Special commissioner John Avery Jones heard the cases of John Astall and Graham Edwards, two participants in the scheme, as test cases for the entire group of 64 KPMG clients. The complex scheme involved the use of relevant discounted securities.

A relevant discounted security is a debt or loan note issued at a discount to its redemption value. When cashed in a relevant discounted security is taxed as income rather than a capital gain. Advisers realised, however, that a relevant discounted security could also be structured to generate a loss.

Typically such schemes, widely marketed by several firms, involved an individual subscribing for a loan note from a company, but on carefully structured terms which ensured the market value was less than what was paid for the note.

The note was then transferred to a trust, generating a tax loss. The difference between what was paid for the note and what its value was when transferred was, meanwhile, sheltered in the trust.

The scheme, which has since been blocked by legislation, was widely used at the beginning of the decade to shelter City bonuses from tax and was specifically targeted at high-net worth individuals.

Avery Jones quashed the argument that the losses should be allowed as they were not genuine economic losses.

‘Early redemption would always require a circular transaction using the capital of the trust,’ Avery Jones said in his judgment. ‘The only way in which the early redemption premium can be paid is by using the trust capital. Asking myself whether the relevant statutory provisions, construed purposively, were intended to apply to such a transaction, the answer is no.’

A KPMG spokeswoman said the firm was considering an appeal.