Banker loses £1.6m Bermuda tax avoidance case

Banker loses £1.6m Bermuda tax avoidance case

Sep 12, 2023

A taxpayer has been ordered to pay a reduced penalty after losing a First Tier Tribunal appeal related to the use of a tax avoidance scheme

The appellant, Kenan Altunis, had appealed against a penalty issued by HMRC for a total of £1,657,268 related to his co-operation with a loss-creation scheme run through a Bermuda based company.

In March 2008, Altunis entered into a tax scheme called Aphabeta designed and marketed by the Montpelier group of companies.

The Montpelier group of companies was headquartered in the Isle of Man. One of its subsidiaries was Montpelier Tax Planning Ltd, previously known as MTM Ltd.

He then filed his 2007-09 self-assessment tax return, which included a claim for scheme-generated losses of £5,344,846.23 from a trade-in derivatives via an agent, Alphabeta Trading Limited (ABT), in Bermuda between 3 and 17 March 2008.

Following an enquiry HMRC issued a closure notice removing the claimed losses and handed Altunis a penalty under Taxes Management Act 1970 (TMA).

This was determined on the basis that Altunis had acted fraudulently or negligently by ‘knowingly’ making a false representation in his return because he knew he was not trading in derivatives on a commercial basis to profit.

The penalty was £1,657,268, but HMRC asked the First Tier Tribunal (FTT) to reduce it to £1,139,371 to allow a higher level of mitigation. Altunis appealed against the penalty.

At the time he entered the scheme, Mr Altunis was the Managing Director and Global Head of FX Sales of UniCredit, part of Bayerische Hypo-und Vereinsbank AG.

He denied he had any expertise in stock market trading, saying that ‘comparing my expertise to that of a trader is akin to comparing a car salesman to the production engineers’.

HMRC placed a lot of weight on a ‘side letter’ issued to Altunis by Montpelier. This said that if the scheme did not work, Montpelier would refund his costs of entering the scheme and would write off a related loan.

As a result of the letter, Altunis had completed his self-assessment return recklessly, not caring whether it was true or false, HMRC said.

The penalties were charged under TMA s95, which does not distinguish between fraud and negligence. Instead, it sets penalties for both at a maximum of 100% of the tax which would have been paid had the return been completed correctly.

In this case, the tax difference was £2,071,585. The issued penalty was 80% of that amount, on the basis that Altunis had acted fraudulently.

During the tribunal, Altunis denied knowing that Alphabeta was a loss-generating scheme and said he thought it was a genuine trading opportunity with the possibility of making profits.

As part of the scheme Altunis had signed a loan agreement for £5,250,000 with a Montpelier company called Bayridge Investments LLC. Altunis said that ‘at no point in time did I think the loan was not real’.

The dividend strip scheme involved the purchase of dividend rights from Montpelier associated companies. Scheme users claimed a trading loss for the cost of purchasing dividend rights.

However, by relying on a perceived loophole in the Income and Corporation Taxes Act 1988 (ICTA), Montpelier excluded dividends received from the computation of trade profits.

The FTT agreed with HMRC that Altunis had known he was not carrying on a trade but added that Altunis had understood that this was not necessary because he was deemed to be trading as a result of the agreement with the agency.

In reference to the side letter, the FTT found that this did not prove Altunis had ‘knowingly’ made a false representation. Instead, it showed he was unsure whether the scheme worked, but participated after receiving the side letter, which had protected him from risk.

But the tribunal did determine that Altunis had been negligent, on the basis that a reasonable person would have taken ‘independent professional advice’ on such a ‘highly aggressive’ loss-creation scheme.

Judge Anne Redston said: ‘In our judgment, the reasonable person would have taken independent advice on the scheme from a suitably qualified tax specialist. Montpelier repeatedly advised that he obtain independent advice, but Altunis did not do so.

‘He read the documentation and noted that it did not guarantee he would be entitled to claim the losses, but instead that HMRC should accept his claim. Even then he did not obtain advice, but instead entered the scheme having been assured that his fee would be refunded and the loan written off were the scheme not to succeed.

‘Mr Altunis had no previous experience with Montpelier, although he checked its website and took into account the professional qualifications of senior staff and his IFA. That falls far short of the actions of a reasonable person, given all the factors set out above.’

As Altunis had not been fraudulent, the FTT allowed a further reduction for cooperation, resulting in a total penalty of £652,459, 31.5% of the tax difference from his inaccurate loan claim.