The media has created a new poster boy for the tax avoidance sector – in the shape of Chris Moyles. Jimmy Carr must be mightily relieved.
Broadly speaking, the scheme adopted by Moyles (and apparently hundreds of others – just three were selected for attack by HMRC) involved them entering into a trade of selling second-hand cars and incurring an (aspired-to) allowable trading loss which could then be set against other taxable income, for example, from the BBC, to shelter it from tax.
An extract from the tribunal case reads “the purpose of the scheme was to manufacture a tax loss much greater than any true economic loss at little or no financial risk to the user, whose exposure was limited to the cost of the promoters’ fees and some other minor expenses. The loss was intended to be available by way of sideways relief against the users’ general income or chargeable gains”.
The principal issues which arise in the appeals are, first, whether each of the appellants was carrying on a trade in used cars during the relevant year of assessment and, second, whether in calculating the profits of that trade, if there was one, there should be allowed a deduction under section 58 of the Income Tax (Trading and Other Income) Act 2005 for the incidental costs of obtaining finance.
The aspired-to trading loss would be created by an enormous fee (by way of payment of a manufactured overseas dividend) charged by an offshore company for arranging finance
Suffice to say that there was no real economic exposure or risk to the taxpayer in relation to this fee.
The tribunal determined that the taxpayer was not actually trading when the purported loss was created – so the loss was not a trading loss and so the outcome desired by the taxpayer was not achieved.
In the light of this conclusion it was strictly unnecessary to consider the “Ramsay” argument raised by HMRC. Nevertheless the judge did also state that “as the sole purpose of the arrangement was to avoid tax, based on the principle established in the Ramsay case, the scheme was based on a series of connected transactions aimed at achieving the tax outcome with no commercial purpose”.
In this context the judge said: “The size of the manufactured payment was not decided upon by the present appellants as the result of any commercial appraisement. It was determined pursuant to a plan. A realistic view of the facts shows that the aim was that the appellants, as though by magic, should appear to have incurred vast fees as a condition of borrowing modest amounts of money they did not need in order to invest it in a ‘trade’ they had no desire to pursue. The supposed fee for the loan bore no relation to the size of the loan but was merely the amount of the artificial loss the user wished to generate.
“The “trade” was no more than a device, necessary if the scheme was to work. The structure of the scheme shows that the large ‘borrowing’ from SGH – I use inverted commas because, as I have explained, SGH never actually handed over any money—was, like the structure in Ensign Tankers v Stokes, self-cancelling: it was pre-ordained that the large “loan” would be repaid by nothing more than a series of bookkeeping entries.
“I see no meaningful distinction between the facts of this case and those of Schofield: in each case the various steps required for the working of the scheme were, to borrow the words of Hallett LJ, ‘a series of interdependent and linked transactions, with a guaranteed outcome’. As Ribeiro PJ might have put it, the relevant statutory provisions, construed purposively, were not intended to apply to the transaction, viewed realistically.
“In my judgment it follows from the various authorities to which I have referred that, had the scheme worked, it would be necessary to disregard its intended fiscal consequences.”
So the result, with or without a Ramsay argument, was failure.
It is worth remembering though that this scheme was entered into before legislation was created to prevent the exploitation of sideways loss relief.
The anti-avoidance legislation combines to make the exploitation of sideways loss relief very difficult now.
Tony Wickenden is joint managing director of Technical Connection