Nothing is what it seems

The decision in Cyclops Electronics Limited and Graceland Fixing Limited is another nail in the coffin for schemes designed to award bonuses to employees at nil or low tax rates. Readers may have given the case report a brief glance and concluded that there was nothing particularly notable in the judgment. That would be a mistake because in my view it breaks new ground for reasons I will explain. It also brings into play yet again the role of zero in the tax system – something that readers who have been following recent articles will know is a special interest of mine.

The scheme in outline

In essence the arrangements were straightforward. The directors of employing companies [empcos] set up new companies [newcos] with nominal share capital. The empcos invested substantial sums into those newcos by way of loans that were formalised by...