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11 Aug 2023

The International Tax Bulletin (June 2023)

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International Tax BULLETin – June 2023

Dear friend,

Our newsletter this quarter looks at the very old and not much used concept of sham – this time in the ongoing cases involving Baxendale-Walker and the overused (and not particularly successfully, at that) so-called remuneration trusts. In a time when tax schemes are no longer viable (the tax scheme industry being pretty much killed off by DOTAS and other anti-avoidance measures) it’s incredible that such arrangements are still being promoted and bought into. ‘Buyer beware’ is still the adage I use when clients ask about arrangements they’ve been asked to consider. If it’s too good to be true it usually is! Andrew Parkes is once again on the money, particularly with his ex-inspector’s hat on having looked at a few of these arrangements.

Speaking of ex-inspectors, Des Hanna turns his attention to Protected Cell Companies (PCC) and the UK’s Controlled Foreign Company Regime (CFC). PCC’s certainly have their uses, not least in offshore fund structures. Such structures are also being considered for tax planning purposes for South American clients whose countries of residence don’t have such sophisticated CFC rules as, say, the UK. However, the world is a small place and, as is often the case, countries look at one another’s tax regimes with a view to introducing legislation to counteract tax planning, particularly where offshore jurisdictions are involved. Again, buyer beware – while we can’t see into the future, we can often see what’s coming down the line as regards copycat tax policy.

And finally, Chimezirim Echendu provides us with a detailed analysis of the case of Jermey Coller which serves as a timely reminder that domicile (at least in the UK context) is an area that HMRC is beginning to scrutinise very closely. Tax always goes to the facts and an individual’s domicile status cannot be taken for granted – a detailed review of an individual’s facts and circumstances is absolutely essential (and this requires looking back to their parents’ domicile and history) if an accurate analysis is to be arrived at – and even then, it is open to challenge. So, again, buyer beware! 

As usual, all feedback, comments and questions are gratefully received.

Happy Reading!

Miles Dean

Head of International Tax
M:  +44 (0)7785 770 431

Since we reported last June on Mr Baxendale-Walker’s foray into the remuneration benefit trust business, another one of his “clients” (Mark Northwood) has found himself before the First Tier Tribunal and, unusually, the judge found that there had been a “sham”.
This is not something you see often in tax cases as, generally, although the man on the street (or the Clapham Omnibus as we’re talking tax) may consider something to be a sham (as may some tax officers), it is more of a legal term.
I was that deck of cards
When I was working at HMRC, I had an enquiry that was clearly a “sham” and wanted to run that as part of my case, but the experts in Counter Avoidance sat me down and explained, very patiently, that there were strict criteria for whether something was a sham in a legal sense and was pointed to Arden LJ’s judgement in Stone v Hitch and Others [2001] EWCA.
The points to bear in mind are:

  • the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties the appearance of creating different rights and obligations;
  • an inquiry as to whether an act or document is a sham requires careful analysis of the facts;
  • when examining a document, the court can also look at external evidence including circumstantial evidence;
  • it is the intention of the parties that matters – not the result;
  • a document can be uncommercial or artificial but not a sham;
  • that the parties deviate from the original contract may mean that they have agreed a new contract and not that they never intended the original to be effective; and
  • it is a common intention of the parties to the transaction.

