.”


HMRC & Analysts Comment on Hyrax’s Tax Avoidance Scheme Decision

Referring to the Hyrax decision, Mel Stride, Treasury’s Financial Secretary, said, “HMRC is cracking down on the unscrupulous promoters who sell these highly contrived tax avoidance loan schemes. Promoters need to take note of this decision and make sure they contact HMRC urgently about schemes they haven’t yet disclosed.”
 
However, Keith Gordon, a lawyer with Temple Tax Chambers, believes this move by HMRC has not arrived on time.
 
Gordan told the Financial Times, “HMRC have failed to tackle these [loan] arrangements effectively.”
 
He added: “Accordingly, a new law, the loan charge, was devised to spare HMRC’s blushes and to give them a second bite of the cherry. It’s that second bite and the fact that it is being used to pressurise taxpayers to abandon their appeals that gives the loan charge its retrospective effect.”
 
Dawn Register, a Partner with BDO accountants, agreed more needs to be done by the UK’s tax authority.

In an interview with the Financial Times, Register said, “While this victory is positive for HMRC, it highlights the fact that it takes many years to bring promoters to justice for arrangements that simply do not work.”
 
“HMRC needs to do more to clarify to the general public what is acceptable and what is not in real time. The present situation allows for arrangements to be marketed for many years, and then for HMRC to take retrospective action to challenge it,” she concluded.
 
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