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HMRC victory on tax avoidance

John Housden, 04 Oct 2012


HMRC has won an important tax avoidance case in the Upper Tribunal.

HMRC has been winning some major tax avoidance cases recently, the most significant of which – in financial terms – was recently decided following an appeal in the Upper Tribunal.

Barnes v HMRC involved a complex gilt-based scheme designed to exploit the interaction of two of the more arcane aspects of income tax legislation: the accrued income rules and the manufactured interest provisions. As with many avoidance schemes, the aim was to generate a claim for relief against income tax (£1.2 million in this instance) where there was no corresponding economic loss. The scheme was implemented in February 2005 and required an overnight borrowing of nearly £36 million worth of gilts, together with a purchase of just under £3,600 worth of the same gilt (i.e.0.01% of the borrowed amount).

The marginal purchase was supposed to be the key that unlocked the scheme’s tax relief, because it meant a loan repayment of 100.01% of the gilt did not exactly match the amount borrowed. The First Tier Tribunal (FTT) and, on appeal, the Upper Tribunal disagreed. Both Tribunals interpreted the law to favour HMRC, without recourse to the Ramsay/Furniss principles on tax avoidance. In effect their shared judgement was that a 100.01% repayment was in reality a 100% matched payment plus 0.01% unmatched rather than a complete mismatch.

Victory for HMRC was important because the FTT hearing had revealed that the avoidance package was a ‘designed and marketed tax avoidance scheme’ with well over 100 individual participants and total tax at stake of around £100 million. The loophole which the scheme sought to exploit was first closed shortly after the transactions took place, with further legislation three years later.

This case is another reminder of the long time it can take to discover whether a complex avoidance scheme works – and it could still go to further appeals.

This article appeared in the September edition of Financial Timesaver – the monthly digital newsletter for the busy financial adviser.


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John Housden

Editorial Consultant

John Housden is a qualified actuary who has worked in the personal financial services industry for 40 years.

A former technical director for a life company and longstanding contributor to a wide variety of Taxbriefs publications.


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