HMRC predicts £110m recovery from tax avoidance scheme promoter

HM Revenue and Customs (HMRC) believes it is poised to recover £110 million after winning a legal battle against a tax avoidance scheme promoter.

HMRC described its victory over the scheme promoter Root2 as a landmark and said it would seek to impose a substantial penalty which would be set by a tribunal at a future date.

The authority brought the case in the First-tier Tribunal claiming that Root2 failed to report a mass-marketed tax avoidance scheme, known as Alchemy, to the tax authority.

HMRC claimed that disclosure of tax avoidance schemes (Dotas) rules, which demand that promoters tell HMRC about tax avoidance schemes they design and sell, were breached.

It said the scheme 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.

HMRC said this was its first victory under the Dotas rules at a tribunal and the £110 million could be recovered just from the Alchemy scheme.

Following a public hearing in London in March, the First-tier Tribunal has ruled that the scheme's arrangements were notifiable.

In its ruling, the First-tier Tribunal, which handles appeals against some decisions made by HMRC on issues including income tax, PAYE tax and corporation tax, found an investigating HMRC officer was patient in the face of an "unwillingness to be forthcoming".

It added that "it would be unfair to describe the responses he received as stonewalling, but they can only be considered to represent an attempt to deflect".

It was also found that the HMRC had taken all reasonable steps to find out what the arrangements were and how they were implemented.

There is no right of appeal against the decision.

Under the Dotas rules introduced in 2004, promoters must disclose schemes to HMRC and report details of their users to HMRC on quarterly client lists.

Users must also report their use of a scheme to HMRC annually.

HMRC has various powers to tackle non-compliance and promoters face penalties of up to £1 million or more if they fail to disclose a scheme.