HMRC has won a tax avoidance case worth £55 million after businesses issued loan notes as bonuses to avoid tax.
The businesses, Cyclops Electronics and Graceland Fixing, were proved to be using a tax avoidance scheme which issued loan notes – a financial instrument that creates or acknowledges indebtedness – to pay company directors’ bonuses.
Specially created companies issued loan notes in £10 denominations that matched the bonus amount. Special conditions were included to avoid the tax and National Insurance due when the loan notes were given to the director.
The scheme was designed to take advantage of the anti-avoidance legislation introduced to the employment income share schemes legislation, which provided tax relief for genuine commercial transactions. This legislation has now been amended to prevent further attempts to exploit the rules.
‘We cannot allow tax avoidance schemes like these to deprive the UK of vital revenue,’ said Penny Ciniewicz, HMRC’s Director General for the Customer Compliance Group. ‘The honest majority of people who pay their taxes shouldn’t have to carry the burden of paying for the public services we need.’
The Upper Tribunal case proved that a multi-million pound tax avoidance scheme used by more than a hundred other businesses was a ruse to avoid paying tax. The win over Cyclops Electronics and Graceland Fixing was worth £350,000, with £55.2 million won in related cases.
