HMRC wins £40m Hyrax tax avoidance loan scheme

HMRC has won a case at First Tier Tribunal (FTT) over a contractor loan scheme promoted by Hyrax Resourcing Ltd which should have been notified under the disclosure of tax avoidance schemes (DOTAS) regulations, paving the way to clawing back some £40m in unpaid taxes

As a result, Hyrax now has to disclose the details of the tax avoidance scheme to HMRC, along with the names and addresses of 1,180 high earners who used it.

If Hyrax fails to provide the required information, the promoter could face a penalty of nearly £6m, as well as £5,000 per day for not fully disclosing the scheme.

The scheme promoted by Hyrax was a disguised remuneration avoidance scheme which worked by paying scheme users in loans so they could avoid paying income tax and National Insurance (NICs) on their earnings. [HMRC v Hyrax Resourcing Ltd & Bosley Park Ltd & Peak Performance Head Office Services Ltd [2019] TC07025]

Scheme users were paid just enough to comply with the national minimum wage (NMW). The rest of their income was made up in loans which were transferred to an offshore trust in Jersey. The amounts received under loan agreements were not declared as income on the scheme users tax return, meaning they did not pay tax on all their earnings.

Hyrax Resourcing Ltd accepted applications from users, created employment contracts, signed service contracts, paid employees and transferred loan agreements to offshore trusts. Scheme users paid Hyrax 18% promoter fees to allow them to access the scheme.

The Hyrax scheme was a successor to the K2 arrangements which became widely known about in 2012. The K2 scheme had been notified under DOTAS.

The tribunal heard that scheme users had transferred from one scheme to the next as new iterations were introduced.  However, Hyrax was not notified under DOTAS, with the promoters claiming this was because the arrangements did not involve tax avoidance but tax mitigation and relied on a specific exemption for employer-financed retirement benefits schemes (EFRBS).

The judge stated: ‘The evidence is quite clear that Hyrax was the latest iteration of a scheme that had been around for many years; users of previous iterations were transferred seamlessly into Hyrax.

‘Hyrax was promoted as being the same as the previous iterations bar being tweaked to avoid being caught by HMRC’s latest round of anti-avoidance legislation.

‘In these circumstances, it is legitimate to take the marketing of the earlier scheme, and in particular its immediate predecessor K2, as likely to reflect how the Hyrax arrangements were marketed.’

The FTT said it was clear that the scheme was marketed and sold on the basis of its tax advantage, and that the main benefit that might be expected to arise from the arrangements would be the tax advantage.

The judge stated: ‘In any event, there is no other rational reason for why anyone would implement a convoluted and expensive set of arrangements which left them with a legal (if economically unreal) obligation to repay a sum that they would otherwise have received as salary, save for the expected tax advantage.’

The judge also found that Hyrax was promoted on the basis that the loans, while strictly repayable, were extremely unlikely ever to be required to be repaid.

She stated: ‘It was clear from logic but also from what was said, including in respect of the scheme’s mortgage brokers, that those promoting the arrangements did so on the basis that the loan was in economic terms if not in law equivalent to earnings.’

The tribunal also considered whether or not the Hyrax scheme met the necessary hallmarks for DOTAS, including the fact it was a standardised product promoted via a series of webinars all containing much the same information, and that it involved payment of a premium fee.

The promoter sought to argue that HMRC had failed to respond adequately to letters and emails it had sent regarding the scheme.

The judge stated: ‘In my view, HMRC obtained sufficient information about the facts to establish that the arrangements were notifiable; it is therefore true to say that they took all reasonable steps.

‘The correspondence was terminated by HMRC but all it made clear was that the parties had fundamental difference of interpretation of the law. Continuing the dialogue would have served no purpose other than to delay resolution; ending the dialogue did not mean HMRC had failed to take all reasonable steps.’

While the tribunal ruled that Hyrax was notifiable under DOTS, it found in the case of Bosley Park and Peak Performance Head Office Services Ltd that while they ‘promoted the arrangements in the colloquial sense by advertising them’, under DOTAS rules this was not enough to make them promoters.

There is no right of appeal against the tribunal decision, although Hyrax can seek a judicial review.

Mel Stride, financial secretary to the Treasury 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.’

HMRC v Hyrax Resourcing Ltd & Bosley Park Ltd & Peak Performance Head Office Services Ltd [2019] TC07025

Report by Pat Sweet

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