Marketed tax avoidance scheme does not work

The taxpayers took part in a scheme whereby they set up a company (WY) which would pay them as sole shareholders distributions without attracting the income tax charge usually applicable to dividends. This entailed the creation of a subsidiary (WS) in which WY subscribed for 199 A shares and one B share. The latter was settled on trust for the benefit of the taxpayers on the basis that WY was entitled to receive a small amount of any income arising and the trust property was to revert to it.

The taxpayers said the dividend should be treated as the income of WY as settlor. HMRC disagreed saying the case involved a series of pre-ordained transactions designed to deliver in effect a distribution to the shareholders of WY in a tax-free form.

The First-tier Tribunal and the Upper Tribunal dismissed the taxpayers’ appeal and the matter progressed...