I’ve written previously about a business called Mogul Press, which spams people on social media from fake profiles, often with stolen photos of real people. They claim to be a “PR agency” but their business appears to actually involve charging for paid placements in low quality media.
UPDATE 17 February 2024 – Mogul Press and its associates appear to be in the business of filing fraudulent copyright takedowns. We wrote about it here.
Mogul Press didn’t much like our article. At that point I thought they had several options:
Change their business practices: stop spamming people, stop using fake profiles, and be honest about what their business actually is.
Given they claim to be an “award-winning public relations and communications agency” they could communicate to the world why my article was inaccurate or unfair.
Threaten legal proceedings – although given that my claims were factual, this would always be challenging.
What I didn’t appreciate was that they had a fourth option – fraud.
I received this from Google:
It’s a “takedown notice” under the US Digital Millennium Copyright Act. The idea is that a copyright owner can submit an online form to a service provider, e.g. Google complaining that an indexed page on the internet breaches its copyright. Google will then delist the page and notify its owner. If the owner disagrees there’s a copyright breach then they can file a “counter-notice“. The complainant then has a couple of weeks to begin an actual legal action for breach of copyright; if it doesn’t, the service provider restores access.
I assumed they’d complained about my use of images of their website. These are copyrighted, but I’m perfectly entitled to use them for purposes of comment/criticism under the US “fair use” doctrine. In theory, I could sue Mogul Press for filing a bad-faith takedown notice.
But I was wrong. We can now see copies of the actual complaints and they aren’t incorrect, or bad faith. They’re simply fraudulent:
The “tribunepost.com” link (archived version here) is just a direct copy of our article. Mogul Press created it (naturally breaching our copyright) and then filed a DMCA notice claiming that we’d copied them. This is, very obviously, just fraud.1
Given the likelihood Mogul Press and its CEO, Nabeel Ahmad, are just scammers with no easily-traceable assets, it’s probably not worth spending time suing them. I’ll probably hurt them more financially by publishing this article – and that would be an entirely fair outcome.
I asked Mogul Press what they were up to, and they didn’t reply – so I think we can discard the possibility that someone else did this without telling Mogul Press ↩︎
Labour seems set to introduce VAT on private school fees. We thought it would be helpful to set out the ways some private schools might try to avoid VAT, and our assessment of their prospects of success. We’ve identified some approaches which we’ve categorised as “good” (likely to succeed), “bad” (likely to fail) and “ugly” (highly inadvisable and maybe even criminal).
Please note two important caveats:
We’ve written this to help advance the debate, and inform private schools and parents of the issues they may wish to consider. This is not legal or tax advice, and anyone considering implementing any of the approaches we discuss should speak to a suitably qualified tax professional.
The question as to whether VAT should be charged on private school fees is a political question on which we take no position. The question as to the wider impact of charging VAT on the private and state sectors is an education policy question where we have no expertise (we wrote about the issues here). This article focuses solely on the question of how the VAT could be avoided.
Why VAT planning is high risk for private schools
Here’s the big problem: if a school takes any steps to reduce the overall VAT it charges parents, and that goes wrong, the school would have a very large liability.
The reason is that, if a private school doesn’t charge VAT, and HMRC disagrees, then HMRC will have at least four years to challenge the position. HMRC can then assess the school to VAT and it will then immediately have to pay.1
The school would be able to appeal but, unlike income tax and other direct taxes, the school would have to pay up-front first, and then spend likely at least two years in an appeal process.
This creates a very significant practical risk for schools engaging in any VAT planning. The planning could appear to succeed and the school hear nothing for four years; then a sudden HMRC enquiry could result in it having to pay four years’ worth of VAT, plus interest, plus legal fees, all in one go. In other words, an amount broadly equal to one full year of fees (plus potentially penalties too).
In principle the school may be able to recover this from parents. That would however require specific wording in schools’ contract with parents, providing for an indemnity in the event HMRC asserts the school charged VAT incorrectly. The current standard form school contract doesn’t do this2.
Even if the contract in principle enabled recovery from parents, the practicalities would be difficult. Some parents would be abroad. Others may not be able to pay. Many would have left the school. All will likely be unhappy. Parents may be able to argue that they are not bound by an indemnity, for example because the school did not fully disclose the risks, and the indemnity is therefore unenforceable (the Consumer Rights Act applies to private schools’ contracts with parents).
We therefore conclude that it is imprudent for any school to engage in VAT planning beyond the extremely simple and vanilla (the “good” items we identify below). Anything further presents a risk that any prudent school should regard as unacceptable.
Note that it doesn’t matter what advice a school obtains – accounting firms, KCs, whatever. If HMRC challenge the arrangement (and if it’s one of the ugly ones below, they will) the tax will have to be paid up-front. And in our view HMRC will win any appeal on these structures.
The good – a year’s fees in advance
Say the election is held in October 2024. What if parents pay a full year’s fees in September 2024 rather than, as is more normal, paying for each term shortly before it starts?
From a VAT point of view, VAT will be charged at the point an early payment is made. So the applicable VAT rules would be those in September 2024, and there would be no VAT. If there was an October 2024 Budget imposing VAT on private school fees, then that wouldn’t ordinarily change the VAT chargeable the previous month.
We say “ordinarily” because, in principle, Government could legislate retrospectively, so that fees paid in advance prior to the Budget became subject to the new 20% rate. That would be unusual, and we would be surprised if it were to happen. A prudent school may, nevertheless, wish to explicitly reserve the right to charge VAT if the legislation is retrospective.
On the other hand we will almost certainly see “anti-forestalling” rules. The Government might announce very quickly after the election that it will apply 20% VAT to private school fees. However the actual legislation would take some time to finalise and pass, particularly if (as would be wise) there is a consultation on the detail.3 That creates a protracted period during which people could seek to pay months and even years of fees in advance. A wise Government would therefore announce that any payment of more than a term’s fees in advance, from the date of the announcement, will be subject to VAT. This approach has been previously adopted for other VATchanges.
Hence it would be sensible for any advance payment of fees to be made well in advance of any announcement.
The theoretically good – several years’ fees in advance
In principle paying several years’ fees in advance of an election should be just as good as paying one year’s fees in advance.
However it seems less likely to happen, for several reasons:
There will be a limited subset of people who can both afford to pay several years in advance, and care enough about the VAT cost to try to escape it.
Schools may be wary about locking in the current level of fees for several years, particularly in a relatively high inflation environment.
What if parents have to move out of the area, or otherwise withdraw their children from the school – would they get the fees back?
If that’s wrong, and we did see widespread payment of multiple years’ fees in advance, then the odds of retrospective legislation would increase. It may be unwise for private schools to push advance fee payments too far. It would certainly be a good idea for them to explicitly reserve the right to charge VAT if in fact legislation is retrospective.
UPDATE – November 2024. What we in fact saw was widespread prepayment but often structured really badly, so the “prepayments” in many cases weren’t actually prepayments at all. We wrote more about this here.
The also good
There are other reasonably uncontroversial ways schools can respond to VAT on their fees:
Schools will be able to recover VAT on their “input” costs, for example IT equipment, rent (not relevant to most schools) and the cost of building/maintaining buildings. This may require updating their accounting systems.
Under the “capital goods” scheme, schools will be able to recover some VAT for capital projects paid for in the previous ten years – previously these VAT costs would have been entirely non-recoverable.
Some school clubs have historically been run by external providers, invoicing separately (e.g. music lessons during school or after-school clubs). Where the providers aren’t subject to VAT (because they are exempt, zero rated, or their turnover is too small to attract VAT) then this will likely continue after school fees become subject to VAT. But see “unbundling” below.
There would be nothing wrong with schools responding to the VAT change by trying to increase parents’ charitable donations (as Labour do not currently plan to end charitable status). Charitable donations aren’t subject to VAT; they also provide school and parents with gift aid (effectively adding up to 80% to the donation). In principle, the more donations a school receives, the less fees it needs to charge.
None of these are avoidance.
The bad – legal challenges
We may see attempts to challenge the imposition of VAT on private school fees.
Provided the legislation is enacted competently, we see no realistic basis on which such a challenge could be made:
EU law would have made it unlawful to simply scrap the VAT exemption for private school fees.4 However, post-Brexit the UK faces no such constraints.
EU law principles such as fiscal neutrality might also have been used to argue that the imposition of VAT on private school fees is unlawful (we are sceptical); but post-Brexit such principles can no longer override UK law.
One might argue that the abolition of the private schools VAT exemption infringes the Human Rights Act/ECHR. However, even in principle, the Human Rights Act cannot override primary legislation – all a successful challenge would do is provide a “declaration of incompatibility“, asking Parliament to think again. And in practice, Courts have deferred to Parliament on tax questions, and no ECHR challenge has ever resulted in tax legislation behind held to be incompatible with Convention rights (even in the case of retrospective legislation). Any argument around private school fees would in our view be weaker than previous failed challenges.
We would therefore caution parents and schools against wasting large sums of money on legal challenges with little or no reasonable prospect of success.
The bad – unbundling
It’s been suggested some services such as boarding school accommodation, after-school clubs, sports activities and transport (e.g. school buses) could be “unbundled” and charged separately, and continue to be VAT exempt.
We are doubtful this will work. The technical question is whether there are two separate “supplies” for VAT purposes (e.g. accommodation with VAT at 0% plus education at 20%) or one supply (education at 20%). The courts have held that the key question is whether the two supplies are “distinct and independent”, but added that a single economic transaction should not be “artificially split”. HMRC have a useful summary of the issues here.
The issues are illustrated by the BPP case. One company provided tuition, with VAT charged at 20%. Another company in the same group provided textbooks intended to be used as part of the tuition, with VAT charged at 0%. BPP argued these were two separate supplies. It succeeded because the supplies were truly independent – a significant number of students bought the books without attending the course, and a significant number attended the course but bought the books elsewhere (and it would have succeeded even if the same company had provided both tuition and books).
Private schools will struggle to show that “unbundled” supplies are really independent – it is unlikely they will be purchased separately from the education. The most obvious example is boarding: it’s usually only available to pupils at the school, and is often part of the history and ethos of the school. Eton is not realistically going to open up boarding to people attending other schools (and if they did so in theory, with nobody taking it up, that would not assist them). Furthermore, any “unbundling” faces the significant challenge that it will clearly have been arranged in response to the VAT change.
There may be some cases where “unbundling” succeeds, but (as we note above) the risk will be on the school, and it’s a risk we believe prudent schools will not take.
Nevertheless, it may be wise for a Labour Government to introduce specific unbundling anti-avoidance rules, to serve as a clear “stay off the grass” warning sign.
The ugly – avoidance schemes
We can imagine a variety of different types of planning/schemes people might employ to avoid or reduce fees. We don’t believe any of these will work, and some could even result in prosecution:
Any attempt to tie donations to the provision of education would likely make that “donation” a fee, subject to VAT. If schools went further, and disguised a fee as a donation, then could potentially amount to criminal tax evasion.
For example, a school could try to game donations by quietly hinting that the children of people making large donations would receive full scholarships. But then the donation is, realistically, a fee, and subject to VAT. If the arrangement is hidden from HMRC then it could again be regarded as criminal.
A few people have suggested creating offshore entities owning the schools. That wouldn’t change anything. VAT is charged based on where the school “belongs” which impact means where the education takes place. So if a school actually moves to Ireland, with teachers in Ireland and children educated Ireland, then that would indeed escape UK VAT. But just moving the company achieves nothing.
A parent’s employer might think it could pay for their children’s education, and therefore recover the VAT cost. That doesn’t work, because the supply from a VAT perspective is from the school to the parent (reimbursed by the employer). The employer cannot recover the VAT. A variant on this would involve a company owned by the parents themselves – that risks heading into criminal territory.
A variant on this: school could hint that if a parent’s company sponsors an event or building then their children would receive full scholarships. The company would ordinarily be able to recover VAT when it buys advertising/sponsorship. However again it would be clear the “sponsorship” is really the payment of school fees for the benefit of the parents. If hidden from HMRC the arrangement could be regarded as criminal.
We don’t think unbundling is a very good idea, but an even worse idea would be to load a disproportionate amount of value into the unbundled items, for example charging thousands of pounds for textbooks or school uniforms, and asserting the 0% VAT rate applies. This again risks prosecution.
Schemes where parents appear to pay several years of fees in advance, but in reality don’t. They keep the money and the school only gets it slightly ahead of each term, as it normally would. For example, you pay say five years’ of schooling up front with no VAT, but funded with a loan from the school. You pay the loan back over time with interest, and the payments just happen to equal the fees you would have paid normally. Any such scheme would be highly vulnerable to challenge (particularly if, as may be inevitable, failing to keep up with the interest payments means that your child can no longer go to the school – it is then clear that this is not interest, but a fee).
We can imagine even more aggressive structures – for example a school moving to a model similar to hairdressers or a strip club, where each teacher/sports coach is an self-employed independent contractor sharing premises. The school provides billing and coordination services but the teachers don’t work for the school. Most of the teachers are under the VAT threshold (or the private tuition exemption applies), so all the teachers’ fees would be free of VAT. This, however, seems wildly impracticable – we doubt most schools could be run consistently with this model, although possibly very small schools could (e.g. with just two or three teachers).
Independent special schools would likely be exempt from the new rules. There is a designation process for these schools – it is possible some schools might try to obtain a special school designation that should not be applicable to them. Again that could amount to criminal tax evasion.
A school could split into multiple separate companies, each below the £85k threshold. There is specific anti-avoidance legislation to stop this, and it’s an area where HMRC is very active.
We might even see “structured” solutions, such as converting a school into an company with parents subscribing for shares – the subscription of shares is not normally subject to VAT. Or perhaps an LLP with teachers and parents as members. All such structures are highly unlikely to succeed given the obvious reality of the arrangement – that the parents are paying to receive a service.
We don’t think specific rules are necessary to prevent any of these schemes, as we believe all would clearly fail. There will probably still be some people who try them, but that would be the case regardless of what anti-avoidance is introduced.
The bottom line
Whenever engaging in any tax planning, or indeed any legal transaction of any kind, a good question to ask is: “What’s the worst that could happen, and what would my liability be?”. The answers in this case suggest that trying to avoid VAT on private school fees will almost always be a bad idea.
Thanks to C for the first draft of this article and V for HRA/ECHR input. Thanks to Q for reading through the final draft. Most of all, thanks to all the people who contributed avoidance ideas on my original Twitter and LinkedIn threads.
It’s slightly more complicated than this; taxpayers have the right to first seek an internal HMRC review, but in practice that almost never changes the outcome. ↩︎
There’s optional language saying fees are exclusive of tax, but that’s not enough to create a four year indemnity ↩︎
The usual timeline would be draft legislation published for consultation say in January, to go into the Finance Bill in March/April and obtain Royal Assent in July. ↩︎
Although the conditions in Article 133 of the VAT Directive could have been imposed, which in practice would probably have amounted to the same thing ↩︎
Since the start of 2023, all overseas entities1 have had to be registered with the land registry and on Companies House – the “register of overseas entities“.
We’ve created a interactive map that lets you see all property held by foreign entities.2 It’s very large (about 93MB), so people with slow or expensive connections may want to click away now.
If you click on a property you can see its land registry details (which you can then look up here). You’ll also see the name of the foreign entity – clicking on that takes you to Companies House and (if there’s one clear match for the company name) straight to the registered beneficial owners of the company.3 Please see below for notes on using the map, and what it does and doesn’t reveal.
