The Commissioners for HMRC v Hamilton Bradbury Ltd (in liquidation)

The Application is for an order under section 314A (or in the alternative, section 306A) of the Finance Act 2004 (“FA 2004”) that the arrangements specified and described (“the arrangements”) are (or, in the alternative, should be treated as) notifiable arrangements within the meaning of section 306(1) FA 2004.

HMRC originally made an application on 25 May 2021, and the respondents to that application were Hamilton Bradbury Limited, a company incorporated and resident in the UK (“HBL”) and HBC Limited, a company incorporated in the Isle of Man and trading as Hamilton Bradbury Consulting (“HBC”).

HMRC has subsequently withdrawn the application against HBC, which was dissolved on 4 February 2021.

HBL is in liquidation, and the liquidators stated that they consent to the matter being dealt with on the papers, they do not wish to file a skeleton argument and they are taking a neutral position on the matter.

The relevant provisions of Part 7, Finance Act 2004 provide:

The arrangements were implemented in the tax years 2013/2014 to 2018/2019.

Individuals (‘the user(s)’) found work via an arms-length UK agency or intermediary (“the UK agency”) and agreed to work for the end user client or customer (“the end user(s)”) in return for a particular rate of pay.

The following steps were implemented:

There is no evidence of interest actually being chargedor repayment of loans actually being required or made, although it should be noted that the 10^th anniversary of the loan has not yet passed.

It appears that the amountspaid to the user under the loan agreement are calculated by reference to theamounts invoiced by HBC to HBL for the provision of the user’s services to the end user, which effectively constitutes around 75% of the user’s incomegenerated from the provision of their services.

Multiple examples of each of the steps a, b and d above were contained in the evidence bundle.

Evidence obtained from HMRC’s enquiries indicate that monies were received andpaid as follows:

HMRC contentd that the arrangements meet section 306(1)(a) by virtue of falling within one or more of thefollowing descriptions in The Tax Avoidance Schemes (Prescribed Descriptions ofArrangements) Regulations 2006, SI 2006/1543 (“the 2006 Regulations”).

Thearrangements need only fall within one of the descriptions for the requirement insection 306(1)(a) to be met.

Regulation 8, description 3: Premium Fee

The premium fee hallmark provides that a promoter or person connected with a
promoter of the arrangements, or arrangements which are substantially similar thereto,
would be able to obtain a premium fee from a person experienced in receiving services
of the type provided.

In the recent decision of HMRC v Smartpay Ltd and another [2022] UKFTT 146 (TC),
Judge Malek considered the premium fee hallmark and stated at paragraph 22:
“The hallmark requires one to envisage a hypothetical promoter of an arrangement
which is the same or substantially similar to the arrangement in question and then
to ask oneself whether it would be reasonable to expect that such a promoter
would be able to obtain a premium fee. It is, therefore, an objective test applied to
a hypothetical promoter. The test does not require an examination of the subjective
condition of the promoter. The fact that UKCO does not receive a premium fee is
neither here nor there. It is equally irrelevant that it would be unreasonable to
expect that UKCO as promoter would be in a position to obtain a premium fee for
the services that it provided. Both considerations go to the subjective condition of
UKCO and are, accordingly, irrelevant.”

HMRC contends that in relation to these arrangements, the premium fee is be a fee chargeable by virtueof the loan element of the arrangements, which accounts for the tax advantageexpected to be obtained from using the arrangements.The arrangements here involve an amount being loaned to the user by HBC, in additionto an amount equal to the NMW being paid to the user. The purported effect of thearrangements was that the amount loaned would not be charged to income tax ornational insurance contributions (“NICs”). The NMW wage element would bechargeable, if and insofar as it exceeded the individual’s personal allowance. Thereduction in income tax and/or NICs is an “advantage” as defined in section 318 undersub-paragraph (a) as a reduced charge to tax which would have otherwise beenpayable by users.

