Disguised Remuneration – bet on an HMRC win?

Disguised Remuneration – bet on an HMRC win?

The First Tier Tribunal (FTT) has found in favour of HMRC in the Root 2 Alchemy tax planning case.

Peter Honeywell

Director, Head of Tax Governance for National Markets

KPMG in the UK


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Tax free gambling winnings or earnings from employment?

Root 2’s tax planning arrangement sought to provide tax free gambling winnings through spread bets, but has been found by the FTT to give rise to earnings from employment.

Following the introduction of the disguised remuneration legislation in 2010, various promotors have looked at offering alternative tax planning arrangements to that of loans from EBTs.

What’s happened?

Root 2 promoted a spread betting tax planning arrangement called ‘Alchemy’.

In summary, under the arrangements individuals would place a bet with a financial counterparty on the movement in value of a basket of securities over a particular period (i.e. the spread bet).

In addition to the spread bet, a corresponding Call Spread Option (CSO) contract was also entered into with the counterparty.

In the event of the spread bet being won, the CSO contract required a payment to the financial counterparty in a similar amount to the value of the winnings received.

However, the CSO contract was almost immediately novated by the employee to the employer, with the benefit of the employer taking on this potential liability giving rise to a relatively low income tax charge for the individual on novation.

Root 2’s view was that the only income tax charge that arose under the arrangements was that associated with novation of the CSO, and that any winnings individuals received from the bets were receipts from a gambling transaction and so not taxable.

However, HMRC’s view was that the amount paid by the employer to the financial counterparty (similar to the winnings paid out to the individual) was earnings from employment.

In 2017, the FTT found in favour of HMRC that the Alchemy scheme was a ‘notifiable arrangement’ under the Disclosure of Tax Avoidance Schemes rules.

Subsequently, HMRC issued Follower Notices to all those known to have implemented the Alchemy tax planning arrangement, including Root 2 who themselves had implemented the arrangement.

Root 2 was the lead case taken to the FTT and, 18 months after the hearing, the FTT has issued a 90 page judgment in favour of HMRC.

What does this mean?

Subject to any appeal, all those who used Root 2’s Alchemy scheme will become liable to income tax (PAYE) and primary and secondary Class 1 NICs.

This case might also have wider implications for other tax planning schemes that seek to remunerate individuals without employers operating PAYE/NIC in full.

How can KPMG help?

Now would be a good time to review, independent of any promotor or introducer, any tax planning arrangements you entered into, that could be considered by HMRC to avoid PAYE/NIC on earnings from employment, so that you can understand, explore and consider your options.

KPMG has extensive experience of assisting employers and individuals in understanding their tax planning arrangements and the options available to them.

If you have any queries, or would like to discuss how KPMG can assist you, please contact either Peter Honeywell or Jay Lad (or your usual contact), or email employersclub@kpmg.co.uk.

© 2021 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.

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