It’s important to note that there is nothing inherently suspicious about a foreign entity holding UK real estate. For example, if you zoom into Canary Wharf, you’ll see JPMorgan’s UK headquarters, which is held (unsurprisingly) by JPMorgan. If a foreign person is investing in UK real estate then it is only natural it holds through a foreign company, and UK tax rules will now tax it in broadly the same manner as a UK company – so there is no avoidance here.4
Some people have presented the raw numbers of overseas real estate holders as some kind of problem – that is in our view wrong and misleading.
There are, however, some things that in our view are suspicious and potentially unlawful:
A missing beneficial owner entry may indicate a breach of the rules. It will sometimes be appropriate to certify there is no beneficial owner, for example where no one person has a 25% holding or control/influence.
The registered beneficial owners should be individuals, with exceptions for governments, listed companies (like JPMorgan), regulated providers of trust services, and companies which themselves list the beneficial owner. If you see any other kind of company listed (like this Barrowman-linked example) then that may be a breach of the rules.
You will sometimes see a company listing its beneficial owners as trust entity, with no other person listed – here’s another Barrowman-linked example. In our view this will sometimes be unlawful, particularly where the company is closely held. The trust entity will often have an individual (such as Barrowman) who exerts influence and/or de facto control over it; that individual should be listed as a beneficial owner on the basis they are a “person with significant influence“. However there appears to be widespread disregard of this rule.
It is, on the other hand, perfectly lawful to hold UK real estate through a foreign company with the aim of saving stamp duty land tax. Selling UK real estate directly triggers stamp duty at up to 15% (for residential property) and 5% (non-residential), but selling a company holding UK real estate does not. We have proposed closing this “loophole” for non-residential properties, and looking again at how the rules apply to residential property. We put “loophole” in scare quotes because it’s a practice that HMRC and successive Governments have known about for decades, and which current legislation permits.
Some notes:
We are certainly not the first to create a map like this, but we believe this has the most up-to-date data and is the easiest to use. It is also, most importantly, pretty.
The map locates properties by postcode, and therefore there will be inaccuracies in the presented location, particularly in rural areas. Where there is no valid postcode (110 properties) or no postcode at all (21,939), we’ve attempted to roughly locate the address by putting a black mark in the geometric centre of the district that they are in. Anything more accurate would probably require someone going through by hand, and/or cross-referencing via the land-registry. A simple manual land registry lookup will reveal the exact location (but will cost you £3).
The price shown will not always be the price for that particular property – simultaneous purchases of multiple properties will often (perfectly properly) be registered showing the total price for all the properties. There are also ways to hide the true purchase price from the land registry (some of which are lawful; others less so).
One important “loophole” is that the register doesn’t show beneficial ownership of land, it shows beneficial ownership of the company holding land. One can therefore use a professional trustee to hide the true ownership. This should be registered with the HMRC trust registration service, but the information will not be publicly available. That seems to us to be a significant problem, but it is unfortunately fundamental to the rules. However where the trustee is significantly influenced by an individual (for example because it is part of a family office and not a professional trust company) then in our view the individual should also be registered as a beneficial owner.
The 25% rule means that where for example, land is ultimately owned by a private equity firm, often no beneficial owner will be shown. That will in most cases be correct, because there are usually (much!) more than four investors in the private equity fund, and more than four individuals running the fund management. There are, for example, many retail chains and hotels owned by private equity funds. This is usually not tax avoidance.
The register doesn’t include Scottish properties – the Scottish equivalent is only updated once a year, costs £300 to obtain, and comes with licensing restrictions. The 2023 update will be released in March, so there’s an opportunity for anyone interested to investigate this further.
The Scottish position is further complicated by the way Scottish land law works. There is a partial map of Scottish rural land ownership here, but we’re not aware of any equivalent for urban areas.
We haven’t looked into the position for Northern Ireland, but it’s not included in the Land Registry dataset we used.
You are free to use the map for any purpose – if you find something interesting then we’d be grateful if you could credit us, but you don’t have to.
Full credit to the code that generated this map to M, who coded it in an amazingly short amount of time. The html is his copyright, and posted on this website with his kind permission. Anyone wanting permission to use it should contact M via us.
Footnotes
Meaning companies and other bodies with legal personality, such as foundations, LLPs and some foreign partnerships. This includes where they are acting as trustees ↩︎
This is the second version with three improvements. First, it attempts to link straight through to the Companies House registered beneficial owners (saving you at least two clicks of the mouse each time). Second, it attempts to locate properties with no postcode. Third, it adds a date for when the registered proprietor’s details were updated ↩︎
Sometimes there won’t be a clear match – perhaps different spelling of “Limited”; perhaps there will also be a UK company with the same name as a foreign company – you will then need to select the correct company, then click on “people” and “beneficial owners” to see who the registered beneficial owner is. Sometimes there will be multiple foreign companies from different countries; you may then need to look at the register itself to see which one is relevant. ↩︎
The position used to be different. Foreign companies holding UK real estate have always been subject to UK tax on their rental income, but gains used to be exempt. That changed in 2015 for residential real estate and in 2017 for non-residential real estate. There also used to be an inheritance tax benefit for non-domiciled individuals of holding UK real estate through a foreign company; that went in 2017. There is a brief summary of some of these issues here. It is therefore often the case that UK land is held offshore for historic tax avoidance reasons that no longer apply, but extracting the land from the current entity owning it is more cost/hassle than it’s worth. ↩︎
Douglas Barrowman describes himself as an “entrepreneur”. The reality is that his businesses made a fortune mis-selling tax avoidance schemes on an industrial scale to people on modest incomes. The schemes all failed, leaving their clients with huge tax bills – many went bankrupt; at least two killed themselves. The clients were then directed to a new company – Vanquish – with a new scheme that supposedly could make those tax bills disappear. That scheme was legally hopeless and relied upon false documents – we believe those involved should be prosecuted for tax fraud. And, whilst Barrowman has denied any connection to Vanquish, the evidence suggests he is lying.
The Times first reported on Vanquish in 2019. BBC File on Four carried a further, more detailed report in 2020. We’ve used these reports as a starting point, and obtained significant amounts of additional documentation and correspondence from AML’s former clients. That new evidence, plus the expertise of the tax specialists we work with, enables us to reach new conclusions.
We believe that the evidence shows that the AML and Vanquish schemes were fraudulent, that the Vanquish schemes relied upon a false document signed by key Barrowman personnel, and that Barrowman’s denial of any connection to Vanquish was a lie. Whether the criminal offences of fraud or tax evasion were actually committed are questions of fact, which ultimately a jury would have to decide, but we believe there is sufficient evidence for a prosecution.
To understand the nature of that evidence, we have to go back through some of the history. This report is therefore inevitably somewhat lengthy.1
Loan schemes – the history
There’s an obvious way to avoid tax on your income: replace it with a loan. Income is taxable; a loan isn’t. If you turn £80,000 of salary into a loan you’ll save £33,600 (40% income tax, 2% employee’s NIC).2
But the equally obvious problem is: you’ll have to repay the loan. This problem was solved in the 1980s3 with the invention of the offshore employee benefit trust (EBT). The idea was that if (for example) you normally earned £90,000, then £10,000 of that would be paid normally, but your employer would pay the other £80,000 to the EBT. The EBT would lend you £70,000 of it, saving you £23,600 each year, and retaining £10,000 as a fee. The claim was that the nature of the trust meant that the trustee wouldn’t, and perhaps even couldn’t, demand repayment of the loan. So the promise (rarely put in writing) was that the “loan” was a very funny kind of loan which would never be repaid, and would remain in existence forever.
In our view these schemes never worked – the uncommercial nature of the loan meant that it wasn’t a loan at all – it was simply remuneration, taxable in the usual way. HMRC was, however, slow to challenge the schemes, and they became widely adopted by large corporates. Eventually, in 2000, HMRC started a challenge against Dextra, a scheme used by John Caudwell, the founder of Phones4U.4 Caudwell and colleagues had avoided tax on about £17m of income,5 but the significance of the case was much wider than that. So it was unfortunate that HMRC lost – the failure of the court6 to step back and look at the reality of what was going on looks very wrong in retrospect.7
The Government’s response was to change the law (but only somewhat). That was insufficient – Dextra was seen as a green light by promoters of the scheme, who just slightly adapted their schemes to (they claimed) get around the new laws. The Revenue lost more cases, the law changed a bit more and the promoters responded by tweaking their schemes again. This “arms race” between Revenue and promoters continued for years, so in the last twenty years we have had eighteen different versions of the “employee benefit contributions” tax rules.8
In 2004, the Government warned that future game-playing would result in retrospective legislation. Retrospective legislation duly followed in 2006, but only a subset of schemes were targeted. From that point, it became standard practice for law firms issuing opinions on tax matters9 to add a caveat that retrospective legislation was a possibility. However we are not aware of any promoters of loan schemes ever warning about retrospection risk (or indeed of any risk).
HMRC lost another case – Sempra – in 2008. Again, it wasn’t appealed. To be fair to HMRC, at this point the courts seemed to be refusing to look at the “loans” realistically, which was peculiar given that in other contexts tax avoidance schemes were being merrily struck down where elements were artificial.10
These failures and half-measures just emboldened the promoters.
In 2010, the Government finally stopped fiddling with the details of the legislation, and introduced a broad anti-avoidance rule specifically designed to stop all the variants of the loan schemes – the “disguised remuneration” rules. As tax barrister Patrick Cannon says, it was clear from that point (at least to advisers) that anyone engaging in a disguised remuneration scheme would be acting contrary to the intention of Parliament, and that rarely ends well.
Large corporates and banks generally received sensible advice from specialists like Mr Cannon, and ended their loan schemes. But individual self employed contractors, typically working through their own services company or another intermediary, and earning relatively modest incomes, didn’t have the benefit of any of this advice. That created a huge opportunity for unscrupulous promoters, who could market schemes to individual contractors which supposedly got round the disguised remuneration rules, take highly aggressive positions, collect large fees, but suffer little or no downside if (as was always likely) the schemes failed to work.
Barrowman’s business, AML (UK) Tax Limited, had started up in 200911 – it was not in the least bit deterred by the new legislation.
Barrowman’s AML Tax business
Here’s their pitch – on the face of it’s exactly the EBT loan scheme we summarised above:12
Words that are missing: “loan”, “offshore”, “avoidance”, “risk”, “retrospective”.
And the following promises were made:
The marketing of these schemes appears to be false and deceptive in a number of respects:
Were the schemes really endorsed by a leading tax QC? We’ll probably never know. But even if they were, the opinions almost certainly provided no actual comfort to clients – we explained why here.
Was the scheme really “audited by a leading international accountancy firm”? Or was the only audit the standard audit of AML’s own accounts?
Where is the warning that the scheme creates a loan which is legally required to be repaid? We have reviewed the AML loan documentation, and it enables the lender to demand repayment, with no protection for the borrower – and that has recently had terrible consequences for some of AML’s clients. However the clients were, so far as we are aware, never warned of this. The assurances that the loan would never have to be repaid were critical to the scheme (because otherwise who would accept it?) but false.
Where is the warning that the Government had already threatened retrospective legislation to reverse remuneration tax avoidance, and had actually done so on one recent occasion? This was known to all competent advisers. But, as far as we are aware, AML never mentioned it to their clients – and the fact retrospective legislation was even technically possible came as a shock to most of them when (as we’ll come to shortly) the Government used exactly that route.
The “disclosed to HMRC” line is particularly troubling. There is usually only one way a structure gets disclosed to HMRC – under the “disclosure of tax avoidance schemes” (DOTAS) rules.13 Early iterations of the AML structure were disclosed to HMRC, later iterations weren’t.14 We even have an email from Arthur Lancaster (an AML director) using the lack of DOTAS disclosure as a selling point.15 So why did this brochure claim the opposite?
Contractors were assured in emails that the trustees who’d be making their loan were “independent”. In fact, all the trustees we’re aware of were companies in Barrowman’s group. We’ve more about the trustees later.
And who, really, was running this scheme? Were there appropriately qualified people advising on the tax and drafting the documents? We don’t know who provided the tax advice, but metadata16 in the loan documentation indicates who drafted it – John Hardman: a former solicitor, struck off for dishonesty, who acts as Barrowman’s legal adviser. There were various different lenders over the years; all the documents we’ve reviewed which have author metadata show Hardman, or his firm (“HC Legal Consulting“) as the author. 17
Contractors were also assured that AML “employed its own in-house barrister”. As far as we are aware, AML never employed any barristers; the only legally qualified individual we’re aware of was John Hardman.
There was no warning at all about the risks that the scheme was running. As the Chartered Institute of Taxation (CIOT) put it, loan schemes, whilst not illegal, were contrived avoidance schemes which were always likely to be robustly challenged by HMRC.
Nor was there any warning that if HMRC successfully challenged the schemes, or if there was a retrospective change of law, contractors could be solely responsible for paying the tax. The contractors we’ve spoken to had no idea this was the case – they assumed that AML would be responsible.
The failure to outline the risk, and who would be responsible if it crystallised, was in our view critical to the contractors agreeing to the scheme – we believe that, if it had been outlined, few if any would have signed up to it. And we believe the people marketing the AML scheme knew that.
The 2019 loan charge
HMRC could have aggressively challenged all of the contractor loan schemes using the disguised remuneration legislation, and made clear public statements (aimed at contractors, not advisers) that the schemes didn’t work. They didn’t do either of these things.18
It’s unclear why HMRC did not react more aggressively. It may have been chastened by the judgments against it. Possibly HMRC did not appreciate quite how many people were now using the schemes.19 But, regardless of the reason, by the mid-2010s there were around 67,000 users – the true number may be higher. Many were under HMRC enquiry (i.e. a formal tax investigation); many were not. When HMRC did open an enquiry, promoters often took control of correspondence and sent back obstructive replies. This, combined with the huge scale, made conventional HMRC challenges difficult and perhaps impossible.
One option would have been to change the law going forwards to put beyond all doubt that the schemes didn’t work. But it was highly likely the promoters would ignore any new rule in exactly the same way as they’d ignored the old rules.20 It meant HMRC would have to continue with the very difficult large-scale enquiry process. And there would be a big revenue loss from all the existing schemes that were not already under enquiry – well over £3bn.
The situation was out of control.
So HMRC and HM Treasury did something quite different: a return to the old tactic of retrospective legislation, but this time with much more impact. They created a one-off tax in 2019 for all loans made since 1999. People would have three years to repay the loans. If they were normal loans (like a standard season ticket loan) people would repay them and there would be no tax. But if the loans were really disguised salary then the loans would remain, and would be taxed.
Now imagine you took part in these schemes. You’ve been borrowing £70,000 a year for each of the last ten years. Perhaps HMRC has never opened an enquiry; perhaps they have but the promoter never told you; perhaps the promoter told you, but seemed confident HMRC would go away.
Now you’re facing a tax hit – the “loan charge”. £70,000 x 10 x 45% = £315,000 of tax. How are you going to pay that? HMRC will give you time to pay the tax – but you can’t afford it. Repaying the loan would eliminate the tax, but that requires an even-more-impossible £700,000 (plus interest). This retrospection was highly controversial and was described by the CIOT as a “blunt instrument“.
