On 11 September 2017, His Honour Judge Colin Bishopp handed down his judgement in the case of The Commissioners for Her Majesty’s Revenue and Customs –v- (1) Root2tax Limited (2) Root3tax Limited (in liquidation)  UKFTT 0696 (TC). The Root2 judgement concerned HMRC’s application to the First Tier Tax Tribunal for an order that the Alchemy tax scheme (promoted by the respondents Root2tax Limited and Root3tax Limited) was disclosable under the Disclosure of Tax Avoidance Scheme provisions (DOTAS).
HMRC was successful in its application and HHJ Bishopp found that the Alchemy tax scheme should have been disclosable under DOTAS.
What is DOTAS?
The DOTAS regime requires promotors of tax avoidance schemes that are “notifiable arrangements" or "notifiable proposals" to disclose the same to HMRC when they are created.
Through notification, HMRC is kept up to date on the latest tax avoidance schemes being used. DOTAS allows HMRC to investigate, legislate (if necessary) and defeat tax avoidance schemes that it considers to fall foul of the relevant tax legislation.
Under DOTAS, individual tax avoidance schemes are assigned a “DOTAS number”. Tax payers who have participated in a DOTAS registered tax avoidance scheme are required to include the relevant DOTAS number in their annual tax returns. As such, HMRC is put on notice of a participant’s use of a tax avoidance scheme and how to seek further payment in the event the scheme is defeated.
Further information on DOTAS can be found here.
What is the Alchemy Scheme?
The Alchemy tax scheme has been described by HMRC as a “disguised remuneration scheme”; this is a tax scheme designed to allow employees, typically directors, to extract money from a company without payment of, or mitigating, Income Tax and National Insurance.
Commenting on the Root2 judgement Penny Ciniewicz, Director General of HMRC’s Customer Compliance Group, said:
“This is a great victory that sends a clear message to tax avoidance scheme promoters that we will pursue you if you don’t play by the rules.
“Most tax avoidance schemes don’t work. The DOTAS rules ensure that HMRC is notified of schemes so that we can investigate and challenge them.
“Designers and promoters of avoidance schemes should come forward now if they haven’t already disclosed a scheme to us. We will take action and nobody should think they can get away with not disclosing their avoidance schemes and misleading users about the need to report them.”
I have been involved in an Alchemy scheme, what does the Root2 judgement mean for me?
HMRC intends to pursue participants of the Alchemy tax scheme; it will seek to recover the Income Tax and National Insurance that should have been paid, had the monies been treated as employment income. HMRC has advertised that this judgement could allow it to collect an additional £110 million in tax revenue.
HMRC’s victory in Root2 means that it is now able to rely on its full arsenal of enforcement tools to pursue users of the Alchemy tax scheme. This includes, most significantly, HMRC’s power to issue Accelerated Payment Notices (APNs).
In short, an APN is a demand that HMRC can make to a participant of a DOTAS registered tax avoidance scheme (which the Alchemy tax scheme now is) for a payment on account of the tax HMRC believes to be due. Such a demand can be made before HMRC has ‘won’ on its claims that the money is in fact due before the court. Monies paid to HMRC under an APN will be repaid by HMRC if they are ultimately wrong.
Further information on APNs can be found here.
As such, participants of the Alchemy tax scheme are likely to receive APNs from HMRC demanding payment of the tax they say is due. Such sums could be very significant and most crucially, any payment will be due within 90 days. This does not of itself mean that HMRC is correct in its assertion that the Alchemy tax scheme is an illegitimate tax avoidance scheme, but it is a stark consequence for Alchemy tax scheme participants.