Soft Currency Schemes

14th April 2012

Contractors were attracted to a number of other schemes that were marketed at the same time as BN66 schemes. One in particular was a Soft Currency loan scheme marketed by a company called Consulting Overseas Limited.

On the face of it, this scheme was particularly well thought out and it came with backing from counsel. Briefly, this is how it was presented to contractors:

1. The contractor would pass his contract to a UK company called Sandfield Systems Limited
2. Sandfield Systems Limited would raise invoices to the client or agent and collect fees for the work done by the contractor
3. Once received, funds would be transferred to an Isle of Man company called Sandfield Consultants Limited
4. Sandfield Consultants Limited would pay the contractor a salary of about £20,000 per annum accounting in full for PAYE and NI
5. Sandfield Consultants Limited would then arrange for a loan to be made to the contractor for the remaining balance of funds it held
6. The loan would be in the form of a soft currency such as Belarus Roubles
7. The majority of the soft currency loan would be immediately converted into sterling to ensure that the contractor would receive 80% of the loan in sterling
8. The remaining 20% would be used to purchase a forward contract for the contractor so that he could be sure of being able to fully repay the soft currency loan when it fell due
9. The end result was that the contractor received a £20,000 per annum salary fully taxed together with 80% of the balance of his fees absolutely tax free

When HMRC examined this scheme there were a number of anomalies:

1. Although contractors were presented with a choice of foreign exchange broker who would handle the foreign currency loan, every single one selected a Bulgarian broker called Credex.
2. Exchange rates used often varied substantially from those available in the market generally.
3. Credex made a huge profit on every one of the forward contracts it purchased.

HMRC concluded that the scheme was a sham and that the contractors should pay income tax and N.I. on the soft currency loans.

Many contractors who used the scheme have settled in full and two cases are due to go the Tax Tribunal later this year. In one case at least, the scheme operation will be defended i.e. it was not a sham.

We represented a former scheme member last year and assisted him in negotiating a substantial discount on the tax due in return for not fighting his case before the Tribunal.
Briefly, we agreed with much of what HMRC believed and went further. The case we presented was that contractors who joined the scheme were victims of a deception in that the foreign exchange dealer, Credex was under the control of the scheme promoters and that the purchase of foreign currency was a fiction, no more than a paper exercise. We argued that what Sandfield Consultants Limited actually, did was pay a salary to each contractor with deductions properly accounted for, and supplemented that with a larger sum paid without deductions. Of course if we are right, Credex would have had no need to purchase forward contracts and the 20% retention would then be the scheme promoters fee.

HMRC pointed out to scheme members several years ago that where an employer makes payments to employees without operating PAYE, it is usually the case that HMRC will collect PAYE from the employer. They went on to say that there is an exception to this rule where the employer is beyond PAYE regulations (such as an Isle of Man company). We agree with this summary, but we believe that Sandfield Consultants Limited was within the scope of PAYE regulations because it maintained a permanent establishment in the UK. Although HMRC have not accepted this particular point we believe it to be one of the reasons why they are prepared to accept a discounted tax settlement.

If you were a member of the Sandfield scheme and you have not yet settled, contact us to see if we can help.

The Point of No Return

16th March 2012

Individuals who were members of BN66 schemes will be aware that in the Huitson case, the Supreme Court on 7th February 2012 rejected the application for permission to appeal the Court of Appeal decision. The HMRC newsletter dated 15th February 2012 states "HMRC intends to make arrangements to finalise all open enquiries and all open appeals". They go on to say that they will "also liaise with scheme promoters to discuss finalising individual appeals".

It is our belief that HMRC will now adopt an aggressive stance. Where closure notices have already been issued, they will demand payment in full. Where closure notices have not yet been issued, they will now be issued. They will encourage individual scheme members to "throw in the towel." Where scheme promoters continue to argue that collection action should be deferred pending the possible intervention of the European courts, we believe that HMRC will bypass those promoters and pursue former scheme members individually.

For the past three years we have been working with a number of former scheme members on an alternative strategy. We believe that the BN66 schemes as set up for contractors were, in many cases, fundamentally flawed. A key part of all BN66 schemes was that members provided services under a self employed arrangement. It is our view that in most cases a compelling argument can be put that the arrangement was a sham and a true analysis of it would show it to be an employment arrangement. We further believe that all monies paid as a consequence of that arrangement are also payments under an employment arrangement. Where an arrangement can be shown to be employment rather than self employment, the norm is that the employer rather than the employee is responsible for paying tax.

You may ask why hasn't your scheme provider explored this possible solution. The answer is simple, because the company that is responsible for the tax payable is (highly probably) your scheme provider and/or a company connected with your scheme provider.

We are arguing on behalf of the former scheme members we are representing that scheme organisers did not properly consider the employment/self employment question and that as a result PAYE is due from the paying company on all monies received. HMRC have aggressively challenged this argument but have not managed to break it and their current stance is one of lengthy delay. Maybe the delaying tactics are a deliberate ploy by HMRC to enable them to corral as many BN66 users as possible into an irreversible position, i.e. so that when we achieve the result (that our Tax QC considers to be correct) that our clients are not liable to pay any tax under BN66, and it will then be too late for you to consider our solution.

We have set out below a "decision tree" format of what we believe are the options for former scheme members.

Q1. Do you believe the scheme promoters will ultimately be successful before the European Courts?

Q2. Do you wish to accept the position as outlined by HMRC that the tax is now payable in full?

Q3. Do you have the funds or can you raise the funds to pay HMRC in full?

Q4. Do you have sufficient income to pay the tax in instalments over a period of no more than 3 years?

A – Complete and submit the enquiry form on the right and we will be in contact with you. Alternatively, please ring Tim Warr on 0161 477 6789 for a no obligation discussion.

B – Continue to take advice from the scheme promoters until a final conclusion is reached.

C – Contact HMRC and request an up to date statement of outstanding liabilities and interest, check the calculations and make a full payment.

D – Obtain and check a statement as in "B" above and then negotiate a payment plan with HMRC. If you have an accountant he may be able to assist in these negotiations.

E – Seek advice from an Insolvency Practitioner.