This might feel just if (in our example) the £315k just took you back to where you would have been if you hadn’t bought into the scheme. But it’s worse than that, because AML extracted their 16% fee, and you won’t be getting that back. You end up in a much worse position than if you’d never bought into the scheme at all. And of course, who earning £70k/year can afford a lump sum £315k payment?
This caused, and continues to cause, terrible financial and personal consequences for AML’s former clients. HMRC were warned about the hardship the loan charge would cause some people back in 2016, and the risk to mental health and even suicide was mentioned; but momentum had built up, and it was clear that the loan charge was coming regardless of opposition. To be fair to HMRC, by that point there were no good options – the mistakes of the past could not be fixed.
What would have happened if, instead of the loan charge, HMRC had properly pursued the schemes in the early 2010s, before they spiralled out of control? Many scheme users would have been put in equally dire financial straits. Escaping tax on all of your income inevitably creates a very large liability if the tax scheme fails, which most people will not be able to afford to pay.21 But earlier HMRC action could have reduced the numbers involved, and the number of years’ tax at stake.
This report won’t go into the rights and wrongs of the loan charge, and HMRC’s actions (and lack of action). Many AML clients/victims are understandably furious with HMRC. It is, however, our belief that primary responsibility rests with AML, and the others promoting and profiting from the schemes. At least two Barrowman/AML clients have killed themselves22: moral responsibility for that is on AML and Barrowman. It is their involvement that is the focus of this report.
AML’s first response to the loan charge
The loan charge was announced in April 2016. At that point it was clear to all that the loan schemes were dead, and the only effect of advancing additional loans was to increase the contractors’ liability.
But additional loans would also mean additional fees for Barrowman’s group. So the loans continued.
Astonishingly, we have evidence that Barrowman’s companies continued with the loan schemes until as late as December 2018, two-and-a-half years after the loan charge had been announced. We cannot understand how anyone would have regarded this as appropriate. In our view it approaches, and may have been, fraud.
This is a serious allegation to make, so we feel it is right we present the evidence. This is a letter from Smartpay Limited, signed by the Deputy Chairman of Knox (Barrowman’s business), showing they continued to make loans right up to December 2018:23
The letter was sent as part of AML’s other post-loan charge plan – to create another scheme that it claimed would rescue its clients from the loan charge. That was Vanquish.
The Vanquish scheme
AML and the other related Barrowman companies ceased trading around the time the loan charge came in. They sent their former clients an email like this:
When asked what precisely their “option” involved, Vanquish were reluctant to spell out the details.25 They described it as a “preferred loan repayment opportunity” which would mean that the contractor would “not be subject to the new Loan Charge legislation”. Payment should be made to a mysterious new Malta entity, Options 365:26
People kept pressing, and eventually they were able to extract some details from Vanquish. The “preferred repayment opportunity” turned out to involve taking another small loan to pay back the original large loan27. That doesn’t make much sense, so people who agreed to proceed were given a more detailed explanation – here from “Jack”:28
Thanks to File on Four we have the benefit of a recorded telephone call with one of Jack’s colleagues, “Jamie”.29 Putting all of this together, the Vanquish structure looks like this:
The EBT will split your loan into a 5% and a 95% bit.
You’ll then repay the 5%, bringing its balance to zero.
The 5% is then invested into a third-party investment company.
The third-party investment company takes on the remaining 95% loan.
The 95% loan would not be written off because that would trigger a tax charge.
But the 95% loan is no longer your problem – you won’t have to repay it, and you won’t have to pay the April 2019 loan charge.
So on our example numbers above: you owe £700,000. The loan is split into £35,000 and £665,000 sections. You repay £35,000 and the £665,000 disappears, with no loan charge.
But this isn’t what actually happened. Here are the documents Vanquish’s clients were given (PDF version here):30
All these documents do is:
Supposedly grant a new loan of the 5%, from the same lender (“to consolidate” the previous loan, which is nonsense). Contrary to the description by Jamie, it’s not a split of the original loan at all – it is (at least on its face) a new loan. But it’s a very curious loan, because no money is advanced by the “lender” to the contractor under this document. It’s not really a loan at all.
Create a “statement of no liability” – a letter saying that the original loan has been “repaid and provided for”. We don’t know what “repaid and provided for” is supposed to mean, but the original loan (£700,000 on our figures) certainly wasn’t repaid by the client.
What the documents don’t say, but what happens, is that the new 5% “loan” is repaid soon after it’s granted. The contractor never received the 5% from the lender, but they make a “repayment” of that 5% anyway. The “statement of no liability” then is issued. So the “loan repayment” is more realistically a fee, in return for which the contractor gets the “statement of no liability” to show to HMRC that the loan doesn’t exist.
How could this work? Jack’s email mentions paragraph 2 of the loan charge rules. This says that, when an old loan is replaced by a new replacement loan, then the April 2019 loan charge applies to the replacement loan. It seems Vanquish think that if the original loan was £700,000, but the replacement loan is for £35,000 then that £35,000 is all that’s taxed under the April 2019 loan charge rules (and if the £35,000 is repaid then there is no loan charge at all). That would be a wonderful result for the client. It is, however, indefensible as a matter of tax law:
For a start, as we say above, the “new loan” isn’t really a loan at all – realistically it’s just a fee for entering into a tax avoidance scheme to avoid the loan charge.
But if paragraph 2 does treat the new “loan” as a loan then the effect is that, for the purposes of paragraph 1, the replacement loan is deemed to be the original loan. That means that the replacement loan is brought into the April 2019 loan charge. But the amount taxed isn’t the £35,000 amount of the replacement loan – it’s the original £700,000 lent.31 In other words, replacing a loan for £700k with a loan for £35k doesn’t change the fact that the amount initially lent was £700k, and so doesn’t change the tax charge. The scheme fails.32
However the scheme does worse than fail. There’s a specific tax charge if someone “releases or writes off” a loan under the normal disguised remuneration rules (and perhaps under the normal rules for beneficial loans and general earnings charge as well). Jamie seems to think there isn’t a problem because the £665,000 now owed by the investment company is never released. The final structure doesn’t appear to have actually worked like that, as we can’t find evidence there was ever an investment company, but even if there was one behind the scenes, Jamie’s claim is false. The question is whether the £665,000 you owed was released – and clearly it was. You previously owed £665,000, and now you don’t. That’s a release, no matter how you describe it or dress it up.33 So the scheme doesn’t just fail to eliminate the loan charge, it triggers an additional 95% liability on the release.
It then gets worse still. There is a targeted anti-avoidance rule (“TAAR”) in paragraph 4 that says that a payment (e.g. the repayment of the 5% loan) is to be ignored if there is any connection (direct or indirect) between the payment and a tax avoidance arrangement. Vanquish is, needless to say, a tax avoidance arrangement. So even though the new 5% loan might actually be repaid, it is still outstanding for the purposes of the loan charge and tax would still be due. That’s an additional 5% liability. The repayment of the 5% achieves nothing except giving money to Vanquish. We don’t understand how anyone could think the TAAR wouldn’t apply.
There is also a General Anti-Abuse Rule (GAAR) which HMRC can apply to defeat schemes. The question then is whether entering into an artificial arrangement to defeat an anti-avoidance rule is a reasonable thing to do, when it involves artificially splitting a loan into two and somehow transferring 95% of the borrower’s liability to a random company solely for a tax avoidance purpose. Or, in the actually implemented version of the structure, whether pretending to “consolidate” a loan and then magicking the 95% away behind the scenes is a reasonable thing to do. Neither sounds reasonable to us. Contrived disguised remuneration schemes have been considered by the GAAR Advisory Panel many times, and failed each time. There is no reason to expect a different result here. The loan charge tax would be due and, in addition, the individual could be landed with a GAAR penalty of 60% on top.
All of this means that a client buying the Vanquish scheme would incur multiple tax charges, including (but not limited to) the original loan scheme charge, a disguised remuneration charge on the new loan, and a charge on the release of the old loan. The liability could more than double. 34
It was clear that HMRC would contest the scheme – only days earlier it had published a “Spotlight” (a public notification highlighting common tax avoidance schemes) saying that these kind of attempts to avoid the loan charge wouldn’t work.
In our opinion any reasonable adviser, even a non-specialist, would have known that the Vanquish structure would be challenged by HMRC, and that the structure would fail. This goes beyond normal negligence. Proceeding in the teeth of the HMRC Spotlight looks like madness.
But actually it made absolute sense for Vanquish, because (on our numbers) it made £35,000 in fees and took no risk. Vanquish then ceased trading soon after the loan charge kicked in. And, of course, HMRC did contest the structure, using some of the arguments above.
Clients buying the Vanquish scheme were asked to sign a letter authorising the transaction to proceed. But the letters weren’t with Vanquish35 – they were with the mysterious Maltese company, Options 365 Limited (which File on Four found was held by Barrowman’s Knox Group.36).
The false documents
The whole point of the Vanquish scheme was to make the loans disappear, and so eliminate the loan charge. That required something contractors could give to HMRC as evidence that the loan had been repaid. This was the “statement of no liability” (the last document in the above gallery and also this PDF).
The key paragraph is this:
This statement is a lie: the loans had not been repaid.37 This is a false document.
As we note above, the new 5% loan created by the Vanquish structure is not really a loan at all. This is what the Vanquish loan says is happening:
…
But this isn’t true – in no sense does the Borrower receive a loan advance from the lender.38 The purpose of the arrangement is to create something they can claim is a “replacement loan” which has been repaid (hopeless as that argument is technically), and then extract fees from the contractor dressed up as a repayment of the loan. This is another false document.
What kind of lawyer would draft such a document? We can look at the metadata:
Intentionally providing a false document to HMRC is very serious. HMRC commenced a criminal investigation against other loan scheme promoters for submitting false documentation to HMRC.
We have reviewed substantively identical “statements of no liability” and “loans” sent by six companies linked to Barrowman39 which acted as trustee lenders under contractor loan schemes:
Knox House Trustees Limited: signed by Anthony Page and Voirrey Coole. Page worked for Knox/Barrowman, and was a director of many Barrowman companies (including PPE Medpro) until he was sacked in disputed circumstances. Coole was a director of PPE Medpro and multiple other Barrowman-linked companies.
SP Management Limited, a Maltese company: signed by Timothy Blackburn (a senior member of Barrowman’s management team, and director of a number of Barrowman’s Maltese entities).
SP Management Limited, an identically named Isle of Man company: signed by Lisa Rowe.
These individuals include some of the most senior people in Barrowman’s organisation.
These documents are sent on the headed notepaper of the separate companies. However, one client received documentation from Smartpay, Knox House and Principal Contracts on the same day, and the metadata suggests all three companies created documents using the same computer:40
How responsible is Douglas Barrowman?
As is typical of Barrowman, he is not a director or shareholder of any of the companies involved, and the Companies House entries don’t list him as the “person with significant control” (PSC).
UK companies have to register their PSC at Companies House. AML’s registered PSC is Braaid Limited42, a BVI company.43 The rules don’t permit a BVI company to be a PSC – the entry should show the actual individual who has significant control or influence over AML – AML’s directors therefore broke the law.44
Many contractors were introduced to the scheme by “Principal Contractors” – registered in the Isle of Man as a “business name” of Principal Contracts Limited, one of Barrowman’s companies.
Here’s a financial projection prepared by “Principal Contractors” for a potential client:
Once clients signed up, the actual loans ended up being made by a variety of offshore company trustee entities, all connected to Barrowman. Many of the loans also show Hardman, or his firm (“HC Legal Consulting“) as the author.
Some of the early loans were made by AML Management Limited. Later loans were less easily traceable to Barrowman.
As noted above, letters supposedly written by Smartpay Limited, PCL and Knox House Trust have metadata suggesting they were all prepared on the same computer.
So we can confidently link Barrowman to AML and the other related companies selling the same scheme (as well as firms supposedly providing tax/accounting advice). It’s plausible that a large proportion of his fortune came from AML’s tax avoidance schemes.
The links between Barrowman and Vanquish
Whilst Barrowman doesn’t deny that AML is his company, he does deny a link to Vanquish Options Limited, possibly because he realises how very questionable, and potentially criminal, its actions were.
Barrowman’s lawyers told File on Four that neither he nor Knox48 have at any time owned or controlled Vanquish.
At the time Vanquish was selling its schemes, its personnel told clients that there was no link to AML or Knox House (which was important, because by that point most of the clients were very unhappy with AML). Here’s one contractor asking “Jamie” of Vanquish directly if the two companies share a director, or if Vanquish is a subsidiary of AML. The answer is a clear “no”:49
Our starting point is that there is no reason to believe any denial by Barrowman that he is linked to a particular company, because it is now a matter of public record that he and his wife have admittedlying about their ownership of another company controlled by Barrowman, PPE Medpro. A lawyer who relayed one of their lies has issued a public apology.
And multiple lines of evidence evidence suggests that in reality Vanquish was part of Barrowman’s Knox Group:
Vanquish, AML and other Knox companies used the same email server. Electronically signed Vanquish documents show that Vanquish sent the document from IP 89.107.1.218, which geo-locates to Douglas, in the Isle of Man, where Knox is based. Vanquish’s email headers50 show that its emails originate from the same IP address. Jamie denied being associated with AML, but his own emails come from the same server.51And AML emails also originated from that IP:52
Vanquish, AML and Knox companies all used computers on the same network. Email headers show that emails from Vanquish (including Jamie’s) were all sent by computers on the “aml.local” subnet. We see the same subnet in emails sent by AML and other Knox companies:
Vanquish shared a director with AML and its other directors are closely linked to Barrowman. Arthur Lancaster is a director of AML Tax; he is also a director of Vanquish Options Limited. “Jamie” in the audio clip above was straight-out lying. Lancaster was also Vanquish Options’ listed PSC at the time (he was also the PSC for PPE Medpro, but appears to have been (unlawfully) “fronting” that company for Barrowman. 53
Vanquish’s documents were written by AML/Knox personnel. Metadata in the PDF documents Vanquish sent to clients reveal that the authors included John Hardman (the struck off solicitor who acts as Barrowman’s legal adviser), HC Legal Consulting (Hardman’s firm), Sandra Robertson (at the time a director of Barrowman’s Knox Group) and Nerys Roberts/Rowlands (head of marketing for the Knox Group, covering all entities owned by the Knox Group).54. These documents on their face were prepared only by Vanquish.
AML Tax specifically recommended Vanquish Options to its clients (so far as we are aware, all of its clients). Barrowman’s other tax scheme companies did too. If Barrowman really had no interest in Vanquish, why would they do this?
Knox businesses were involved in the structure. A bona fide structure to repay the original loans would not have required any involvement from the original Knox lenders of the contractor loans. However, in this case, the lenders were deeply involved, supposedly making the new 5% “loans” (which were not really loans at all). The lenders were all Knox businesses – Smartpay, PCL and Knox House Trust.
AML admitted the link on one occasion. We have reviewed an email exchange between AML’s Isle of Man entity and a client. The client asked if AML was associated with Vanquish Options. AML replied that AML (UK) Tax “appointed” Vanquish Options “to assist with the loan charge once AML ceased trading”.
The link is made even clearer by Companies House filings. Vanquish was established in 2008 as “Aston Ventures Consultants Limited”. “Aston Ventures” was Barrowman’s first successful business endeavour, a private equity fund of sorts. The register of debentures (i.e. lenders), and later its registered office, was at the offices of John Hardman’s law firm at the time (before he was struck off). The company soon became dormant, before being revived in 2018 when its name was changed to Vanquish Options Limited. During the time Vanquish Options was most active, its registered office remained Hardman’s law firm – it only changed in March 2019.
