Tax Avoidance, HYRAX and DOTAS
HMRC v Hyrax Resourcing Ltd and others  UKFTT 0175 (TC)
The Case against Hyrax
Hyrax Resourcing Ltd recently lost a key First-Tier Tribunal ruling on whether their tax avoidance scheme, a new version of the K2 tax scheme, should have been registered with HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) rules.
The DOTAS regulations force promoters of tax avoidance schemes to register with HMRC, and in turn provide HMRC with a technical explanation of how the scheme works. The scheme is then given a Scheme Reference Number (SRN), which users of the scheme are required to declare on their tax returns.
The Hyrax scheme sought to give those individuals in the scheme rewards for their work via a trust arrangement. In summary, the individuals in question received a small salary (to satisfy minimum wage regulations) but, importantly, also received loans from an offshore trust which were, in reality, unlikely to ever be repaid. The intention of the arrangement was that the employees would only be subject to tax on the benefit in kind value of the loan rather than on the true value of the income they enjoyed.
Not all schemes fall within DOTAS. Indeed, Hyrax contended that their contractor loan scheme (similar to a remuneration trust) was one such scheme meaning, they said, that clients did not have to declare the use of the scheme on their tax returns (In summary they argued that if a UK resident employer made loans to its employees via an Employer-Financed Retirement Benefits Scheme (EFRBS), those loans are subject to a permitted tax exemption, so cannot be considered tax avoidance, and thus should not be subject to DOTAS (nor, presumably, the GAAR)).
The statutory test applied by the court was whether the arrangements might be expected to enable a person to obtain a tax advantage. HMRC was not, therefore, required to prove that the scheme involved tax avoidance (but had it been so required, it would have succeeded). Having considered that issue, the tribunal determined that the arrangements were notifiable under DOTAS (due to the premium fee, standardised nature of the tax product and disguised remuneration hallmarks) and that Hyrax was a promoter.
Impact of Hyrax
The result of Hyrax’s defeat is that Hyrax Resourcing Limited must notify HMRC of the names and addresses of all users of the scheme. Failure to do so could result in significant penalties being charged to them. Once they have that information, it seems likely that HMRC will enquire (if time limits permit) or raise discovery assessments into the tax returns of those involved.
Further, HMRC could potentially issue accelerated payment notices (APN).
The decision in favour of HMRC may well impact more than 1,000 taxpayers. That impact could be felt all the harder given the penalties being imposed pursuant to the Loan Charge which came into effect on 6th April 2019.
The list of taxpayers may include some high-profile individuals, given that it seems that many K2 users were seemingly migrated into Hyrax after legal changes rendered the K2 product unusable (both the K2 and Hyrax schemes were apparently developed by Kircaldy-based Peak Performance, a firm that had operated at least seven tax avoidance schemes since 2004 according to HMRC: Assignment Solutions (IoM), Penfold, Hamilton, Cirus, Lighthouse, K2 and finally Hyrax).
Managing the Impact
If you engaged in the scheme promoted by Hyrax, or any other scheme, and would like to discuss the options available to you in terms of managing the impact of these or related developments, or if you have any concerns about how HMRC could respond to your particular situation, please contact us.
We have advised a number of clients in relation to claims against their advisers and promoters after they engaged in tax avoidance schemes or other tax mitigation schemes/ strategies, including EFRBS, EBT, SHIPS, Contractor Schemes, Film Scheme and Remuneration Trust arrangements.
We have successfully recovered significant compensation from advisors and/ or promoters where, for example, the advice given was negligent or the promoters acted in breach of their statutory duties.
If you want to discuss matters in greater detail, please contact Tom Maple on 0118 951 6200 or email [email protected].
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.