The avoidance by an employer of an obligation to deduct andaccount for income tax under PAYE procedures and to deduct and account foremployee NICs is also a tax advantage within sub-paragraph (c) of the definition of“advantage” in section 318.

HMRC have obtained from users “personal illustrations” which were provided to them,
indicating the arrangements offered take home pay of 85%. The increase intake home pay referred to in the illustrations is a direct result of the purported reductionin charge to income tax and NICs on the loan element of their earnings. Therefore, it might reasonably be expected that a promoter or a person connected witha promoter of arrangements that are the same as, or substantially similar to, thesearrangements, would, but for the requirements of the regulations, be able to obtain apremium fee from a person experienced in receiving services of the type beingprovided.

This appears to be supported by the fees in fact charged. The Hamilton Bradbury
Companies retained up to 15% of the users’ gross contract value each pay cycle. There was a
self-billing agreement between the Hamilton Bradbury Companies which showed that that HBL paid 97.5% of users’ gross invoice value to HBC. HBL retained2.5% of the gross contract value and HBC retained approximately 12.5% (having paidout the remainder to users as NMW and payments pursuant to the loan agreements).

Users therefore appeared to agree to give say 90% of their taxable income generated by their economicactivities to HBC (allowing approximately 10% of the gross contract value to be paidas wages in line with the NMW legislation) in return for receiving around 75% of the
gross contract value under loan agreements, which is asserted not to be employment
income and so is not liable to tax or NICs. As such, the amounts withheld are paid out
of income generated by users’ economic activities and ultimately, although indirectly,at users’ expense.

The amounts withheld by the Hamilton Bradbury Companies are determined by
reference to the amounts put through the scheme or, in other words, charged based
on users’ contract value with the end user. Since processing large sums does not call
for significantly more work from the Hamilton Bradbury Companies than processing
small sums, the amounts withheld do not reflect the amount of time, effort or risk to theHamilton Bradbury Companies. HMRC contend that the rewards which the Hamilton Bradbury Companiesreceived therefore must have been attributable to something else.The value of the amounts put through the scheme determine the amount of the taxadvantage which users expected to obtain from the arrangements. As the fee ischargeable as a percentage of the contract value, the greater the amount awardedthrough the arrangements, the greater the expected tax saving (as tax is a percentageof earnings) and therefore the Hamilton Bradbury Companies’ cut increases in line with the expected tax saving. The expected outcome of the arrangements is that users receive cash payments to the value of approximately 85% of the income generated by their economic activities with no, or no significant, tax or NICs either deducted and accounted for or payable by their employers or by them and with no practical prospect of being required to repay funds borrowed.

It is obvious that no individual would willingly agree to be paid only NMW for work that was commonly paid at much higher rates. Nor would individuals agree to be loaned money if they thought that both the money would need to be paid back and that in another employment a high proportion of that loan would be paid as wages.

It is therefore clear that the tax purported tax advantage was an integral and main feature of the scheme, and was implemented in order to gain that tax advantage.

The tax advantage is the main, if not the only, benefit of the
arrangements. It is only because of the tax advantage that users are willing to give up
15% of their pre-tax income by agreeing to the Hamilton Bradbury Companies
withholding and retaining that amount. The amount withheld shows the size of fee that
could have been obtained and that is only attributable to the tax advantage to which
the transactions purportedly give rise.

I agree with HMRC that the arrangements therefore fall within the description in regulation 8.

Regulation 10, description 5: Standardised Tax Products

the arrangements have standardised, or substantially standardised,
documentation—
(i) the purpose of which is to enable the implementation, by the client, of the
arrangements; and
(ii) the form of which is determined by the promoter, and not tailored, to any
material extent, to reflect the circumstances of the client;
(b) a client must enter into a specific transaction or series of transactions; and
(c) that transaction or that series of transactions are standardised, or substantiallystandardised in form.

