Corporation Tax Avoidance Scheme Ineffective

Posted: 15th November 2012

A complex series of transactions designed to avoid corporation tax on a chargeable gain of more than £8.5 million on the sale of shares was ineffective either to avoid or defer payment of the tax charge, the Upper Tribunal (UT) has ruled.

The sophisticated scheme, entered into on specialist advice, involved a number of steps, including the incorporation of various subsidiaries and entering into a series of futures contracts, culminating in the sale of shares of the last subsidiary in the chain to unconnected third parties for £10. The arrangements were said to have resulted in an allowable capital loss greater than the chargeable gain.

The First Tier Tribunal (FTT) accepted arguments put forward by Her Majesty’s Revenue and Customs (HMRC) that the scheme was ineffective to avoid corporation tax. However, it ruled that the scheme had operated to defer the tax charge by a year. At the UT, both the taxpayer and HMRC challenged those aspects of the FTT’s decision that were not in their favour.

Rejecting the taxpayer’s appeal, the UT emphasised that the scheme had to give rise to a ‘real’ loss and ‘not merely an arithmetical difference’ in order to achieve the desired tax saving. The tribunal upheld HMRC’s arguments that the scheme also did not have the effect of deferring the charge to tax for 12 months.