A couple of weeks ago, the very day that Jimmy Carr was on the front page of the Times, our company accountant had arranged me & Pete a presentation with a tax-avoidance specialist, or “profit extraction” service.
I didn’t really get a say in participating, so sat through this woman’s presentation, slightly open-mouthed. It was fascinating, apparently scandalous and we declined to take part. But according to a poll on moneysavingexpert.com, 58% people would go to any legal length to dodge tax, so here’s to you guys, knock yourselves out!
This is what she described to us, a scheme for removing profits from a UK company, largely tax-free. I think I am describing this correctly, but if I don’t, I it’s because something was being hidden from me, or I’m getting my terminology wrong. I’d be glad to take clarifications or corrections.
For this dodge you will need a) an individual who wants to receive their tax-free cash (that’s you), b) a company from which to pay the money, c) an arbitrary investment fund (or “basket”), and d) a casino bank.
You go to the bank, and strike two deals:
1) you buy a spread bet, betting that the investment will go up in price by a small and fairly sure percentage. This costs you a stake of e.g. £7,000, for a £100,000 payout;
2) you sell an option to the bank at the same time, contracting to pay the beneficiary £100,000 if the investment performs, to the same condition as the bet. The bank pays you £4,000 for the privilege of becoming the beneficiary of that option.
So you’re now personally £3,000 down – that’s is the bank’s commission. Nobody pays any taxes on these transactions, which are fundamentally risky. Individually, they’re to nobody’s obvious benefit.
The casino bank is on the hook for a spread-bet that is very likely to pay out. But the bank also has a position over you by being the beneficiary of the option you sold them. If the bet pays out, so must the option, which would leave everyone back where they started (except for the commission).
The dodge is: you’re able to assign the obligation for this option to your company. That’s a benefit to you, because you would no longer owe the bank in the event of a pay-out.
However – this is now a large potential liability for the company. Because it’s a liability, nobody sane would take it off you for free, right? Your company is providing a “benefit in kind”, as if it had bought you a holiday or car, and you’d have to be taxed on that at an equivalent cash price. You can’t just give money away (that would be tax evasion, which this isn’t). How should we value this gamble?
Apparently, the “proper” way to value the option (the £100,000 liability) is the Black Scholes model. Its model calculates the benefit to the employee at a value of only £6,000. Really, it does. So after the transfer is done, your company not you is on the hook for this £100,000 liability, and this has only “cost” you £6000 as a taxable benefit (so e.g. you might pay £2400 at 40%).
At the end of the bet period (90 days), the performance of the investment is evaluated, and the spread-bet & option conditions are very likely (though not certain) to be triggered.
When that happens, the casino bank pays out £100,000 to the individual. Winnings on a bet attract no income tax, so you receive the full amount – hurrah!
The company pays out £100,000 to the casino bank. But it’s not a dividend on profits any more, it’s a bad investment that can be written off altogether. It’s completely tax-deductible, so there is no corporation tax to pay on it.
So the end position is that £100,000 has been transferred from the company to the individual. Through lies and smoke, this transfer has been valued at only £6000, i.e. the apparent value of the option assignment, not the eventual payout.
One wrinkle: if the performance of the investment didn’t meet the bet criteria, you have to start again and re-place the contracts, and wait another 90 days. This means it costs e.g. another £3000 in fees to the bank. I was assured that this has only ever happened once in the history of the scheme. If there wasn’t risk, it wouldn’t be a bet. And that wouldn’t be “proper”.
The certainty of the bet is set at a level that the tax planners (and – apparently – HMRC) consider “proper”. I heard assurances (from a circle of people paying each another to say so) that it was “proper”, including a tax barrister. She actually said “of course if we’d bet against a rise of 1.75% that would clearly be a scam, which is why we put the bet level at 2.35%”. My question, “so it’s literally 0.6% away from being a scam?” got laughter but no response.
I thought this artificial loss would fall under the description of tax avoidance established by the Ramsay Principle. Could I see their independent legal opinion of the scheme? They had one, but I wasn’t allowed to see it unless I signed a non-disclosure agreement. Which would have ruined this post.
The firm assures me they have a £500,000 fighting fund, in a trust, against an investigation they think of as “inevitable”. That’s only to cover their clients’ costs in defending an investigation – this is mere advice, and they can’t guarantee we wouldn’t have to pay the tax. But that would be years down the line (i.e. implicitly, after we are long gone from the business, and if HMRC were being properly funded instead of cut to the bone). And for their pearls, the firm only wants £13,000.
The scheme doesn’t even demand large sums, just a limited company where you can withdraw a few tens of thousands of pounds, a cooperative
casino investment bank, and a strong desire to leech off the entire rest of society. I was told this firm’s clients are putting tens of millions through their scheme, and they’ve even declared and explained it to HMRC “because we’ve got nothing to hide”. ”Proper” was the word I kept hearing – a cast-iron assurance that there were solid, well-researched and slightly technical reasons that not paying tax was OK.
It’s not. I don’t get why disclosure shouldn’t get the scheme instantly shut down. I don’t get why we have a tax & legal system that makes this complex dodge even possible. I don’t get why our own accounting firm thought it was ethical to take kickbacks from this firm to sign their own clients up. And I’d hope that one day, people who take advantage of these schemes gets shamed as publicly as Carr did, because they’re the UK’s real scroungers.