So I didn’t get to run that argument, as the other party to the transaction didn’t know what my taxpayer was up to.
Fraud or sleight of hand
Sham was also considered in Hockin v HMRC [2017] UKUT 176 (TCC) and this case was referred to in Northwood, where an interesting point was found. Where a sham has been perpetrated, it does not mean that someone must have been dishonest. It can mean that there is a common intention to make things appear other than they are.
To make this distinction, consider two scenarios. In the first, Mr A enters into a contract to pay £10,000 to X Ltd, a company resident in Utopia, where it doesn’t pay tax. However, when entering into the contract, X Ltd agreed to return the payment to Mr A without telling anyone and does so. The contract is designed to give the impression to anyone that Mr A has made a payment and lost control of the money, whereas the intention of both parties is that Mr A retains the money.
Contrast this with a contract between Mr A, X Ltd and Y Ltd, where it is agreed that both X Ltd and Y Ltd will tender for a job and they do so, but it has already been agreed between the three of them that Y Ltd will provide a bid of double the market rate. Mr A then accepts the quote from X Ltd. It just happens that Mr A controls X Ltd, but that is public knowledge and the money stays with X Ltd.
Both examples show an intention that the contracts are not to reflect reality and, from a tax point of view, the first is highly likely to be considered to be evasion. However, the second could be said to be a case of where the intention is to make things appear other than they are (an open competition) and does not breach the dishonest threshold. Using Hockin, both are a sham.  
Flood gates not exactly open
The need to show that both parties to a transaction intended to give a misleading impression to third parties means that it will still be difficult for HMRC to show a sham has been perpetrated. However, the idea that it can be done without also alleging that the person has been dishonest may make HMRC more likely to attempt to make the case in the future. This is especially so for avoidance cases, as if HMRC can show a sham, they are more likely to be able to show that the transaction was tax driven and falls within anti-avoidance legislation.
If you have any queries about HMRC enquiries please contact me – Andrew Parkes, or Des Hanna and Dion Seymour as we all learned our trade with HMRC.

Andrew Parkes

National Technical Director
M: +44 (0)7522 229 589 or

Des Hanna

National Technical Director
M: +44 (0)7496 410 126 or

Dion Seymour

Crypto Tax & Accounting Technical Director
M: +44 (0)7375 804 498 or

Breaking Control: Protected Cell Companies

Des Hanna

One of the most important functions of any Tax Authority or Government Treasury Department is to protect the tax base of that country, particularly where there are “cross border” transactions which involve the outflow of money or capital from that country.

For example, where a subsidiary company pays a dividend to its parent which may be based in a different (low tax) jurisdiction, or where cross border interest is paid. If the paying jurisdiction doesn’t have any legal means of taxing the outflow of cash, then this arrangement can be manipulated to the extent that huge sums of cash could leave the country without tax being paid in the source country. To protect from situations like this, many jurisdictions will charge a Withholding Tax (WHT) e.g., 15% of the value of the dividend or interest or royalty so that the tax base can be fortified.

However, jurisdictions can’t apply WHT to every transaction, and multinational groups which have companies located all over the world come up with many ingenious ways of diverting profits offshore. From transferring “Intellectual Property” to low tax jurisdictions so that “royalties” suffer no or low taxation, to putting group Treasury Companies in low tax jurisdictions; that Treasury Company is then financed with equity (e.g., from the UK) and that equity is lent around the group at interest and the interest it receives is either not taxed at all or taxed at a low rate…

Find out more

Revisiting the Concept of Domicile

Chimezirim Echendu

The remittance basis available to individuals domiciled outside the UK makes the question of their domicile an important one if they are UK resident. In the recent case of Jeremy Coller v HMRC [2023] TC 8738, the First Tier Tribunal (FTT) revisited, in quite exhaustive fashion, the general rules as they relate to the domicile of an individual.
The concept of domicile here is a common law one and refers to a person’s permanent home, not their tax residence as in some civil law countries, and a person can only have one domicile at any given time. For this subject the UK is broken down into its constituent parts, i.e. you have a Scottish or an English domicile and not a UK one. 
There are three types of domicile: domicile of origin, dependence and choice.
A domicile of origin is acquired upon birth, and will follow the father’s domicile where the child’s parents are married (and the mother’s in any other case). The domicile of origin is the most tenacious domicile and cannot be shaken off; however, it can be replaced by cutting ties clearly with the domicile of origin and obtaining a domicile of choice after attaining majority.

A minor will have a domicile of dependence and this domicile is dependent on their parent’s domicile.  
The issue of domicile is an extremely fact sensitive one and will be determined on a case-by-case basis, and this segues into our discussion of Coller v HMRC…

Find out more

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The content of this newsletter and any subsequent updates we send do not constitute tax or legal advice and should not be acted upon as such. Specific tax and / or legal advice should be taken before acting on any of the topics covered.

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