There is a Maltese connection which also traces back to Knox. As File on Four reported, some of the Vanquish documentation creates a contract with Option 365 Limited, a Maltese company owned by Knox Limited, Barrowman’s company. Clients were also told to make their payments to Option 365. Barrowman’s lawyers told File on Four that the Option 365 shares were held for third parties (who they wouldn’t disclose). We note again that there are good reasons to be sceptical about such denials.
On the basis of this evidence, we believe that Barrowman’s denial of involvement in Vanquish was another lie.
How much money did Barrowman make from the schemes?
There are a large number of uncertainties here, but we can make a reasonably reliable lower-bound estimate based on the following figures and assumptions:
Most of the schemes ran for about nine years.
This case suggests AML’s fee was 16-18% of gross income (and that is consistent with what we hear from former AML clients).
Average contractor salary was around £75,000 (that’s consistent with HMRC’s figures and the data we’ve reviewed).
We’ll assume that at any given time only half of the 67,000 were using a scheme (on the basis that four or five years seems typical in the cases we’ve reviewed).
On this basis, the total fee revenue for all loan scheme promoters was approximately £3.6bn.56
We can test this estimate independently by looking at HMRC’s stated recoveries from the loan charge. HMRC say they settled 21,900 cases of either individuals or employers, and the total tax brought into charge as a result of that was about £3.9 billion. That implies total loans of approximately £9.8bn57. Scale this up to the total 67,000 users and we have total loans of £29.8bn. 16% of that is £4.8bn. This will be an over-estimate because around 25% of the original £3.9bn is likely to include interest; the figure also includes companies. On the other hand, the marginal rate will be lower in many cases. But overall this confirms that our £3.6bn estimate is in the correct ballpark.
How much of the approximately total £3.6bn did AML and the other Barrowman companies receive?
AML was one of many promoters selling these schemes, but had a large presence in the market – informed sources have told us at least 10% and perhaps much more. In March 2022, the Loan Charge & Taxpayer APPG issued a call for evidence to loan charge users – the responses from scheme users disclosed 1,006 contractor loans, of which 295 (29%) were from Barrowman’s companies. That figure should, however, be used with caution, because these were voluntary responses to a questionnaire and not a random sample, and there could be reasons why the responses over-represent or under-represent Barrowman.
We will therefore prudently use the 10% figure, suggesting fee revenue for Barrowman’s companies of £360m, but plausibly the true figure was much higher (over £1bn if the 29% figure is correct).
(20 January 2024 update – we’ve seen an email from a Knox Group company dated 2015 which boasts they have 7,500 contractors on their books. If that was a true statement at the time that implies Barrowman’s companies had at least 12% of the market by 2019, and likely more)
This certainly won’t all have been profit for Barrowman – he had all the fixed costs that come from running a medium-sized business, and was also paying commission to independent financial advisers (IFAs) and accountants who referred clients to AML.
There are many uncertainties, but we believe it is safe to say that Barrowman made comfortably north of £100m from the original contractor loan schemes, and potentially much more.
We currently have no reliable way of estimating the income/profit from the Vanquish scheme. Only about one in twenty of the AML contractors who’ve contacted us used the Vanquish scheme, but that could easily be unrepresentative of contractors generally (in either direction).
Evidence for a prosecution
We believe this report demonstrates there is sufficient evidence for a criminal investigation and, if that supports it, a prosecution of some of the individuals responsible for the AML and Vanquish schemes.
There are several key questions: did AML and the other companies defraud their clients? Did they defraud HMRC? Which individuals and companies should be prosecuted?
1. Did AML and the other companies defraud their clients?
Here’s how the Crown Prosecution Service summarises the offence of fraud by false representation:
This report identifies numerous instances where individuals working for AML, Vanquish and other Barrowman entities made false representations to clients to gain or retain their business, in circumstances where we believe they must have known those representations were false:
The implication that the original AML scheme had been “audited by a leading international accountancy firm”. We expect that was not true.
The assurances that the original AML scheme loans wouldn’t have to be repaid. These were untrue.
The assurances that the schemes were legally robust, when everyone in the sector knew that the Government had already threatened retrospective legislation to reverse remuneration tax avoidance, and had actually done so on one recent occasion.
The claim in marketing brochures that the scheme had been “disclosed to HMRC”, when at the same time AML were assuring people in private emails that the scheme had not been disclosed under DOTAS.
The claim that the schemes were “HMRC compliant”, which was understood by clients to mean that HMRC would not object to it – AML surely knew that HMRC would absolutely object to the scheme.
The claim in emails to contractors that the trustees who’d be making their loan were “independent”, when in fact all the trustees we’re aware of were companies in Barrowman’s group.
The claim that AML “employed its own in-house barrister”. We believe this was untrue.
The fact at least one of the AML companies continued making loans even after the loan charge had been enacted, when the only consequence of those loans was (inevitably) a large tax liability for the contractors (plus, of course, fees for Barrowman’s companies).
The claim that Vanquish was not linked to AML, including a specific claim by “Jamie” that AML and Vanquish had no directors in common. These claims were false; the companies had a key director in common; they used the same staff; they were on the same computer network and used the same email server.
The description of the Vanquish scheme as a “preferred repayment opportunity” when it reality it was a very aggressive tax avoidance scheme.
The claim, that the Vanquish scheme would work, when it had no technical prospect of working, and even a non tax-specialist would have realised that upon reading the whole of the legislation. That isn’t speculation – a (presumably) non-specialist on a web-forum took less than an hour to spot this point.58 A specialist – and Barrowman’s team hold themselves out as tax specialists – would also have appreciated that HMRC were easily able to counter it in any one of several different ways, with the potential for multiple tax charges plus penalties.59
Furthermore, Vanquish were proposing a scheme to avoid the loan charge just days after HMRC had said schemes of that type wouldn’t work, and that HMRC would challenge them.
Vanquish mentioned none of these issues to clients; their clear representation was that the scheme worked. This was enough to persuade some people, who couldn’t believe that an adviser would sell a scheme that didn’t work.
In addition:
AML and then Vanquish stood to gain significant fees by selling the schemes, but would have no liability if the schemes failed.60
The scheme Vanquish actually implemented was not the scheme it told clients it would implement.
Both the original contractor loans and the Vanquish loans were drafted by a former solicitor previously struck off for dishonesty.
Vanquish did not stick around to defend its position; it stopped trading right at the point when its structure would become visible to HMRC.
Were the AML/Vanquish individuals involved “dishonest”?
That means asking whether their conduct was dishonest by the standards of ordinary decent people (regardless of whether the individuals in question believed at the time they were being dishonest).61 The leading textbook of criminal law and practice, Archbold, says:
“In most cases the jury will need no further direction than the short two-limb test in Barton “(a) what was the defendant’s actual state of knowledge or belief as to the facts and (b) was his conduct dishonest by the standards of ordinary decent people?”
In our view it is plausible, even likely, that Barrowman’s team knew full well that what they were doing (particularly Vanquish) would not result in the advertised outcomes, would leave their customers exposed and yet create a profit for themselves. We expect most ordinary decent people would say that was dishonest; but ultimately that is something a jury would have to decide.
Given the terrible consequences of the schemes for AML’s clients, the clear public interest, we’d have hoped the CPS would have considered a prosecution. We don’t believe they did. We hope they reconsider in light of the evidence in this report.
There is no statute of limitation on criminal fraud.
2. Did Vanquish defraud HMRC?
There’s a good summary of the law on “cheating the revenue” (the technical term for “tax evasion”) from barrister Patrick Cannon:
There are also statutory offences, for example s106A Taxes Management Act 1970:
We can identify the following false statements made, or facilitated by Barrowman’s companies:
The scheme involved producing false documents, procured by Vanquish and signed by the directors of AML Management Limited, Smartpay Limited, Knox House Trustees Limited, Principal Contracts Limited, SP Management Limited (Isle of Man) and SP Management Limited (Malta). There were loans that said on their face that money was being lent, when it was not. There were statements that loans had been repaid, when they had not been (in either the usual meaning of the word “repaid” or its technical tax meaning in this context). These documents were produced for the purpose of leading HMRC to believe (incorrectly) that the loan charge would not apply.
Vanquish told clients to submit false tax returns, declaring no disguised remuneration loans, and including a note in the “white space” on the tax return reading “I did receive loans that were caught by the loan charge, but these were all repaid by 5 April 2019”. The loans were not repaid, so this statement would again be false.
Whilst we have not been able to verify this, there is one report that Vanquish told a client that, after the Vanquish structure had been executed, the trustee would report a zero loan balance to HMRC (and not disclose that the Vanquish structure had been used). Any such report would be false.
The stated technical basis for the Vanquish scheme, on the strength of which clients filed their tax returns, was false, and anyone reading the legislation (even a non-specialist) would have realised it was false.
Vanquish told its clients not to mention the arrangement to HMRC: “We do not want to weaken the position of the individual by giving out any information that could end up with HMRC”. That is not how normal tax advisers behave. Advisers have been prosecuted for failing to disclose material facts to HMRC.
Were these false statements made with the intention of defrauding HMRC? That again comes down to whether the individuals in question were being dishonest, by the standards of an ordinary decent person. On the evidence available to us, we expect an ordinary decent person would regard the making of these statements as dishonest, but ultimately that is a question for a jury to decide.
In our view, the evidence is strong enough, and clear enough, that a prosecution is in the public interest.
There is no statute of limitation for tax fraud. However, Vanquish will soon be wound up, complicating any investigation – HMRC and other interested parties may wish to act to prevent this.
(It possible that AML and the other loan scheme companies were responsible for false statements during the period when they were active, prior to Vanquish (particularly during the post-2016 period when it was very obvious that the loan schemes were doomed). However, our detailed analysis of scheme documentation for this report was limited to Vanquish.)
3. Who should be prosecuted?
A criminal investigation would be able to identify all the people involved in the false statements and potential frauds identified above, but from our research we can identify the following individuals:
False documents were signed by the six lenders who participated in the Vanquish arrangements. The signatories were the directors of those companies: Timothy Eve, Anthony Page, Voirrey Coole, Lisa Rowe and Timothy Blackburn. Eve and Rowe were, we understand, responsible for the day-to-day management of the tax business. The others may or may not have been familiar with every aspect of the Vanquish structure, but as directors we expect they knew that new loans were not really being made, and the old loans were not really being repaid. Yet they signed documents saying they were.
Metadata indicates that false documents were drafted by John Hardman.62
Metadata indicates that Sandra Robertson and Nerys Roberts/Rowlands were involved in the marketing of the Vanquish scheme. We do not know how much they knew about the details.
The directors of Vanquish were Arthur Lancaster (who we understand takes a key role in the design of the Knox Group’s tax products), Timothy Eve and Paul Ruocco. We do not know what role Ruocco had in the business.
Douglas Barrowman ultimately controls all of the entities named above. We do not know how involved he was personally in the actions of the entities and their personnel, but given the very large amount of money these businesses made for him, and the involvement of some of his most senior personnel, it is in our view unlikely that he was a mere passive investor.
False representations were made by more junior Vanquish personnel; it is possible that their understanding of the arrangements was such that they did not realise what they were saying was false, and they were just following a script, but the denial by “Jamie” of a connection between Vanquish and AML appears to have been intentional deceit (and it doesn’t seem from the recording as if “Jamie” was following a script).
Our findings raise the possibility that a civil claim could be made against various entities in Barrowman’s group, for example based on deceit, unlawful means conspiracy or negligent misstatement. There is also the potential to bring deceit/conspiracy claims against Barrowman himself, and the directors of his companies, on the basis that they were the real controlling minds behind the statements, or were party to a plan that others made.
Any such claim would not be straightforward, particularly given the passage of time and the difficulty of establishing what precisely was relied upon – nevertheless the evidence we’ve assembled, particularly in relation to Vanquish, suggests this is worth serious consideration.
As a practical matter, the initial challenge would be organising a group claim, and arranging funding and/or insurance – given the amounts that contractors have lost as a result of Barrowman’s schemes, they will rightly be reluctant to put their own money at risk. We hope that there are law firms willing and able to take this forward.
Why prosecute?
In our view, Barrowman is morally responsible for the damage caused by the AML and Vanquish schemes to thousands of people, including two suicides. Whether he’s legally responsible, and whether he knew about, was complicit in, or directed, the numerous false statements made by his associates, is something that should be considered by a jury.
If, on the other hand, the behaviour of Barrowman and his companies – the false representations, the impossible legal positions, the false documents, the obfuscation and lies – does not result in prosecutions, then Barrowman and other bad actors will know they can act with impunity, and make illicit fortunes without any accountability.
Barrowman’s response
We gave Douglas Barrowman the opportunity to respond to the serious, specific and evidenced allegations we make in this report. His lawyers, Grosvenor Law, initially responded with an entirely non-specific denial – “your outright and unqualified allegations of dishonesty, wrongdoing and misconduct are denied by our clients in their entirety.”
The only point of substance in their response was a claim that the AML and Vanquish arrangements were properly notified to HMRC. We believe that is untrue – it’s reasonably clear from the evidence we cite above that neither the original AML nor the Vanquish structures were properly notified to HMRC. So we’ve asked Grosvenor Law why they are relaying this false claim. They have so far refused to answer.
His lawyers also claimed to be acting for Barrowman and the “Knox Group”. Given Barrowman’s previous attempts to conceal the identity of his the members of his group, we asked specifically which companies Grosvenor Law were acting for. They have, again, refused to answer. It highly unusual, and may be improper, for a law firm to refuse to identify its clients.
The BBC asked Grosvenor Law specifically if Barrowman now accepted that his previous denial of links to Vanquish was misleading. The lawyers responded with another generic denial:
STATEMENT BY THE KNOX GROUP The Knox Group denies any and all allegations of dishonesty, misconduct and wrongdoing. HMRC has had disclosures of all relevant documents and information relating to the loan charge arrangements for a lengthy period and the parties have been engaged in an ongoing and extensive process of dialogue and disclosure with the HMRC for several years in relation to such schemes.
HMRC has had all relevant materials for several years during which time it has never even suggested, let alone alleged, that there has been any form of dishonesty or wrongdoing by the Knox Group.
For the BBC to allege otherwise is speculative and not justified.
The Knox Group deeply and sincerely regrets that any contractor or their families suffered any distress or anguish arising from tax charges levied by HMRC when it retrospectively and retroactively amended the relevant legal framework. This retrospective change in the law was a matter of industry-wide criticism at the time from bodies such as the Chartered Institute of Taxation and the Institute of Chartered Accountants.
This is a weak response, which fails to engage with the substance of our evidence and our accusations, and which notably fails to even defend Barrowman’s past denials of his link to Vanquish.
The claim that HMRC has not alleged wrongdoing is false. We do not know if HMRC has ever suggested dishonesty, but we also do not know if it has had access to the same information as us.
This is also a misrepresentation of the CIOT, which has said the loan schemes were contrived avoidance schemes which were always likely to be robustly challenged by HMRC. Advisers expected challenges, and the Government had expressly warned of retrospective legislation – the question is why Barrowman’s businesses hid this from their clients.
