Root2 Tax Limited (in Liquidation) – Alchemy Spread Betting Tax Avoidance Scheme
HMRC Wins in Root2 Tax Limited Alchemy Scheme
The success of HMRC against Root2 Tax Limited (in Liquidation) in the First Tier Tax Tribunal earlier this year means that taxpayers who were advised to utilise the scheme will now likely face substantial PAYE and NICs liabilities. FS Legal understands that the finding of the First Tier Tribunal will not be appealed further and that HMRC will now pursue participants for the sums owing under the scheme.
FS Legal’s specialist tax team is currently providing urgent legal advice to a number of participants in the Root2 Alchemy scheme. We are pursuing claims against both Root2 Tax Limited (in Liquidation) and against accountants or advisers who introduced the Root2 Alchemy scheme. We also have a team of external specialist tax advisers who can work with HMRC to protect your position.
UPDATE: Root2 Tax Limited entered into Liquidation on 29 November 2022. Please contact us for further information.
Time to act is very limited. If you wish to discuss your own position with us, please contact us urgently. We operate on a fully contingent funding basis for the vast majority of our cases.
The Root2 Tax Scheme
The Root2 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 (in Liquidation) 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 Root2 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.
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 Root2 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.”
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 Root2 Alchemy Tax Avoidance Scheme and other promotors such as Root2, and against accountants and tax advisors who recommended schemes like the Root2 Alchemy Tax Avoidance Scheme without explaining the significant risks involved.
We understand that whether it is a personal or business matter, funding is a key concern. We have a variety of funding options available to seek to remove the risks and costs from our client. Unlike most firms, we are able to operate the vast majority of our cases on a contingent (“no-win, no-fee”) basis.
Because professional negligence cases are intricate and require specialist knowledge, we offer a free, no obligation, and confidential advice service to all our prospective new clients.