A scheme which tried to avoid tax by paying salaries in gold bullion has been labelled “abnormal and contrived” by an expert panel, opening the way for HMRC to clamp down on it.
The case brought by the taxman focused on two company directors who were paid £150,000 from their business using a process involving the purchase and immediate sale of gold, a transaction which was funded by an employee benefit trust.
The company’s liability to pay the gold supplier was settled by one of the directors in return for a director’s loan account credit.
A long-term obligation was created in which one of the directors was required to pay back the price of the gold into the trust in future.
The GAAR (General Anti-Abuse Rule) advisory panel – which looks at the proper application of the GAAR tax law – found that the directors had sought advice on how to structure this reward so it would not count as remuneration for tax purchases.
It noted it is “abnormal for an employer to reward employees using gold” and also for an asset to be sold immediately after purchase.
“In this case we can see no reason for the steps to involve gold, other than for tax purposes,” its report said. “In our view, the steps in this case involving gold are abnormal and contrived.”
HMRC had argued the directors wished to avoid paying National Insurance and income tax on the funds, and the company sought an upfront corporation tax deduction for the cost of the reward.
Last summer, HMRC warned companies to stop paying staff using gold bars, saying some were still using the tax dodge most commonly seen 20 years ago.
The findings of the expert panel will allow HMRC to use the GAAR introduced in 2013 against such schemes.
The GAAR was a new way to clamp down on tax avoidance, brought in as a response to taxpayers’ use of loopholes to reduce their tax bills that went against the spirit of legislation.
Andrew Constable, a tax partner with accountants Kingston Smith, said the findings demonstrate that GAAR is a powerful weapon in HMRC’s arsenal.
“The GAAR was designed to hit the parts of the tax avoidance industry that other measures couldn’t reach; it has now started to earn its place in HMRC’s armoury,” he said.
“This decision against payments using gold will allow the taxman to use these provisions of last resort. It shows that GAAR has teeth. Anyone seeking to exploit loopholes in the tax legislation should mark and learn.”