Grosvenor have since added:
By way of context, HMRC estimate that there are 50,000 tax payers in the UK who have used a loan scheme. My instructions are that a large number of companies and professional advisors promoted these (legally compliant) schemes at the time: the Knox Group accounted for a small percentage of this number overall.
The fact other promoters were pushing similar schemes is irrelevant; we are specifically identifying evidence of fraud by the Knox Group.
Many thanks to M, the remuneration tax guru who provided most of the technical content for this article on the schemes and the loan charge, and wrote the first draft. Thanks also to K and N for tax law input, to L and Michael Gomulka of 25 Bedford Row for the criminal mens rea and dishonesty content, to H for the “cheating the revenue” analysis, and to Y for general insight. Thanks to F and B for their invaluable review and research, and P for advice on metadata and email IP address tracing. Thanks to the advisers working with former Vanquish and AML clients who provided their expertise and experience (particularly T). Thanks to Ray McCann (former senior HMRC inspector and past President of the Chartered Institute of Taxation) for reviewing a late draft, and to YK for a critical review and her invaluable suggestions on how to best structure this report. Thanks to PS for a final read-through. And thanks, as ever, to J.
Thanks to The Times and File on Four for their journalism that originally exposed the Vanquish scheme.
Thanks to Simon Goodley at the Guardian, and Ben Chu and team at Newsnight.
Most of all, thanks to all of the the clients/victims of AML and Vanquish who spent time corresponding with us, and digging out old documents and emails – we can’t name them, but the evidence highlighted in this report would never have been found without them.
Footnotes
We nevertheless cover only a very small part of the history – a big omission is IR35. Anyone interested in the full background should start with the Morse Review↩︎
We’ll ignore the personal allowance to make the calculation easier ↩︎
One of the key originators of the scheme was Paul Baxendale-Walker – a barrister and solicitor who moonlit as a porn star, and eventually ended up struck off, bankrupt, and convicted of fraud. It’s very strange that someone so peculiar was responsible for so much damage to the tax system, to many peoples’ lives, and led to the downfall of a football team. There’s a good summary of much of this in the Wikipedia article on Baxendale-Walker, but be warned that the article is out of date and parts of it appear to have been written by him. ↩︎
Interestingly, in 2022 John Caudwell said he was “extremely proud” of paying tax in the UK and “absolutely wouldn’t” use loopholes to save money again. ↩︎
The old Special Commissioners, who heard first instance tax appeals until the modern tax tribunal system was adopted in 2009 ↩︎
HMRC did appeal on the question of whether the company was entitled to a deduction for its payment to the EBT, but didn’t appeal on the question of whether the individuals should be taxed on the loan amounts. ↩︎
i.e. mundane vanilla transactions, not tax-motivated transaction, as by that time major law firms would rarely if ever advise on tax avoidance arrangements ↩︎
As late as 2014, the First Tier Tax Tribunal (FTT) and (on appeal) Upper Tier Tribunal (UTT) found for the taxpayer in Murray Group Holdings (the Rangers case) on the basis that the repayment of the loans was not a “remote contingency”. This showed a remarkable failure by the tribunals to understand what was going on – these structures only make commercial sense if the loans aren’t repaid. The “loans” are, in reality, not loans at all. ↩︎
Although other AML entities appear to have started to run schemes as early as 2006 ↩︎
Barrowman had numerous companies selling what was always basically the same scheme. This video is badged “Principal Contractors”. A lawyer looking at their emails and website immediately sees something odd: no company name is ever stated, just “Principal Contractors”. We can find no evidence that company ever existed. However “Principal Contractors” is registered in the Isle of Man as a “business name” of Principal Contracts Limited, one of Barrowman’s companies. We can also tie Barrowman directly to documents sent out by Principal Contractors. ↩︎
The point being to identify avoidance structures early to “inform legislation to close loopholes” (see e.g. paragraph 2.2. here↩︎
AML has twicebeen found by a court to have unlawfully failed to disclose under DOTAS; those schemes were slightly different, but we believe all were disclosable. We’ve reviewed a email explaining AML’s basis for not disclosing under DOTAS in 2015, and in our view it’s clear AML was acting unlawfully. ↩︎
In theory the structure could have been disclosed on some informal basis, but that would be contrary to HMRC’s usual practice. Another possibility is that elements of the scheme were individually disclosed in response to preliminary HMRC enquiries. But we would very much doubt the whole scheme was confirmed, outside DOTAS. ↩︎
Metadata is the hidden information contained in computer document files. For example, if you open a PDF document in Adobe Acrobat, then click “File” and “Properties”, you will see the author of the document (or at least the person whose details were entered into the application that generated the original document) and the details of the application that generated the PDF ↩︎
Metadata needs to be viewed with caution. It can be changed, although here that would mean multiple former AML clients sent us documents with identically forged metadata, before they even knew we were looking at metadata (or, in many cases, before they knew that metadata existed). That is therefore very unlikely. More importantly, metadata does not tell you who wrote a document. The default setting is that the “author” is taken from the user of the machine on which the PDF was created, but this default can be changed. Someone else could be using that person’s computer. If we had one loan document with Hardman in the author metadata then that could easily be an accident, but multiple documents created over years for different lender entities, sent to us by unrelated people, is much less easy to dismiss. ↩︎
There was a Spotlight published in 2015, updated/replaced in 2016, but by then it was too late. Contractors would readily believe promoters who responded by claiming that their scheme was totally different from the Spotlight scheme, and the lack of HMRC challenge proved this. The industry probably could have been strangled at birth: it wasn’t. ↩︎
The schemes were not disclosed on tax returns but there were fairly obvious tell-tale signs: the sudden 90% drop in reported income, and the use of AML affiliates as the accountants submitting the tax return; query how fair it is to expect HMRC to have spotted this at the time. ↩︎
Which is why we believe no reasonably prudent adviser would ever advise someone on a relatively modest income to use a scheme of this type, even if it had good prospects of success ↩︎
Our source for this is the Loan Charge Action Group, who have identified that two of the reported cases of suicide were of former AML clients ↩︎
We are redacting the details to protect our source. ↩︎
This and many other links in this report are to the “Internet Archive“, which enables us to view websites as at particular dates in the past, even if they no longer exist. Note that many corporate networks block the Internet Archive (because it could otherwise let users circumvent restrictions on which websites they can view), so you may need to view these links on a mobile or home computer. ↩︎
We would not normally include publish bank account details, but the same information has been visible in forum postings for four years; furthermore there is a chance this information will be helpful to other researchers. ↩︎
We have not been able to positively identify Jack or any of the other individuals appearing in the Vanquish emails we have reviewed. This is surprising given that most people working in marketing, tax, accounting and business development are on LinkedIn. One possibility is that these were assumed names. We are not publishing the full names, because of the potential for innocent people to be wrongly identified (if the names are false) and the potential for junior employees to be unfairly blamed (if the names are real). ↩︎
When we first received Vanquish documents from a contractor we assumed that he had mislaid the document moving the loan to the third-party investment company. However when we received more sets of documents, we were still missing any document referring to the investment company. We spoke to advisers representing former Vanquish clients, and they’d had the same experience. We’ve also reviewed HMRC correspondence sent to former Vanquish clients, and it is apparent HMRC have also never seen any documents relating to a third party-investment company. A review of forum postings suggest that by early 2019 the scheme had changed. It is therefore our conclusion, as well as that of the advisers we spoke to, that Vanquish never implemented the “Jamie” structure.30Could the structure still have been implemented behind the scenes, with the lender entering into some kind of agreement with the third-party investment company? We think not, or at least not in a legally coherent manner. As a legal matter it’s not possible for the borrower’s side of a loan to be transferred (“novated”) to a company without the borrower signing a legal agreement (there is a nice explanation of novation from law firm Watson Farley Williams here). ↩︎
Because the charge is based on the amount that is “outstanding” on 5 April 2019. The term “outstanding” is defined in paragraph 3 as the “initial principal amount lent” (with some adjustments, including for amounts have really been repaid). This is not defined further but has nothing to do with the amount of the replacement loan and so would not change the amount taxed in April 2019. ↩︎
This was a failure common to a number of loan charge avoidance schemes. The leading practitioners’ textbook, Pett on Disguised Remuneration and the Loan Charge says that none of the loan charge avoidance schemes addressed this point, and follows this with a statement that criminal charges had been brought against a number of individuals in connection with the such schemes – see para 15.6. ↩︎
As a matter of English law and UK tax law you can assign the lender’s side of a loan, but you cannot assign the borrower’s liability. Anything that looks like the borrower is moving their liability to someone else is actually a release of the old debt and the creation of a new debt – often called a “novation“. The courts have always been clear on this. ↩︎
In practice HMRC doesn’t appear to take these points, but we believe technically multiple charges do apply (there are others in addition to those mentioned in this paragraph). ↩︎
There is an ancillary question as to whether Vanquish itself has properly accounted for corporation tax on its profits. It was introducing clients to a variety of offshore companies who were charging large fees; however from Vanquish’s accounts it appears as though Vanquish received no compensation for this. That is not the result one would expect.↩︎
The document says “repaid and provided for”. This is curious terminology. If a loan is “provided for” that usually means that the lender thinks it won’t be repaid, and so has written it off in its accounts, even though it remains in existence as a legal matter. “Repaid and provided for” is a non-sequitur. Possibly the authors thought this gave them sufficient cover to avoid any suggestion of fraud. It does not. The document says the loan was repaid, and it wasn’t. The other potential argument the authors might raise is that the loan was repaid, just not by the contractor. That may have happened (one can imagine a circular movements of funds behind the scenes, not involving the contractor at all), but it is not what most ordinary people would understand by the word “repaid”. And that ordinary meaning of “repaid” is expressly adopted by the loan charge legislation, which says a repayment must be a “payment in money” by the contractor. We don’t believe the authors of the letter can credibly claim that “repaid” was intended to have a meaning which both defies common sense and the legislation that the letter was created to thwart. ↩︎
It is of course not necessary for a borrower to actually receive cash themselves – for example in a typical mortgage, a person is borrowing to finance the purchase of a house, but the loan goes straight to the seller (via the solicitor) and the money is never received by the borrower. There is however no doubt that in that case the borrower is receiving the benefit of the loan advance, both in practical terms and legal terms – the way the money moves is a point of detail. By contrast, in Vanquish there is no loan advance in any sense. ↩︎
We trace the links below, in “How responsible is Barrowman”? ↩︎
i.e. a Mac using the same os/version of Preview. This looks like a one-off: the other documents we have were either exported from Word or are scans. ↩︎
The Panama Papers list Braaid as the road where Barrowman’s house is located. ↩︎
On 9 September 2016 the PSC was listed as “Knox Limited Ref Willowbarn Trust”; this was then changed to Braaid Limited on the same day. A mistake? Or an accidental reveal of the real ownership structure? ↩︎
Companies have to identify their actual human owners – they’re only permitted to identify companies as their PSCs/beneficial owners if those companies report their owners (preventing multiple duplicated filings). There are certain other cases where a PSC/beneficial owner can be a company which are not relevant here – there is helpful guidance in paragraph 2.2 here. So, for example, if I own UK company A which owns UK company B, then company B will declare that company A is the PSC, and company A will declare that I am the PSC. But if I own BVI company A which owns UK company B, then company B will declare that I am the PSC. ↩︎
We assume this was Barrowman’s assistant, or someone using Barrowman’s computer; it seems most unlikely that Barrowman prepared the financial projection himself. We’ve redacted some of the metadata, and the details from the PDF itself, to protect our source. ↩︎
It’s very unusual for groups to set up multiple companies with the same name in different jurisdictions – ordinarily one wants to avoid even similar names given the potential for confusion. We cannot think of a legitimate reason to do this – but Barrowman’s group often does. We do not know why. ↩︎
Oddly there is also a UK company called Smartpay Limited; its PSC is said to be Paul Ruocco. Most groups don’t register identically named companies in different jurisdictions, but Barrowman seems to make a habit of it, with one particularly well-known example. It is unclear what legitimate purpose this could have. ↩︎
This is part of the same recorded phone call covered in the File on Four broadcast, although they didn’t include this question/answer ↩︎
All emails include “headers” which contain information about the sender, the recipient, and the route that the email took through the sender and recipient’s network, and through the public internet. This data is usually hidden, but it’s easy to reveal and analyse it – there is a good explanation and analysis tool here.↩︎
i.e. 89.107.1.218 was specified in the Sender Policy Framework (SPF) for the Vanquish domain. SPF is a protocol designed to prevent email impersonation. The receiving server checks that emails claiming to come from a domain originate from the SPF IP address. So 89.107.1.218 isn’t just a random node on the internet; it’s the email server from which the Vanquish email was sent, and which Vanquish officially designated as their email server. ↩︎
The Roberts document contains no information identifying a particular contractor, and so we have made it available here, and you can view the metadata yourself. We have established Roberts’ role from two independent sources, but there is no confirmation of this in any public material. There is clear evidence Roberts ran the “AML 250” network which managed referrals by advisers to AML – see Chartered One – “the Quarterly Bulletin of the Liverpool Society of Chartered Accountants”, edition 10 from Autumn 2014 contains an interview with Roberts. That’s not available online, but there is a Google cache available here, which we have archived here. Roberts’ marketing role also included Barrowman’s PTS Tax/c business, which claimed to help AML clients with their HMRC enquiries. We can demonstrate that Roberts worked for PTS thanks to metadata in PTS documents ↩︎
This figure comes from the 21,900 loan charges HMRC has settled, plus the 45,000 that HMRC estimate have not settled – see these select committee minutes. The number will be higher than this, given that the loans were not disclosed on tax returns, and HMRC can only discover them if the taxpayer comes forward, the trustee/lender discloses the taxpayers’ identity (which they should, but may not), or HMRC’s own analysis of tax returns reveals that a taxpayer likely took a loan. However we have no idea how much higher the true number is. The Loan Charge Action Group believes the figure could be as high as 100,000 ↩︎
Vanquish claimed their scheme was “supported by tax counsel”. We’d be very surprised if the scheme they actually implemented was supported by tax counsel; if it was, that raises very serious questions for the tax counsel involved. And we would be amazed if an opinion didn’t include warnings about the TAAR, GAAR and further retrospective legislation. Saying “we have a KC opinion” is no defence – the question is, what does the opinion say, how was it obtained, and what precisely does it cover? There is more about KC opinions here. ↩︎
You might say clients could sue AML/Vanquish for negligence. In principle that’s right; in practice these claims have very rarely succeeded, not least because promoter companies tend not to stick around to face the music. We are not aware of any successful claims against AML, Vanquish, or any of Barrowman’s companies. ↩︎
The subjective element of the test for dishonesty (see Ghosh (1982)) was removed by Ivey [2017] for civil cases, and that decision was confirmed to apply to criminal cases in Barton [2020]. The fact that a defendant might plead he or she was acting in line with what others in the sector were doing, and therefore did not believe it to be dishonest is no longer relevant if the jury finds they knew what they were doing and it was objectively dishonest. ↩︎
Noting our caution above about reaching conclusions from metadata ↩︎
Fujitsu has indicated that it’s willing to help compensate victims of the Post Office scandal.But will this be a small voluntary contribution, or can the Post Office sue Fujitsu to recover some of the £1bn cost of the Horizon scandal?We’ve spoken to leading commercial litigation lawyers, and we’re concerned that the Post Office’s own failures mean that there is little legal prospect of recovering the £1bn from Fujitsu in the courts.
