Alchemy Spread Betting Tax Avoidance Scheme

The Scheme

The Alchemy Scheme was an unusual form of cash extraction scheme designed to allow directors or senior employees of companies to extract otherwise highly taxable remuneration as untaxable gambling winnings.

The Alchemy Scheme was devised by Root2 Tax Ltd from around 2012 onwards. The Scheme was notable, not only for the fact that it relied upon the use of spread betting but also because of the fact that three Root2 directors attempted (with predictably unsuccessful results) to avoid tax on their own remuneration.

How it Worked

In brief terms, the way the Alchemy Scheme was set up was as follows.

The director (or other senior employee) made two offsetting bets on financial indexes with a financial services company, Heronden.

The first bet was a spread bet that a nominated basket of funds would grow in value over a three month period by at least a predicted amount. This bet had a 90-95% chance of “winning”.

The second bet was what is known as a “call spread option” (“CSO”), which was to lay off the (small) risk of failure on the first bet. This second bet had a 90-95% chance of “losing”.

The transactions were arranged so that when the bets expired, the director ended up with the “winning” first bet and his employer ended up bearing the burden of the “losing” second bet. The overall effect was to transfer the value of the winning bet, purportedly free of tax, from the employer to the employee.

Root2 attempted to present the Alchemy Scheme as a genuine investment, but in reality it was only ever a tax avoidance scheme designed to extract money from a company free of income tax and NICs whilst still allowing the company to deduct the money from its taxable profits.

In the case of one of the Root2 directors, the aim was that he was to emerge with the sum of £385,686 completely free of tax and National Insurance.

HMRC’s Attack

Understandably, HMRC objected to the Alchemy Scheme and have assessed users to tax and NICs on the basis that the value extracted from the company is PAYE employment income. The Scheme is already the subject of two adverse judgments of the First-tier Tribunal. In one of the cases, the judge described the oral evidence of a Root2 director as “disingenuous, if not evasive”, “incomprehensible”, “fanciful” and “sophistry” .

Commenting on the Scheme George Rowell, Tax and Professional Negligence specialist at Exchange Chambers, said,

“Although the Alchemy Scheme was dressed up as an ‘investment scheme’, in reality it involved no genuine investments and was a blatant attempt to avoid the income tax and NICs normally payable on a director’s remuneration. It was always entirely predicable that HMRC would assess users of the Scheme for the tax and NICs they had avoided and that such assessments would be upheld if they were challenged in the tax tribunal.”

Route to Redress

Clients who have been advised by financial or tax advisors in relation to the Alchemy Scheme need to consider whether, prior to investment, the risks of the Scheme were properly set out by the advisors involved. If those risks were not properly spelled out then it is highly likely that investors have a remedy in the form of proceeding against their former advisors.

FS Legal Solicitors

FS Legal is one of the very few law firms in the country specialising in claims arising from schemes like the Alchemy Tax Avoidance Scheme as promoted by Root2. We have a leading team of expert lawyers who have been ranked by the independent legal directories Legal 500 and Chambers & Partners in this specified field.

Chambers & Partners wrote: The team is especially skilled acting on high-value tax-related disputes.

Legal 500 comment: FS Legal has a national reputation for high-profile, multi-million pound “big ticket” litigation, in particular tax negligence claims having recovered seven figure settlements …… FS Legal is described by some as “the only pure financial services litigation firm outside London – its team is the envy of many of the top law firms it comes up against”.

Our team has successfully pursued claims against accountants who recommended cash extraction schemes such as the Alchemy Tax Avoidance Scheme and other promotors such as Root2, and against accountants and tax advisors who recommended schemes like the Alchemy Tax Avoidance Scheme without explaining the significant risks involved.

To discuss your specific circumstances in more detail without charge or obligation please call Kit Sorrell at our Manchester Office. In the present pandemic circumstances, Kit can be reached on 0161 714 4525.

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