Tax dodge quashed by special inquiry

Tax dodge quashed by special inquiry

A scheme to avoid paying corporation tax on a $20m (#12.8m) company sale has been outlawed by the Special Commissioners.

The commissioners’ decision upholds case law principles derived from Ramsay v IRC in 1982 demanding identification of a real transaction carried out by taxpayers by disregarding any artificial steps inserted for avoidance purposes.

Spectros International, a US/UK business now in creditors’ voluntary liquidation, sold a wholly-owned subsidiary, Spectros International Holdings, to US company Applied Biosystems Inc in 1986 for $1,000.

But HM Inspector of Taxes argued that ABI’s agreement to also pay off a manufactured $20m debt of SIH, a liability retained by Spectros, amounted to a benefit for the company. Spectros later used the $20m to pay a dividend.

The commissioners accepted that the dividend was an inserted step with no commercial purpose other than tax avoidance.

They said: ‘To us, it does not seem to matter whether the $20m was paid to Spectros. SIH or the bank. It is clear that $20m had to be applied in some way, in order to release Spectros’ security with the bank.’

Price Waterhouse tax partner John Whiting said: ‘It’s confirmation that you can squash a scheme if there is an artificial avoidance step inserted into it. Spectros was clearly $20m better off, even though the amount that went into its coffers was only $1,000.’

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