We have reviewed Post Office annual reports and accounts, and other publicly available documentation, and can see no mention of any potential claim against Fujitsu to recover some of its Horizon losses. This is surprising given the £1bn+ cost to the Post Office of the scandal, the fact that the ultimate cause was faulty software provided by Fujitsu, and the evidence that Fujitsu personnel were complicit.1 Horizon is still being utilised by the Post Office and we understand that the software is still producing faults.
The obvious route for any claim by the Post Office would be breach of contract.2 Fujitsu’s staff may also have been negligent, or even have deceived the Post Office, both of which could give rise to a claim in tort (the law of civil wrongs). Whether any such claim could be successfully made by the Post Office is undoubtedly a difficult question, particularly that the Post Office appears to have been complicit in Fujitsu’s failings. Establishing whether Fujitsu is liable, the quantum of its loss, questions of causation, contributory negligence, mitigation etc, would require an extremely lengthy and complex investigation and analysis, and any legal dispute would undoubtedly occupy the courts for years.3
Even if the Post Office concluded that its prospects of success were limited, we believe a normal company in that position would make a claim to protect its position, and that of its shareholders.4
The problem is that 2020 may well have been too late. The Post Office may be time-barred.5
The Limitation Act – the basic position
Claims will become statute-barred under the Limitation Act if an action is not started within the relevant period:
For contract claims this period is six years from the date of the breach of contract, but this can be extended to run from the time when the claimant realised or ought to have been aware that the claim existed.
For tort claims (i.e. negligence, and the tort of deceit and other economic torts) the period is six years from the date of the loss, potentially extended to three years from the date on which the claimant had the requisite knowledge and the right to bring such an action.6
For negligence there is an absolute long-stop date of fifteen years from the date of the breach of duty.
Let’s leave aside Fujitsu’s technical failures in building Horizon, because whilst these no doubt resulted in significant loss for the Post Office, the £1bn relates to the persecution of the postmasters, and the many costs that have resulted from that (the years of legal disputes, the compensation itself, the cost of the Inquiry, etc). Any prospect of recovering a significant part of this £1bn from Fujitsu requires establishing that Fujitsu personnel were responsible for the actual persecution of postmasters.7
The most serious actions of Fujitsu appear to be the evidence of its employees, Gareth Jenkins and Anne Chambers, in the trials of Lee Castleton, Seema Misra and others, who assured courts that Horizon was robust when they knew full well it was not. These trials took place in 2007 and 2010. Similar evidence was given in other trials until 2013.
That all stopped because, in 2013, the Post Office was advised by barrister Simon Clarke that there was a serious problem with Jenkins’ evidence:
Also in 2013, Second Sight published an interim report identifying serious bugs in Horizon.
It is plausible, even likely, that the Post Office was aware of these issues well before 2013, but in our view 2013 is the latest date that the limitation period clock will have started ticking. That means the limitation period ended in 2019 at the latest.8
Standstill agreements
In practice it’s fairly common for claims to be started after the normal limitation period has expired. Where, as may have been the case here, the nature and fact of the claim is known but the extent of it is not, parties typically enter into a “standstill agreement” at an early stage. The limitation period then stops running.9
We infer from the report in The Times that the Post Office entered into a standstill agreement with Fujitsu at some point around 2020. The Post Office would be able to claim against Fujitsu on the basis of how the position was in 2020, notwithstanding the amount of time that has passed since then (and waiting until the Inquiry has reported its conclusions would be sensible).
However if that the limitation period ended in 2019 (or earlier), then any 2020 standstill agreement was too late, and Fujitsu will be able to argue that the limitation period has expired.1011
Can the Government sue Fujitsu?
It is unlikely but possible that the Government was party to the Post Office’s contract with Fujitsu, or was given rights under that contract. In that case the Government might be able to bring a claim itself; however it would again be out of time unless a standstill agreement was signed.
Otherwise we see no basis for the Government bringing a claim in contract or tort – although of course it is possible there is some unique factor here which we are missing.
Can the Government force Fujitsu to pay?
In principle, Parliament could pass an Act requiring Fujitsu to pay up. This is, however, not how liberal democracies normally behave.
A more normative way to achieve the same result would be for the Government to require that Fujitsu make a “voluntary” contribution to the costs of the scandal, or be barred from Government contracts. Fujitsu is a “key strategic supplier” to Government and has been awarded 101 new government contracts worth over £2bn since 2019.
Either approach could have adversely impact the UK’s relationship with Japan; Japan might even be able to point to a breach of an international treaty (e.g. the UK/Japan Trade and Cooperation Agreement or WTO GATS).12
Of course the most consensual outcome would be the one that Fujitsu has suggested, involving Fujitsu doing the right thing (whether out of principle or pragmatism), and making a genuinely voluntary contribution without any action of Government. We are not aware of any precedent for a company acting in this matter, but these are extraordinary circumstances. The question then is whether Fujitsu would make be making a direct contribution to the £1bn bill, or (as many people might welcome) direct compensation payments to postmasters on top of, and not reducing, the compensation they are already receiving from the Post Office and the Government.
The key questions
We believe these are some of the key questions:
Has the Post Office signed a standstill agreement with Fujitsu?
If it did – when? And why isn’t this mentioned in the Post Office’s annual reports and accounts?
If not, why not? And does that mean there is now no possibility of a claim against Fujitsu?
If it was as late as 2020, then why was the matter left so long, given the grave potential consequences of delay?
Does the Government have a potential claim itself which is not time-barred? If so, what?
In normal circumstances these would be commercially sensitive questions on which we would not expect a company to comment. However, given the public and political interest, we feel the Government should require the Post Office to provide a clear statement on these matters.
Many thanks to AP for the initial draft of this article and to J for his invaluable litigation input. This article also benefited from review by K, a former general counsel of a FTSE 100 company.
We have not reviewed the contract between the Post Office and Fujitsu, but it would be surprising if so faulty a system was within contractual specifications. ↩︎
Fujitsu’s UK accounts don’t reveal any relevant liabilities, although that tells us no more than that Fujitsu (and/or their auditors) do not think liability is likely. ↩︎
Section 172 Companies Act 2006 requires that a director’s overriding fiduciary duty is to “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”. Section 172 also sets out a list of non-exhaustive factors which a director must consider while evaluating what would be likely to “promote the success of the company”. ↩︎
This article does not discuss the actual contractual position, only the limitation period position. Generally in IT contracts there is a defects liability period after “completion” – typically 12 to 24 months for the contractor to remedy glitches at its own cost. If the glitches remain then a new contractor can be instructed to perform remedial action at the original contractor’s cost. However the contract is commercially confidential, and so any analysis of the contractual position would be pure speculation. This article therefore focusses on the limitation period point. ↩︎
This is a considerable simplification of an extremely complex legal position – see, for example, this excellent blog from the late David Sears QC. ↩︎
In other words, we see no way that the jailing of innocent people can be said to be a “reasonably foreseeable” consequence of the IT failures, let alone in the “contemplation of the parties” when the contract was agreed. Failed IT projects don’t usually lead to innocent people being jailed. ↩︎
Unless either (1) a longer time period was agreed in the contract, which is theoretically possible but unlikely, or (2) the Post Office can point to fraud by Fujitsu, e.g. in what we assume must have been lengthy correspondence between the parties over many years. ↩︎
You might wonder why a defendant would ever agree to such a document. That’s because the alternative is the claimant commencing a court action, and then applying for it to be stayed. The courts would likely be unamused by a defendant whose failure to sign a standstill created so unnecessary a use of court time, and therefore a sensible defendant agrees to a standstill (with the additional advantage that a court filing is public; a standstill is private). In this case, we would assume here there was no court filing and stay, or that would have become public by now. ↩︎
There is one further way the limitation period could be extended – the Civil Liability (Contribution) Act 1978. This says, very broadly, that if two people are liable to pay damages, but one actually pays, then they can recover a contribution from the other. The important thing is that a two year limitation period starts from the date the damages are paid. So if the Post Office is paying damages today then, on the face of it, it could have two years to claim a contribution from Fujitsu. However much of the compensation is being paid by the Government, not the Post Office; and the compensation paid by the Post Office is more political than legal (for example limitation period points are not being taken). And the Act wouldn’t be applicable to the Post Office’s own considerable costs/losses (aside from having to pay compensation). ↩︎
If the Post Office’s lawyers at the time didn’t advise it to agree a standstill then there may also be a question as to whether the Post Office has an action in negligence against them. Many thanks to G for spotting this point. ↩︎
We have not looked into these issues; a serious analysis would require input from a trade law specialist. ↩︎
We previously reported that Douglas Barrowman’s companies had unlawfully hidden their ownership of PPE Medpro and the companies holding Barrowman’s Belgravia house. We can now identify 25 additional companies where Barrowman’s group has unlawfully failed to disclose the ownership, abetted by what appears to be a rogue company verification agent.
(Update: the total is actually now 27, thanks to a tip received shortly after we first published)
The law
There are two separate regimes under which companies are required to report their true owner.
The details of the rules are a little different, but the principle is the same. Companies have to identify their actual human owners – they’re only permitted to identify companies as their PSCs/beneficial owners if those companies report their owners (preventing multiple duplicated filings).1 So, for example, if I own UK company A which owns UK company B, then company B will declare that company A is the PSC, and company A will declare that I am the PSC.
The evidence suggests that Barrowman’s group of companies completely ignores these rules. We can discard the possibility that they don’t understand them: Barrowman himself is a sophisticated businessman with years of experience in business, funds and corporate finance, and he runs a group of companies that provide technical tax and legal services to private offices. Understanding rules like these should be part of their core expertise.
1. The Belgravia townhouse
The FT reported in December 2022 that a company in Barrowman’s group, Chester Ventures, paid £9.25m for a townhouse in Belgravia.2
Under the Economic Crime (Transparency and Enforcement) Act 2022, foreign companies owning real estate have to register who their beneficial owners are. Here is the registration for Chester Ventures Limited as at last week:
This was wrong in several respects:
Soldaldo PTC Limited, company number 1814078 appears to be a typo for Soldaldo (PTC) Limited, company number 1814077. A sloppy error by Barrowman’s companies (and this is supposed to be their expertise).3
The other registered beneficial owner is Knox House Trustees Limited, an Isle of Man company.4 As it is regulated in the Isle of Man it (unlike most overseas companies) can be a registrable beneficial owner. However we expect that in reality Barrowman exercises significant influence over Chester Ventures (by some formal or informal arrangement with Knox House Trustees (UK) Limited) and therefore he should personally be listed as a beneficial owner.
The “verification agent” responsible for checking the registration for Chester Ventures was FCLS – the same agent that missed evident errors in the reporting for Barrowman’s house. This suggests that FCLS don’t in fact verify anything, even in an automated way – even a simple check would have revealed that Soldaldo PTC Limited doesn’t exist.
This was amended last week, with Knox House Trustees (UK) Limited shown as the only PSC:
The registered PSC of Knox House Trustees (UK) Limited is Arthur Lancaster. Lancaster is an accountant who is closelyconnected to Douglas Barrowman and the Knox Group – he was recently described by a tax tribunal as “seriously misleading”, “evasive” and “lacking in candor”.
Lancaster is also listed as the PSC for PPE Medpro – which Barrowman has now admitted is really controlled by him. It looks like they’re pulling the same trick here – Lancaster is a “front man”.
2. The dissolved company
Barrowman’s group is connected to an apartment in Chelsea, held by an Isle of Man company called Charleston Properties Limited.5
The land registry shows Charleston bought it in 2014 for £5.8m:
Perhaps for this reason, the company isn’t registered at Companies House at all.7
3. Eleven more offshore companies with false ROE registrations
We were able to identify eleven further companies connected with Barrowman which hold UK real estate 8. They are required to be on the “register of overseas entities”, and declare their beneficial owner. However in each of these cases the declared beneficial owner appears to be false.
F is an Isle of Man company which holds two titles in Hertfordshire. Its declared owners are one company with a properly declared ownership chain held by a third party, and Knox House Trustees, which doesn’t. We’re keeping this anonymous because it’s likely a bona fide business which has made the mistake of hiring Knox.
R is another Isle of Man company owning UK property, with the beneficial owner listed as Knox House Trustees Limited – an Isle of Man company cannot be listed as the beneficial owner. Again it appears to be a bona fide business which hired Knox.
Some of these may be beneficially owned by Knox’s clients, and not Barrowman himself – but in all these cases there has been a failure to comply with the laws requiring beneficial ownership disclosure. In each case the verification agent was FCLS (save R, where FCLS didn’t act).
4. Twelve more UK companies with false PSC registrations
There are a series of UK companies which are connected to Barrowman which have declared what appears to be a false “persons with significant control” to Companies House:
AML Tax (UK) Limited is a UK company which is involved in abusive tax avoidance schemes, and was fined £150,000 last year for unlawfully failing to comply with an information notice from HMRC. It has registered its PSC as Braaid Limited, a BVI company.13 The rules don’t permit a BVI company to be a PSC. This is a very material failing, given dubious nature of AML Tax (UK) Limited’s activities (for which its directors were severely criticised by a tax tribunal), and the tax and potentially other liabilities which we expect it will have accrued.
Denmedical UK Limited is another UK company involved in the same types of avoidance scheme. Its registered PSC was originally Barrowman himself, then this was changed to Anthony Page. Page who worked for Knox/Barrowman until he was sacked in disputed circumstances. It seems unlikely the ultimate owner of a group company is an employee – this is consistent with Page being a “PSC of convenience”, with Barrowman really exercising influence/control over the company.
Carnegie Knox Limited participated in the same avoidance schemes. It declared no PSC until 2021 and now declares Timothy Eve (Knox Deputy Chairman). Weirdly there is an Isle of Man company with the same name – “weird” because most corporate groups would never have two companies with the same name (even similar names create the potential for dangerous/expensive mistakes).
Q Tax Services Limited, previously Grosvenor Tax Limited, marketed the AML Tax scheme to contractors. Its PSC is listed as Knox Limited, an Isle of Man company. An Isle of Man company cannot be a PSC.
Carnegie Knox (Scotland) Limited had no PSC until 19 January 2021, then registered Douglas Barrowman as the PSC for precisely one day, and then registered Timothy Eve. Could it be that, by accident, this company was briefly compliant with the law?
Knox House Trustees (UK) Limited is a UK company. Douglas Alan Barrowman was listed as PSC for Knox House Trustees (UK) Ltd from 26 June 2020 to 10 February 2023, but since then it has declared Arthur Lancaster as the PSC. However, Lancaster is an employee of Barrowman. It seems most unlikely he is the true beneficial owner of a company in Barrowman’s group; Barrowman surely has “significant influence” and is therefore the PSC. Lancaster is also listed as the PSC for PPE Medpro – which Barrowman has now admitted is really controlled by him. It looks like they’re pulling the same trick here – Lancaster is a “front man”.
PPE Medical Protection Limited is another UK company which declares Lancaster as the PSC. The previous PSC was Anthony Page. That is consistent with Page and then Lancaster being a “PSC of convenience”, with someone else (presumably Barrowman) really exercising influence/control over the company.