For the purpose of paragraph (1) arrangements are a tax product if it would bereasonable for an informed observer (having studied the arrangements) to concludethat the main purpose of the arrangements was to enable a client to obtain a taxadvantage.

For the purpose of paragraph (1) arrangements are standardised if a promoter makesthe arrangements available for implementation by more than one other person.

Subject to regulation 11, arrangements are prescribed if a promoter makes thearrangements available for implementation by more than one person and theconditions in paragraph (2) are met.

The conditions are that an informed observer (having studied the arrangements andhaving regard to all relevant circumstances) could reasonably be expected to conclude that –

the arrangements have standardised, or substantially standardised,
documentation—
(i) the purpose of which is to enable a person to implement the
arrangements;
(ii) the form of which is determined by the promoter; and
(iii) the substance of which does not need to be tailored, to any material
extent, to enable a person to implement the arrangements;
(b) a person implementing the arrangements must enter into a specific transactionor series of transactions;

the transaction or series of transactions is standardised, or substantially
standardised, in form; and

either the main purpose of the arrangements is to enable a person to obtain atax advantage or the arrangements would be unlikely to be entered into but forthe expectation of obtaining a tax advantage.

In relation to current regulation 10(1) and former regulation 10(4), HMRC contend the
requirements are met on the basis that the arrangements were made available for
implementation by more than one person.

HMRC state that in 2017/2018 there were approximately 900 users of the arrangements. The Tribunal has not been provided with complete lists of all the users, but from the evidence provided in the form of contracts of employment, loan documents, and details from the HBL of employees paid under umbrella arrangements it is clear that there were many users of these arrangements.

HMRC say that evidence obtained by them demonstrates the requirements of current regulation10(2)(a) to (c) and former regulation 10(1) and (2) are also clearly met.

Documentation obtained by HMRC indicates the arrangements are substantially
similar in relation to each user, varying only in relation to the personal details of the
individuals involved and the monetary sums. The documents were not tailored to any
material extent to suit the individual circumstances of the different parties. Evidence provided to the Tribunal showed multiple identical loan agreements and contracts of employement, varying only in personal details and monetary sums. Whilst it may be common for employers to have standardised agreements, given that for example the Bank of England base rate, and the official beneficial loan rate varied over the period, it might be expected that there would be some variation in loan arrangements to reflect this.

Following execution of the above standardised documents, each user was placed into
HBC’s PAYE system reference 120/MA86049 where they received their NMW and
payments in the form of a loan pursuant to the loan agreements. There was no
significant difference in the way the arrangements operated with the series of
transactions being broadly the same for each user.

On the basis of the above, it would appear that HBL, HBC or both together pre-determined the formof the series of standardised documents, which are integral to the series ofstandardised transactions which users entered into. The purpose of these documents
and transactions was to enable the implementation of the arrangements by users.

In relation to current regulation 10(2)(d) and former regulation 10(3), HMRC contend itwould be reasonable for an informed observer (having studied the arrangements) to
conclude the main purpose of the arrangements was to enable users to obtain a taxadvantage.

It is clear from the evidence provided by HMRC, both from ‘personal illustrations’ provided to users, and from information provided by the users to HMRC, that low taxation/increased money in their bank account every month was the main marketed benefit to this arrangement.

There does not appear to be any other significant benefit to the arrangements.

I agree with HMRC that the conditions for both the former and current regulation 10 hallmark apply in this case.

As it is only necessary for one hallmark to apply, and I have considered two hallmarks and found them both to apply, I have not considered whether any other hallmarks apply.

As I have found s306 (a) applies, I now need to consider whether the requirements of section 306(1)(b) and (c) FA 2004 are met.

These are met where the arrangements:

As mentioned above, the evidence from the written personal illustrations, and from communications between users of the arrangements and HMRC, show that the amount of cash received per month, and the difference between amount and the amount of cash that might be expected from using either a personal limited company or a direct employment relationship were foremost in the marketing to the users and the understanding of the arrangements by the users.

