The lengths to which people go to avoid paying taxes are sometimes surprising, and the schemes that are created to facilitate tax avoidance come under close scrutiny from HM Revenue and Customs (HMRC).

So it was that a tax avoidance scheme based on a Jersey Limited Liability Partnership (LLP) led to an appearance before the First-tier Tribunal (FTT). The LLP ‘traded’ in the UK and it contained 99 members who put more than £62 million into it. The LLP used the cash to buy the rights to the dividends from a company registered in the Cayman Islands and by a convoluted scheme claimed that it incurred a trading loss, even though a dividend of some £60 million was paid to the partnership, because the legal right to receipt rested in another company situated in the British Virgin Islands. More than £750,000 was paid to the advisors who set up the scheme.

The way in which the arrangements were structured (which even its organisers agreed was ‘artificial’) was followed by the LLP carrying out a number of transactions that, after considerable discussion, the FTT agreed mostly amounted to the carrying on of a trade rather than just investment activity.

These, the LLP claimed, led to a trading loss of some £18 million, which was the cost of the dividend rights purchased, and a loss claim totalling more than £7 million. Being the losses of a trade, these could be set against the other income of the LLP members to reduce their tax liabilities.

In a 135-paragraph judgment and despite the pleadings of a QC retained by the LLP, the FTT concluded that because some of the transactions were not trading transactions at all, the claims of the taxpayers were bound to fail. Furthermore, the sums paid to the tax advisors were not an allowable deduction for tax purposes by the LLP as these were also not trading expenses.


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