Neo Space (Aberdeen) Limited is a UK company providing flexible office space. According to reports when it was founded, it is owned and funded by Barrowman and Mone, as a “collaborative business project” between them. So it’s a surprise that its listed PSC is Scott Paton, its managing director. The previous PSC was Anthony Page; again that’s consistent with Page and then Paton being a “PSC of convenience”, with someone else (presumably Mone and/or Barrowman) really exercising influence/control over the company.
Marclaud Limited was dissolved in 2017. It listed as its PSC Knox House Trust Limited, an Isle of Man company. That is, again, not permitted.
Klaba Limited has Anthony Page (former Barrowman employee) and Timothy Eve as directors. It is in the process of being liquidated. It lists as its PSC Omnia Group Limited, an Isle of Man company. Again, not permitted.
Also two more, courtesy of G (who alerted us shortly after we first published). it would be confusing to change the title of the article, but the total companies stands at 27 not 25
Criminal liability for Barrowman and his companies
There are potentially criminal consequences for Barrowman, his companies and his staff.14
Section 32 of the Economic Crime (Transparency and Enforcement) Act 2022 creates an offence for false registration of beneficial ownership of UK real estate held by foreign companies. It’s an offence for anyone, without reasonable excuse, to deliver (or cause to be delivered) a false or deceptive filing (even accidentally). On conviction they can be liable for an unlimited fine. The offence is “aggravated” if the person knew the filing it was false or deceptive – there is then also the possibility of up to two years’ imprisonment.
There are a variety of offences under the Companies Act 2006 for false registration of PSCs of UK companies. That includes specificoffences for breaches of the PSC rules, plus a general Companies Act offence of knowingly or recklessly delivering a false statement or document to Companies House, and another offence for a beneficial owner who knowingly fails to supply information. On conviction there’s an unlimited fine and up to two years’ imprisonment.
It seems clear that the section 32 offence has been committed – the filings were false, and it is hard to see how there could be a “reasonable excuse”. It is plausible that the offences were aggravated.
It also seems reasonably clear that Companies Act offences have been committed. The failures were, at a minimum, “reckless”.
The obvious question is whether any prosecution will take place.
Criminal liability for the agent, FCLS
Regulations made under the Act require that an agent (regulated under money laundering rules) must verify beneficial ownership and submit details to Companies House within 14 days of registration, using this form. They’re not just a post-box – they have a positive duty to verify, and can be liable if they get it wrong. The Law Society has published detailed guidance for lawyers acting as verification agents, and the risk of liability lead the Law Society to caution against lawyers agreeing to do so.
The section 32 offence of making a false or deceptive filing applies to verification agents as well as the companies/directors involved.
FCLS are responsible for a series of false/deceptive filings. The obviousness of the falsity means that we are doubtful there could have been a “reasonable excuse”. It therefore seems likely they are criminally liable.
The register of overseas entities relies upon verification agents. The entire enterprise falls apart if there are rogue agents, making not even the most straightforward of checks. That appears to be what FCLS is doing. A prosecution would be in the public interest.
Because they are not enforced, and Barrowman and his team likely perceive the risk of material fines/penalties, let alone prosecution, as non-existent. Barrowman and others will continue to behave like this until there are high profile prosecutions.
A law that is never enforced may as well not exist.
Thanks to V and P for their research on this, and to M for Companies Act and ROE advice. Thanks to G for spotting two more Barrowman connections shortly after we first published.
Footnotes
There are certain other cases where a PSC/beneficial owner can be a company which are not relevant here – there is helpful guidance in paragraph 2.2 here for PSCs, and paragraph 4.1 here for beneficial owners. ↩︎
Not the house he and Michelle Mone lived in; another property said to have been acquired for development. ↩︎
On the basis of this search, we can probably discount the possibility that there are two companies with almost-identical names and sequential registration numbers. ↩︎
It also holds two other smaller properties in the same building. Query if these properties are really owned by Barrowman or on behalf of a third party client, although the fact it has only one registered proprietor suggests it isn’t held on trust (i.e. because overreaching requires two trustees and therefore a single trustee cannot in practice deal in the land). ↩︎
If Charleston held as trustee then the terms of the trust should facilitate its replacement; if Charleston was not a trustee then the apartment may now be bona vacantia, i.e. go to the Crown. ↩︎
The Panama Papers list Braaid as the road where Barrowman’s house is located. ↩︎
And potentially Michelle Mone, if she is a PSC of the two Neo Space companies, although it is plausible that in her case this was an innocent error. ↩︎
The Post Office has claimed a £934m tax deduction for its compensation payments to the victims of the Post Office scandal. That’s outrageous – and also unlawful. The consequence is that the Post Office has underpaid its corporation tax by over £100m over the last five years, and may no longer be solvent.
We understand that HMRC are actively pursuing this point – and it’s just one of five major Horizon scandal matters where the Post Office has, we believe, materially underpaid its tax. The Post Office failed to declare these issues in its accounts until this year, when it included an obscure reference which failed to adequately disclose the point.
The Post Office’s report and accounts for 2022/23 suggest there is a serious potential tax problem that could result in it becoming insolvent:
And again on page 70:
and on page 82:
We’d expect so serious a contingent liability to be disclosed in the notes to the accounts – it is mentioned, but with nothing specific:
The only hint as to what the issue could be is in the small print on page 101:
So we know this relates to historic periods, that nothing was disclosed until this year (none of these disclosures were included in previous accounts), and that it is something to do with the provisions/expenses and funding income relating to the Post Office’s compensation payments to victims of the scandal.
We can also take from this that the Post Office is under investigation by HMRC (either an HMRC enquiry and/or a discovery assessment).1
What is the liability?
Our team of eminent tax and accounting experts has reviewed the Post Office’s accounts for the last ten years in detail and one issue stands out: it has treated the compensation it pays to postmasters as tax deductible. That is not correct.
A source at the Post Office has confirmed to us that HMRC is investigating this and asserting that the Post Office owes tax – in our view they are right to do so.
Background
Most payments made by a trading company are deductible for tax purposes. However, a deduction is only permitted for a payment made “wholly and exclusively” for the purposes of the trade. At this point we cannot say with certainty why the Post Office falsely accused 4,000+ postmasters of theft, but we can be sure it was not for any bona fide purpose of its trade. The Post Office’s actions were, as the Court of Appeal put it, an affront to the conscience of the court – unlawful and very plausibly criminal.
It follows that all expenses connected with the Post Office’s persecution of the postmasters are non-deductible – including (but not limited to) compensation and provisions for compensation. There are many cases on this point, but none with facts as extreme as the Post Office scandal2 – the position is, in the view of our team, reasonably clear.
We understand from our source that the Post Office is contesting HMRC’s position that the compensation payments are non-deductible. We believe the Post Office’s prospects of success are low.
The total deductions wrongly claimed by the Post Office
We can find the data on the deductions taken for compensation payments by looking the notes in the account for the last five years.3. The totals are shown below. All figures are £m.4
In other words, a total of £934m has been claimed – improperly.
There was a partial reversal of the provisions in the most recent year (2022/23), however that will not change the corporation tax liability for previous years.
The impact of reversing those provisions
Like most companies, the Post Office does not disclose its actual corporation tax liability for each year. However we can infer this by looking at the figures in its accounts for tax losses brought forward each year. The change in tax losses broadly reflects its taxable profit for each year (i.e. because a further tax loss increases brought-forward losses, and a taxable profit reduces them).
On that basis, we estimate the Post Office’s taxable profit for each year as follows (£m):
The next step is to adjust this inferred taxable profit to reflect the reversal of the tax deduction. That profit will then be reduced by the Post Office’s considerable carried-forward losses; but a change of law in 2017 means that no more than half of a current year profit can be sheltered by brought-forward losses.5 Interestingly, and probably not by coincidence, the Post Office’s accounts disclose the loss utilisation point this year, never having mentioned it in the past (despite having large losses).
So we can model the impact on the Post Office as follows:
However it seems likely that the Post Office has a corporation tax liability of over £100m.
There is also the question of penalties: the non-deductibility of compensation for unlawful acts is a well-known point, and the Post Office certainly knew that its actions had been unlawful. It was careless. Hence we would expect HMRC to consider penalties of up to 30%, with the precise figure depending on the facts, and in particular whether this was a “prompted” disclosure by the Post Office (i.e. whether the Post Office approached HMRC with this issue or whether, alternatively, HMRC identified it).
The Post Office’s response
We asked the Post Office for comment on a potential undisclosed £100m tax liability. They said:
“The disclosed information on taxation in Post Office’s Annual Report and Accounts for 2022/23, published on 20 December 2022, is appropriate and accurate. Discussions with HMRC and the Department of Business continue.”
(Presumably this is a typo, and they meant to say “20 December 2023”)
We read this as confirmation that our findings are accurate, and that the Post Office is under HMRC investigation. We also note that the Post Office is asserting that the disclosure in this year’s accounts is appropriate (we disagree) but not defending the accuracy of its previous years’ accounts.
The other tax liabilities
The Post Office likely has other significant underpaid corporation tax resulting from the scandal, in addition to the £100m we estimate above. We can identify four particular issues:
First, the “shortfalls” it recovered from postmasters, which supposedly represented the return of money they had stolen, but actually represented a windfall for the Post Office. This income should have been included in the Post Offices taxable profits7; was it?8
Second, the Post Office will have non-deductible costs dating back to the inception of the scandal, including the costs of falsely prosecuting postmasters between 2000 and 2015 (which we would say were unlawful/illegal actions carried outside the course of the trade and therefore are not deductible).
Third, the Post Office has claimed a deduction for all of its legal fees and other costs of fighting the postmasters’ claims, and of dealing with the Inquiry. We do not know the full amount, but we expect it is several hundred million pounds (given that the postmasters’ costs for the civil claim alone were £150m). Some of this may be deductible; other amounts (particularly for pursuing unjustifiable positions) may in our view not be. We await the Inquiry’s conclusions on the appropriateness of the Post Office’s actions in this regard.
Finally, and most significantly, the Post Office has been receiving funding from Government in a form which may be taxable. If a shareholder pays cash to a company to subscribe for shares, the cash isn’t taxable for the company. If a shareholder makes a cash loan to a company, the loan advance isn’t taxable. But if the shareholder just gives money to a company, to supplement its trading receipts and enable it to carry on in business, then that will be a taxable trading receipt. HMRC guidance on this is clear – and so businesses typically never obtain funding in the form of simple gifts. But, for unknown reasons, that’s what happened here (again suggesting a basic lack of competence at the Post Office).
Possibly the Post Office can argue that the funding from Government is a special case which doesn’t give rise to a profit;9 but our understanding from the accounts disclosure and a source at the Post Office is that HMRC believes the amounts are taxable. This was confirmed by the Post Office yesterday – the FT asked the Post Office if it had written to HM Treasury to complain about HMRC and they responded:
“We have regular conversations with Government who are our sole shareholder. Our correspondence in respect of this issue was about ensuring that the tax treatment of compensation was treated in the same way as other government funding that we receive.”
This suggests the Post Office is very confused.10 The tax treatment of gifts will not be “treated in the same way” as funding by way of share capital or loans, because a gift is not the same as a share subscription or loan. It is, furthermore, not appropriate for the Post Office to write to the Government to lobby for HMRC to treat it differently from other companies – the Post Office is supposed to be managed at arm’s length.
Ordinarily HMRC cannot recover tax from more than (broadly speaking) six years ago, but it can go back 20 years where an action was deliberate. That may be the case here.11 It may be difficult in practice to quantify the amounts in question, particularly given what appears to be poor record-keeping on the part of the Post Office. That would (rightly) not stop HMRC pursuing the point against a normal commercial taxpayer – HMRC would require that the Post Office provide the best figures available for the potentially taxable and non-deductible items we identify.
We would hope HMRC will pursue all these points, and that it will disregard any attempt at political interference from the Post Office.
The interest is likely to be a significant amount and, again, penalties may be chargeable (particularly if the misappropriated “shortfalls” were not taxed as income).
Does it matter?
Taxes go to HMRC, a non-ministerial Government department. The Post Office is wholly owned by the Government. Does it matter how much tax the Post Office pays?
We would say it does:
The Post Office should follow the law, just like every other company.
The Post Office has boasted about finally making a trading profit. Our findings show that it has in fact made a very substantial loss.
Bonuses have been paid to the executive team based on an apparent level of profitability which does not exist.
The existence of a £100m+ hole in the accounts suggests that the Post Office has an alarming lack of the usual financial controls one would expect from a business of this size.
It is inappropriate that the point was not disclosed at all in previous years’ accounts, and was disclosed only very elliptically in the most recent accounts.
Has the Post Office informed the Government, as its shareholder, as to the true state of its accounts and tax position?
It is possible that this liability means that the Post Office is in fact insolvent.
This all raises the question of whether, in accordance with the Post Office’s published policies, bonuses paid to its executive team should be reduced or returned:12
It also raises the question: if the management team can miss a £100m black hole, what else are they missing?
Thanks to K1 for asking the question which led to this analysis, Heather Self (one of the UK’s most respected corporate tax advisers) of Blick Rothenberg, together with K2, D, and X for generously providing their expertise on non-deductibility of compensation payments, and to C for his invaluable tax accounting input. And many thanks to Emma Agyemang at the FT for her help developing this report.
Footnotes
The term “investigation” is often used, but technically that is not a term of art – any query from HMRC as to the accuracy of a recent corporation tax return is technically an “enquiry”; a discovery assessment is the process for re-opening previous years that would otherwise be past the point of correction. Both have legal consequences. ↩︎
The leading case is probably still Strong & Co of Romsey Ltd v Woodifield. A customer sleeping at an inn was hurt when a chimney collapsed on him, because the company had breached its duty to maintain the property. The company had to pay costs and damages, and the House of Lords ruled this was non-deductible. Here, whatever the precise reasons for the Post Office’s actions, to say it “breached its duty” would be a significant under-statement. Other relevant cases include Cattermole v Borax Chemicals Ltd [1949] (payments to settle potential fines in the US were non-deductlble) and Fairrie v Hall [1947] (libel damages are ordinarily not deductible, although newspapers are different). ↩︎
We’re following the accounts convention that positive numbers here are losses booked in the accounts for the compensation provisions, and negative numbers are reversals of the provisions. ↩︎
After an allowance of £5m which can be entirely sheltered by losses. Note that as the Post Office’s losses end up being exhausted by the reversal of the provision, the loss restriction rule ends up having little effect (other than to decelerate loss utilisation and therefore slightly increase the interest charge). ↩︎
In particular, it doesn’t take account of loss surrenders (although that likely means the same amount of tax would be collectable, but from other entities). ↩︎
The demand for payments of shortfalls was unlawful, and potentially a criminal offence, but unlawful/illegal income is taxable if (very broadly) it forms part of a systemic activity – there is helpful HMRC guidance here. So, for example, a drug dealer’s profits were taxable. We are confident the Post Office’s “shortfall” receipts were taxable too. ↩︎
By analogy with BBC v Johns – however the facts here are different. ↩︎
We believe the statement means to say “the tax treatment of funding for compensation” ↩︎
The point is not straightforward. The Post Office’s actions were clearly deliberate, but we expect they paid no heed to tax at all. Was the loss to tax “brought about deliberately“? ↩︎
This is an update of this article from June 2023. We now know more, and the Post Office’s victims are receiving an even worse deal than we thought.
