A prominent technology company which used loan notes to pay tax-free bonuses to its company directors was utilising a multi-million pound tax avoidance scheme to swerve its responsibilities, a recent Upper Tribunal (UT) ruling has found.
According to reports, Cyclops Electronics attempted to avoid tax and National Insurance (NI) on awards paid to senior officials by paying such awards using loan notes in £10 denominations.
In each case, these loan notes matched the bonus amount exactly – yet special conditions were included which enabled Cyber Electronics to avoid paying tax and NI in instances where the notes were issued to directors in the company.
The scheme enabled the business to manipulate tax legislation relating to loan notes, which typically enables companies to tap into tax relief for genuine commercial transactions, a Court heard.
The tax avoidance scheme has previously been used as a ‘ruse’ by more than one hundred other businesses, HM Revenue & Customs (HMRC) said.
However, following the ruling, the rules governing loan notes have been amended “to prevent any further attempts to exploit the rules,” it added in a recent press release.
Penny Ciniewicz, Director General of HMRC’s Customer Compliance Group, said: “We cannot allow tax avoidance schemes like these to deprive the UK of vital revenue. The money we’ve protected in this case alone would be enough to pay the annual salaries of around 2,400 newly qualified teachers.
“The honest majority of people who pay their taxes shouldn’t have to carry the burden of paying for the public services we need.”
Elsewhere, reports suggest that HMRC has been successful in winning nine out of every 10 tax avoidance cases which have appeared before the Courts in the last two years.