Class action over Alchemy avoidance scheme planned

A Midlands law firm is set to take a group action suit against a tax planning scheme which cost the taxpayer up to £110m in related cases

A group action lawsuit has been set up by Wright Hassall, against tax scheme promoter, Root2 Tax Limited, which set up the Alchemy tax avoidance scheme.

The group action follows the latest decision at the First Tier Tribunal (FTT) - Root 2 Ltd [2019] TC 07502 - which upheld HMRC’s argument that amounts paid under ‘spread betting’ contracts were taxable as earnings from employment, in effect meaning that Class 1 national insurance contributions (NICs) and PAYE were payable by the directors of the tax consultancy business, and their customers who used the scheme.

A total of £2.4m in lost tax could be recoverable by HMRC.

The latest case decision, released in December, 18 months since the tribunal heard the case in June 2018, focused on NICs and PAYE liability for users of the scheme. HMRC’s argument was that the scheme was a disguised remuneration scheme, based on a complex spread betting scenario, and was therefore disguised remuneration and so liable for full income tax and NICs as per any other employment relationship.

In making its decision, the tribunal said that there was a ‘relevant arrangement’ intended to remunerate the individuals, and a ‘relevant step’ (the pay-outs made to the individuals) taken by a ‘relevant third party’ (the spread betting business).

The tribunal ruled in favour of HMRC and told the parties to go away and agree a settlement figure.  

Former customers who were involved in the Alchemy scheme are now being called on to enter into the group action being put together by Wright Hassall. Over 200 customers are said to have used the Alchemy scheme.

The long running saga first went to the tax tribunal in 2017 on a separate argument.

At the 2017 tribunal, judges ruled that Root2’s mass-marketed tax avoidance scheme should have been reported to HMRC under UK rules on Disclosure of Tax Avoidance Scheme (DOTAS) [[2017] UKFTT 0696 TC06115]. Root2 was not allowed to appeal this decision but was told at the time that it could apply for judicial review.

The original scheme, which was deemed as tax avoidance, aimed to extract profits from owner-managed companies in the form of winnings from betting on the stock market, which the scheme aimed to ensure would be tax free, rather than in the form of taxable employment income.

Matthew Goodwin, associate in the tax litigation team at Wright Hassall, said: ‘We are representing a number of Root2’s former clients and this group action will mean that the case can be pursued on a much larger scale.

‘HMRC has shown that the Alchemy scheme does not work and should be treated as tax avoidance so it is important that this group action can look to recover some of their losses and hold Root2 to account.

‘A third-party funder is prepared to support and fund the litigation against Root2, and also to provide insurance against adverse costs, so we are able to offer risk free litigation.’

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