It was this Daily Mail story that made me realise something was deeply wrong with the Post Office’s compensation scheme. And, in particular:
How could that happen? How did Mr Duff end up with only £8,000? Indeed how come one postmaster applied for only £15.75 compensation? I didn’t forget to add “thousand” or “million” – the Post Office revealed to me1 that they received one application for £15.75 compensation. That indicates a very serious problem with the application process.
This article answers that question. Our conclusion: the Post Office has adopted a strategy to minimise compensation for the worst miscarriage of justice in British history. It does that by minimising the initial claim postmasters are making. The Post Office can then point to all the procedures in place to ensure claims are handled fairly – but the unfairness happened right at the start.
Now, finally – eleven years after the Post Office almost certainly knew 3 that it had wronged these people, it is paying compensation – but in a way that guarantees the wronged postmasters receive derisory sums. This article focuses on the “historical shortfall scheme” (HSS), which compensates postmasters who were not actually convicted of theft, but who were accused of theft, lost their jobs, threatened with prosecution, and forced to repay cash “shortfalls” which in fact were entirely fictitious. There are about 2,750 HSS claims. The average settlement payment so far is only £32,0004
The Post Office say this about the HSS claim process:
I would invite anyone to read the below and then return to this paragraph, and decide for themselves how “simple and user friendly” the scheme is, and how fair and reasonable it is for the Post Office to not cover the legal costs of applying.
There are nine elements of the HSS scheme that in my view amount to a strategy to minimise the initial HSS claims. In other circumstances, I would willingly accept that this was a series of good faith mistakes; but given the history here, I don’t think we can assume good faith.
Here are the nine:
1. Force postmasters (mostly in their 70s and 80s) to go through a complex legal process.
The Post Office could have proactively investigated what had happened, identified and interviewed the people it wronged, and proposed full and fair compensation. After all, it’s the Post Office that required postmasters to repay the phoney “shortfalls” – it surely has at least some data that it could be using to estimate the compensation due, and “pre-complete” forms for postmasters.
But instead, the postmasters are required to complete a lengthy and very legal form, with the Post Office providing absolutely nothing in the way of information or assistance. Even where the Post Office writes to a postmaster saying they identified an issue that may have caused a shortfall, they make no attempt to pre-populate the form with that issue.
I have heard (but do not know for sure) that the Post Office’s systems and recordkeeping were such a disaster that it in fact has little useful data. If so, it is outrageous that the Post Office expects elderly postmasters to have better recordkeeping than a large corporate, and – if they don’t – that this reduces the compensation they receive.
I put this point to the Post Office. Their reply is as follows:
This is all irrelevant, as it’s about the process after postmasters send in claims. None of it is about the claims themselves. The forms are lengthy and complex, and the key elements (dates, amounts of “shortfalls” repaid) should be in the possession of the Post Office. The onus should not be on the memory of elderly postmasters. The fact it is ensures that claims are for far less than they should be. Nothing in the later processes can fix that initial injustice.
2. Ensure the postmasters don’t receive legal advice when they complete the form
The HSS claim form is in reality a complicated legal claim, and nobody should be completing it without detailed legal advice.
That legal advice will need to consider all the facts specific to the individual’s treatment by the Post Office, and the financial, health and reputational consequences over the subsequent years/decades. I understand from discussions with experienced lawyers that, for all but the simplest cases, this would require at least a week’s work by a couple of experienced claimant lawyers, so ballpark fees of £10,000.
Few postmasters could afford anything like that. So how much is the Post Office covering?
Zero.
The Post Office provides no cover for legal costs in completing the form. None. It doesn’t even suggest they should obtain legal advice.
Postmasters are being asked to assert their legal rights, and their legal claims for compensation, without legal advice. The intention was that this would be an informal process for which legal advice would not be necessary. However, that is not remotely how it has worked out.
After the Post Office receives the form, it will send the postmaster a settlement offer. At that point the Post Office will cover some legal costs. But it’s too late – the offer has been framed by the form, and the postmaster received no legal advice in completing the form. And only 10% of postmasters took legal advice even at that late point.5
So aged and vulnerable postmasters applying for compensation are required to complete lengthy and complex legal documentation without legal advice.
Here is the Post Office’s response. They say that applying for the scheme is straightforward. Postmasters disagree, and I think most people (lawyers or laypeople) would share that view.
If I was the Post Office, and someone had submitted a claim for £15.75, I would have thought something was very seriously wrong with the claims process.
3. Write the form to prevent claims for damage to reputation
That complicated form seems designed to limit compensation to financial loss – principally loss of earnings, and the fake accounting “shortfalls” which postmasters were required to repay the Post Office if they wanted to avoid prosecution.
Any lawyer – I think any right-minded person – would say that financial loss is the least of it. Stress, suffering, damage to reputation – all of these should be compensated for. But the form goes out of its way to stop this.
Claimants are surely entitled to compensation for damage to their reputation. In many cases that was significant – everyone in the village where they lived and worked became convinced that the postmaster was a thief, with many postmasters forced to move.
But the design of the form means that claimants are unlikely to realise they can claim for this. Here’s the relevant box:
A lawyer would know this is referring to consequential loss, and would think (amongst other things) about damage to reputation. I doubt many 80-year-old postmasters would do that.
But I suppose a particularly assiduous postmaster might go into the detail of Appendix 1, where we see an acknowledgement that damage to reputation can be included…
… but only where it causes financial loss – which is notoriously hard to quantify.
I paused when I read this, as I wasn’t aware of a legal principle that a person could recover for damage to reputation only where it causes financial loss. I called a few much-more-qualified lawyer contacts. Their answer: there is no such legal principle. The Post Office invented it, to minimise compensation claims.6
I put this point to the Post Office. Their response:
But that is absolutely not what the Post Office’s own guidance says. It says: “Where a postmaster has incurred a financial loss as a result of damage to their reputation, they may be able to claim… The Postmaster would need to explain… why the damage to the postmaster’s reputation caused financial loss”. This is a statement that damage to reputation can only be claimed where a financial loss is incurred, and that is absolutely a misrepresentation of the legal position.
So even if a layperson goes deep into the small print, they won’t realise that they are entitled to compensation for damage to reputation which goes beyond mere financial loss. They have been misled by the Post Office, and that will mean they end up claiming for much less than they should.
Of course, this issue would be spotted by a competent lawyer, but the Post Office ensured that the form would always be completed by an unadvised layperson. So a postmaster would, almost inevitably, claim less compensation than he or she is due.
4. Write the form to minimise compensation for stress
The postmasters spent years and often decades crushed by the experience they’d been through. It’s a level of stress and unhappiness that most of us can fortunately never imagine.
The courts often provide compensation for stress and related psychological injury. If you are wrongly arrested and spend a night in the cells, you’ll receive several thousand pounds compensation. If you are sacked in an unfair or repressive manner, you will receive compensation. So how much compensation are the postmasters receiving for the stress that they suffered?
The Post Office’s HSS claim form contains no indication that postmasters should be claiming for stress. There is one reference in the Q&A provided by the post office:
How is an unrepresented postmaster supposed to even realise what this means?
Most HSS claimants are receiving no more than £5,000. The very top end we’re aware of is one postmaster who had a stroke as a result of the stress of the Post Office’s false allegations, and is receiving £15,000.
To put this in to context, these are the Court guidance for the “vento bands“, which apply to awards for injury to feelings in discrimination claims:
So it seems incomprehensible that any postmaster is receiving compensation for stress of less than £33,000.
5. Write the form to prevent exemplary damages claims
When a wrongdoer causes harm intentionally, recklessly, or with gross negligence, then a court can award “punitive” or “exemplary” damages. This seems a model case where such damages would be awarded – so where on the HSS form is the box for a claimant to assert exemplary damages? Where is that mentioned in the Appendix?
Nowhere.
Both of these omissions would be spotted by a competent lawyer; but are unlikely to be spotted by a layperson. And the Post Office ensured that the form would always be completed by an unadvised layperson. So a postmaster would, almost inevitably, claim less compensation than he or she is due.
This is how the Post Office responded:
Again, this doesn’t address the point – the Post Office’s own form, and (lack of) guidance means that unrepresented postmasters will not make these claims.
And the Post Office appear to be saying that punitive damages have only been offered in malicious prosecution cases, and perhaps not even all of those. That cannot be right.
I would suggest exemplary damages should be the rule, not the exception. It seems beyond doubt that the Post Office acted oppressively and unlawfully (and very plausibly criminally) towards the HSS postmasters.
6. Intimidate postmasters into silence, to stop them discussing their settlement offers with each other, friends, family, or the media
As already reported by us and The Times, each postmaster receiving an HSS offer was warned by the Post Office that legally they were not permitted to mention the compensation terms to anyone. This had consequences. They weren’t able to compare compensation terms with each other. They weren’t able to speak to family or friends (who might have suggested they speak to a lawyer). And they weren’t able to go public about the way they were being treated.
The Post Office refused to respond to this point, saying:
7. Run every possible argument to minimise payouts
The Post Office’s litigation strategy in the 2010s was described by the Court of Appeal as evidencing a “desire to take every point, regardless of quality or consequences”. The Post Office has never apologised for that approach – and seems to be continuing it.
What I’m hearing from postmasters is that the Post Office is running every possible argument to minimise its payouts:
responding to claims for loss of earnings by arguing that the Post Office would have shut down the Post Office in question under its “transformation programme”, so compensation is limited to the 26 week notice the Post Office typically gives. In strict legal terms that it is a legitimate argument, but (1) it is inconsistent with the informal approach the Post Office should be taking, (2) the Post Office is not running a proper counter-factual but simply asserting the argument, even in cases where the transformation programme would not have applied.
responded to postmasters who entered bankruptcy by arguing that the bankruptcy was caused by other factors (whilst providing no evidence of what those other factors might be)
The Post Office appears to be completely ignoring Sir Wyn’s initial finding that “normal negotiating tactics often found in hard-fought litigation in the courts should have no place in the administration of any of the schemes for compensation”.
The Post Office’s response to me does not address the key point here – that the Post Office is running aggressive arguments to minimise payouts:
Where it runs these arguments against unrepresented postmasters – and, remember, 90% of postmasters are unrepresented, the Post Office is in my view taking advantage of unrepresented individuals.
8. Provide a token amount to cover a lawyer reviewing the settlement
Once the postmaster sends the form to the Post Office, the Post Office responds with a draft settlement agreement, and the postmaster is invited to sign it. At that point, the Post Office will pay for the postmaster to engage a lawyer.
It’s too late. The advice should have been right at the start, to enable the postmaster to construct their claim in a sensible manner, and work out how much tax is due.
And the Post Office is paying an amount which won’t begin to pay for a lawyer actually looking at the fundamentals of the claim. In a Freedom of Information Act response, the Post Office confirmed to me they have paid 1,924 HSS settlements totalling £62m, but in only 198 cases did they cover legal fees, amounting to £217k (i.e. an average of £1,100 each).7
£1,200 of legal advice (for the few people receiving it) would realistically cover a “sense check” of whether the settlement terms themselves are reasonable. It will not cover an assessment of whether the right amount of compensation is being paid.
So this is a fig leaf which enables the Post Office to tell the world it is paying postmasters to receive legal advice, without taking the consequences of postmasters actually receiving legal advice (i.e. having to pay out the compensation that it realistically should be paying).
Back in August 2022, Sir Wyn’s initial report said that reasonable legal fees should be paid where the Post Office’s initial HSS offer was rejected by a postmaster. The evidence suggests that didn’t happen between August 2022 and April 2023, when a large number of settlements were agreed.
9. Dump the claimants into a complex tax position
The Post Office made no attempt to assist the postmasters’ tax position, and didn’t adjust the compensation upwards to reflect tax. So postmasters ended up losing far too much of their compensation in tax – in some cases up to half.
This was supposed to be fixed by the Post Office making “top-up” payments to postmasters to cover the tax. But it’s been so slow at doing this that 1,100 postmasters won’t receive a top-up payment in time for the 31 January 2024 tax filing deadline. We wrote more about this here.
What should happen now?
The HSS compensation scheme isn’t fit for purpose, and has become just one more entry in the sordid list of Post Office failures and obfuscations.
Ideally, it would be replaced, but it’s too late for that – out of 2,400 original applications only 23 are awaiting offers, and 200-300 have pending offers. Time is running out for many of the postmasters, and we can’t have more months and years of delay.
So I would let the scheme let it run its course, but establish a quango empowered to review every single Post Office compensation payment, from all the different schemes/settlements, and make whatever additional payments to the postmasters as it thinks is fair and just under all the circumstances. The usual paradigm of legal claims would be replaced with an informal inquisitorial process. It would, of course, be funded by the Post Office (although the Post Office is insolvent, and so ultimately every £ would come from the Government).
And what about the individuals responsible?
It remains to be seen whether individuals will be held to account for having destroyed thousands of lives.
When Sir Wyn’s Inquiry is complete, and his findings published, I hope prosecutions follow against key individuals for perjury and/or perverting the course of justice.
I also hope we see Solicitors Regulation Authority proceedings against the Post Office’s internal and external lawyers. That means the lawyers involved in the original prosecutions, and the lawyers involved in sustaining meritless litigation for years (including those making a hopeless recusal application which they must have known would fail, and was no more than a cynical delaying tactic).
It should also mean Solicitors Regulation Authority proceedings against those lawyers who constructed a compensation process which has the effect of taking advantage of vulnerable people who the Post Office knew were not legally advised.
The compensation process itself is a scandal, and there should be consequences for those involved.
Thanks to Anthony Armitage for his expertise on the SRA Standards, to P and F for their input on the tort law elements of the above, and all the postmasters who have contacted me with their practical experience of the HSS process. And thanks to Tom Witherow and the Daily Mail for their original story which inspired/infuriated me to look into the Post Office scandal in more detail.
Footnotes
See below, and the Post Office’s response to allegation number 2 ↩︎
I have previously written that this was between 2000 and 2013, but I have now spoken to postmasters who faced false allegations of theft as late as 2017 ↩︎
Although important people at the Post Office surely knew well before 2013, albeit that the details of “who knew what when” remain unclear ↩︎
The HSS scheme doesn’t cover the 980+ postmasters who were wrongly convicted, or the 555 postmasters who claimed under the Bates group litigation order (GLO) – and there are certainly others who haven’t claimed under any scheme. So the total number of affected postmasters is unknown, but certainly over 4,000 ↩︎
The source for this is that, as of 4 April, 1,924 settlements had been entered into, of which the Post Office had covered legal fees of only 198 (see our FOIA correspondence, linked here). Given the age and limited resources of most of the postmasters, it is reasonable to take from these figures that around 90% of the postmasters had no legal representation. ↩︎
See the helpful summary set out by Warby J in Barron v Vines, paragraph 21. ↩︎
Apparently the Post Office pays £400 for small claims and £1,200 for larger claims. ↩︎
![106AOffence of fraudulent evasion of income tax
(1)A person commits an offence if that person is knowingly concerned in the fraudulent evasion of income tax by that or any other person.
(2)A person guilty of an offence under this section is liable—
(a)on summary conviction, to imprisonment for a term not exceeding [F212 months] [F2the general limit in a magistrates’ court] or a fine not exceeding the statutory maximum, or both, or
(b)on conviction on indictment, to imprisonment for a term not exceeding 7 years or a fine, or both.](https://taxpolicy.org.uk/wp-content/uploads/2024/01/Screenshot-2024-01-18-at-11.07.20-1024x202.png)