According to the evidence provided, the users did not view the loans as something that required repaying. One user said ‘I have not replaid any of the loans, I don’t actually understand how the loan works...In terms of repaying the loans....I was originally told this never happens. If this does happen I don’t have any source of funds to repay the loans’.

Users had also been told that the arrangements reduced tax. For example ‘X had been advised by HBL of the benefits of having a proportion of his emoluments paid in the form of a loan and out of the Isle of Man. As an offshore tax jurisdiction, these emoluments would not attract a charge to either income tax or employers/employees NI contributions.’

As mentioned above, it is not credible that an individual would willingly agree to be paid far below the market rate for his or her services, and to be advanced an amount that, even if it was slightly more than they might receive through a payroll, would need to be paid back with interest.

It is clear that the individuals entering into the agreement were told, and believed, that the loan would not need to be repaid and that interest would not need to be paid.

It is noticeable that even though HBC was dissolved, there was no attempt to call in the loans that had been made to hundreds of individuals.

Therefore the reduction in income tax that arose from only the NMW being put through the payroll was an ‘advantage in relation to tax’.

There is no other credible benefit from there arrangements, and therefore the tax advantage is the main benefit.

I conclude that the requirements of s306(1)(b) and (c) FA 2004 are met.

As HMRC has withdrawn the application in respect of HBC, I am only considering whether HBL is a promoter in respect of these arrangements.

HMRC contend that HBL is a promoter under s307(1)(a)(iii). They contend that the ‘relevant business’ of HBL was facilitating the arrangements of the contracts designed to enable minimisation of income tax and National Insurance Contributions, and that this is therefore a relevant business involving the provision to other persons of services relating to taxation.

HBL was the gateway for employment contracts to be signed with HBC. It appears from the evidence in the bundle that it was not clear to end users that there was an offshore company in the employment arrangements. The emails sending links to the documents were sent by HBL and reference what HBL would do, for example ‘during working hours we process your invoices the same day we receive them’.

I concluded above that the main purpose of these arrangements was to obtain a benefit in relation to taxation. As HBL was paid for its part in these arrangements, I conclude that HBL had a business which involved the provision to other persons of services relating to taxation, and hence this was relevant business.

In relation to s307(1)(a)(iii) it is clear that the notifiable proposal was ‘made available for implementation by other persons’ by HBL. The bundle contains examples of emails from HBL to end users with links to all the documents required to enter into the arrangements.

HBL also appears to be significantly involved in the organisation or management of the arrangements, as HBL invoiced UK agencies on behalf of users, received payments from UK agencies on behalf of users, issued full VAT invoices to HBC in relation to the amounts HBL owed HBC (which it was required to settle by paying HBC in return for the services users
provided to end users in their capacity as HBC employees) and transferred the above funds to HBC. Without HBL’s involvement the income received would not reach HBC and be paid to the end users. The issuing of invoices to agencies is therefore crucial to the arrangements, and therefore HBL is involved in a critical part of the organisation of the arrangements.

I therefore find that HBL is a promoter under s307(1)(a)(iii) and 307(1)(b)(ii).

The relevant legislation in respect of National Insurance Contributions is section 132A Social Security Administration Act 1992 and National Insurance Contributions (Application of Part 7 of the Finance Act 2004) Regulations 2012, SI 2012/1868.

I find the requirements of the legislation in relation to National Insurance are also met, for the reasons given above.

For the reasons given above, I make an order under s314A Finance Act 2004 that the arrangements are notifiable within the meaning of s306(1)FA 2004.

Right to apply for permission to appeal

By virtue of article 3(i) of the Appeals (Excluded Decisions) Order 2009 (SI 2009/275) any decision of this Tribunal about the applicability of section 314A and section 306A of the Finance Act 2004 is an excluded decision for the purposes of section 11(1) of the Tribunals, Courts and Enforcement Act 2007 and accordingly there is no right of appeal against this decision.