Accountants lose £196k Aikido tax avoidance dispute

Accountants lose £196k Aikido tax avoidance dispute

Mar 5, 2024

Two directors of accountancy firm Winn & Co (Yorkshire) Ltd will have to pay tax on a £196,930 payout of distributable reserves after a Court of Appeal ruling

The Court ruled that appellants Sharon Clipperton and Steven Lloyd had used a marketed tax avoidance scheme called Aikido, which was designed to enable the owners of a company to extract funds from the company without incurring a charge to income tax.

Clipperton and Lloyd each held 50% of the shares in Winn & Co (Yorkshire) Ltd, which provided accounting services, and in 2012 were sole directors.

This case centred around the use of the Aikido scheme in 2012 and whether it amounted to tax avoidance.

In early 2012 Winn Yorkshire had distributable reserves sufficient to enable it to pay dividends of £200,000 to the Clipperton and Lloyd. In previous years it had paid them substantial dividends from the profits of its accounting business.

The reserves were subject to income tax under section 383 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) which imposes a charge to income tax on ‘dividends and other distributions of a UK tax resident company’, the recipient being liable for the tax under s385 ITTOIA.

Rather than pay themselves dividends of £200,000 and accept the tax consequences, in January 2012 the appellants decided to use the Aikido scheme and set up a subsidiary in Scarborough which was held through a trust. Winn & Co paid £200,001 into the scheme and various shares were created.

On 29 February 2012 Winn Yorkshire, as the sole voting member of Winn Scarborough, by written resolution resolved to reduce the share capital of Winn Scarborough by £200,000 by cancelling the share premium account and crediting the amount to distributable reserves. A week later on 5 March 2012, Clipperton and Lloyd were each paid £98,465 with £1,455 paid to Winn Yorkshire and the same amount of Cancer Research UK, the two other beneficiaries of the trust.

Each appellant disclosed the arrangements in their self assessment tax return for 2011/12 but did not include the sums received as their income (on the basis that the scheme had the effect that these sums were to be treated as the income of Winn Yorkshire and of no-one else).

HMRC opened enquiries into the returns and in March 2016 concluded that the sums received were taxable and amended the returns accordingly.

The directors disputed the tax charge and appealed twice, but their argument was rejected by both the First Tier Tribunal and later the Upper Tribunal.

At the Court of Appeal, Michael Jones KC for the appellants argued that the Upper Tribunal was wrong to rely on the Ramsay case, had erred in law and had ignored the ‘settlement code’.

Lord Justice Nugee rejected this, stating: ‘The payment by Winn Yorkshire to Winn Scarborough was simply the first step in a scheme designed to distribute the majority of the money to the appellants.

‘The money was being distributed to them because they were the owners of Winn Yorkshire and wished to extract profits from the company into their own pockets. Everything else was just a means of enabling that to happen.’

HMRC had a legal team of two, including Aparna Nathan KC and lawyer Laura Poots, who led the HMRC case.

At the Court of Appeal, Poots argued on several grounds, stating: ‘The first is that there was indeed only one distribution, namely the Winn Yorkshire distribution.

‘This was because in a case where the Ramsay approach leads to a composite transaction being taxed as one overall transaction, the individual elements in the overall transaction are just mechanics and are subsumed into the overall transaction. They have no separate existence for fiscal purposes.’

HMRC’s argument was described as ‘well founded’ by the judge.

The second element of HMRC’s argument focused on the tax consequences of the Winn Yorkshire distribution. HMRC’s view was that ‘there are no tax consequences of the Winn Scarborough dividend; the Aikido scheme was premised on the basis that if the Winn Scarborough dividend were treated as the income of Winn Yorkshire, the latter would pay no tax on it.’

Jones also argued that ‘settlement’ was very widely defined by s620(1) to include any ‘arrangement’, and that the entire Aikido scheme was therefore a settlement for these purposes.

However, this argument did not get much traction. The judge said: ‘As I have already said Winn Yorkshire does not have any interest in those shares or in the income from them.

‘Nor do I think it makes any difference that £1,455 of the money put into the scheme reverted to Winn Yorkshire; the money that flowed through the scheme to the appellants was the £196,930 which reached them, and that is the taxable income, as it was only that part of the money which was paid in respect of their shares. Winn Yorkshire had no interest in that money.’

The appeal was dismissed by the three judges, Lord Justices Nugee, Lewison and Newey.

According to Companies House records, Clipperton resigned as a director in July 2022 and the firm faced strike-off action but this was suspended in September 2022. It is now majority owned by Fortus North Limited.