High profile ‘Working Wheels’ tax scheme fails

High profile ‘Working Wheels’ tax scheme fails

Fri 28 Feb 2014

Last weekend’s press had headline stories of the First Tier Tribunal (FTT) decision in Flanagan & Others v HMRC that the “working wheels” tax scheme was not effective.  The press particularly highlighted the involvement of Chris Moyles, the former Radio 1 DJ. 

Three matters were considered by the Tribunal:

  • were the participants carrying on a trade as used car dealers?
  • was the claimed relief for a manufactured overseas dividend (MOD) due? and
  • did the scheme fail by application of the Ramsay doctrine?

There was no trade

None of the participants had any involvement in the very few purchases and sale of cars that were said to constitute their trade: “details were available … only long after the event”.  Comments made in the judgment were that the participants were indifferent as to whether a profit or loss was made,  “this was not a trade but a means of securing tax relief” and the fiscal drivers for the so-called trade were so great that the “shape and character of the transaction is no longer that of a trading transaction”.  Or as HMRC’s Counsel put it, “the supposed car dealing was nothing more than the “hook” the appellants needed in order to bring them within s 58 [ITTOIA 2005]”.

Whilst trade is very widely defined for tax purposes confirmed by historic case law the Tribunal decision shows that there has to be reality for the activity to be treated as a trade for tax purposes.  This decision shows the vulnerability of schemes that rely on an automatic acceptance that engaging in trading transactions will constitute a trade.

The MOD payment was not “representative” of a dividend

Under complicated rules dealing with the taxation of manufactured overseas dividends a relief is given for the manufacturer of the dividend (was in ICTA 1988 sch 23A para 7, provisions relevant to individuals now ITA 2007 s 583).  Relief is given for the excess of the manufactured amount over the “gross amount of the interest or overseas dividend of which it is representative.” (ITA 2007 s 583(1)(b)).  In the case the MOD was £5m, the dividend was £61.64 and the taxpayer claimed the difference as being the relief due under what is now and tax deductible under ITTOIA 2005 s 58.

There is no statutory definition of “representative” in the legislation.  The Tribunal decided that “there must be an upper limit to the disparity in value between the two payments beyond which it cannot realistically be said that one is representative of the other.  The requirement to pay £5m for the loan was part of the creation of the artificial tax loss, not for raising finance.

Ramsay would apply

Again, the FTT considered the Ramsay doctrine, holding that it would apply to Working Wheels resulting in the claimed fiscal consequences being disregarded.


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