Metal trader loses £1.5m EBT tax appeal

Metal trader loses £1.5m EBT tax appeal

Sep 15, 2023

A metal trading company has lost a First Tier Tribunal appeal related to an offshore employee benefit trust ineligible for corporation tax deductions

Delphi Derivatives Limited appealed against two penalty assessments issued by HMRC totalling £1,572,260.16 about the company’s PAYE returns on form P35 for the employee benefit trust (EBT).

HMRC said the P35 returns contained a ‘careless’ inaccuracy in a 2008-09 return, and a ‘deliberate’ inaccuracy in a 2009-10 return.

These errors were related to Delphi’s participation in a tax planning scheme used to pay directors.

Mark Langran incorporated Delphin on 12 July 2001, with its principal trade to broke and trade futures and options on the London Metal Exchange.

He was the managing director and majority shareholder at the relevant time. The other two directors were James Kelland and Bruce Martin, and all three were involved in the day-to-day running of the business.

The scheme was created and marketed by Clavis Tax Solutions Limited to obtain a tax advantage under Schedule 24 of Finance Act 2003.

The scheme was designed to enable tax-free remunerations of employees through an offshore EBT and to gain an immediate deduction for corporation tax for contributions made to the EBT and the fees for the use of the scheme.

It relied on the exception provision under subsection 1290 (4)(a) Corporation Tax Act 2009 (CTA) to claim the corporation tax deduction.

The main feature of the scheme was to secure an immediate corporation tax deduction while claiming that no PAYE and NICs arose on the contributions made by the employers to the EBT, which would be allocated to sub-trusts designated for the appellant’s directors.

In July 2009, the directors were introduced to the scheme by a financial adviser, who then introduced them to John Forbes of Forbes Accountants.

Delphi used the scheme in the years 2008-09 and 2009-10 by making four tranches of payments to the human resources company Herald, which outsourced the service of the scheme.

Delphi paid £1.8m to Herald, of which £1,651,376.15 was settled on the Delphi Derivates Limited Special Purpose Trust, also known as Delphi’s EBT, on 7 October 2008.

The second tranche was implemented two months after the first in November 2008, with a payment of £3.9m to Herald. On 24 November 2008, the sum of £3,611,111 was settled on Delphi’s EBT.

This was followed by a third payment of £1.35m in February 2009 and a fourth of £3m in October 2009.

In the corporation tax return for the accounting period ended 30 June 2008, the appellant claimed a deduction of £1.8m for the first tranche payment to Herald.

They also claimed a deduction for the second, third and fourth tranches in a corporation tax return on 9 June 2010 for the accounting period ended 30 June 2009.

On 15 September 2009, HMRC sent a letter to Delphi to open an enquiry into the 2008 return and a further enquiry into the 2009 return on 12 January 2011.

HMRC then issued PAYE determinations and NIC decisions for 2008-09 and 2009-10. Subsequently penalties were calculated on the basic that the payments were both ‘careless’ and ‘deliberate’.

On 20 October 2018, Delphi appealed the penalties to the First Tier Tribunal (FTT). On 29 July 2019, the tribunal granted HMRC’s application for the appeal to be heard in private due to the ongoing criminal investigations into Clavis.

HMRC argued that for the first three payments, the culpability was attached to the failure to follow the advice provided to the appellant by its accountant, who had highlighted the weaknesses of the scheme.

For payment four, the inaccuracy had been categorised as deliberate because the appellant had already used the scheme three times and so would have been familiar with how the arrangements should work.

Delphi argued that it was not sufficient for HMRC to demonstrate that they were careless in entering into the scheme and that it had no connection with the completion of the P35 returns.

Judge Heidi Poon said: ‘To the extent that the scheme purported to obtain a corporation tax deduction through the provision of service in the form of an independent review of Delphi to make the remuneration recommendation to qualify for the disapplication of s 1290 CTA 2009 under sub-s (4)(a).

‘We are satisfied that HMRC has met the burden in establishing that on the balance of probabilities, Herald did not carry out an independent review for the exemption to apply, and that the appellant knowingly instructed Herald to amend the recommended amount with the intention that it could double the corporation tax deduction for the year 2009 to reduce its corporation tax liability.

‘We conclude that the inaccuracy in the P35 return for the tax year 2009-10 about tranche 4 was due to the deliberate action on the part of the appellant for the deliberate penalty to be imposable.

‘The tribunal affirms HMRC’s decision to impose the penalties of £525,484.99 for the year 2008-09, and £1,046,775.17 for the year 2009-10.’