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/ Legal Articles / HM Revenue and Customs and Hybrid Arbitrage

HM Revenue and Customs and Hybrid Arbitrage



Nicola Sharp of Rahman Ravelli assesses HMRC’s action against General Electric

For the first time, HM Revenue and Customs (HMRC) has accused a multinational company of engaging in fraudulent misrepresentation in order to gain a tax advantage.

HMRC has alleged that General Electric fraudulently obtained a tax advantage in the UK worth US $1 billion by failing to disclose documents relating to the company’s financing arrangements.

The Case

HMRC claims that it was deceived by General Electric in an agreement reached in 2005 that saw the company obtain a “triple dip” tax advantage in three countries - the US, the UK and Australia. In documents before the High Court, HMRC alleges that its approval of the arrangements in the agreement was only given to General Electric on the understanding that the funds would be used to invest in businesses operating in Australia. But HMRC later discovered that, after leaving the UK for Australia, the AUS $5 billion concerned was not invested in any businesses. The funds were, in fact, part of a complex and contrived tax avoidance scheme, also known as a hybrid arbitrage scheme. The transactions involved in the agreement had no commercial purpose other than to circumvent tax obligations.

HMRC has asked the High Court to annul the 2005 agreement. This would force General Electric to pay 15 years’ worth of retrospective taxes on the transactions, plus interest and fines, which would total more than US $1billion.

HMRC has alleged that General Electric deliberately omitted key passages from the minutes of board meetings that demonstrated its knowledge of the hybrid arbitrage scheme, in order to mislead HMRC and gain its approval for the agreement. General Electric denies that it deliberately misled the tax authority about the nature of the transactions. It claims that any information omitted was not relevant to the tax issues being considered.

The matter will now go to trial. 

Hybrid Arbitrage Schemes

The principle behind arbitrage schemes is relatively simple, although in practice the schemes are usually very complex.

Different countries often have different tax rules governing particular transactions or corporate entities. Companies seeking to engage in tax avoidance can exploit these differences to create transactions that generate a deduction against taxable profits in one jurisdiction but create no corresponding taxable income anywhere else. The result of this could be that a transaction is not taxed anywhere - or that a company achieves two tax deductions on the same transaction.

Tax arbitrage schemes typically involve so-called “hybrids” - financial instruments or entities that appear to be two different things under the rule of different tax authorities. This can result in a mismatch in the way that the instrument is treated for tax purposes, thus potentially resulting in two tax reductions on the same transaction - or no taxation at all.

When faced with complex tax avoidance schemes which are operated by large multinational companies, HMRC has, for a long time, shied away from using the tools it has at its disposal to assertively combat tax fraud. This case could be seen as an indicator of a change in its stance.

HMRC has complete discretion as to how it deals with tax fraud, including commencing criminal prosecutions, bringing civil action or obtaining contract settlements. With other tax authorities around the world taking more decisive action against tax fraud perpetrators, greater pressure has been placed on HMRC to change the way it tackles tax fraud in the UK. This may well be the catalyst for determining how HMRC now seeks to bring such perpetrators to account.

This article was also featured on Lexology.com.

Nicola Sharp

Nicola Sharp

Legal Director

nicola.sharp@rahmanravelli.co.uk
+44 (0)203 910 4567 vCard

Specialist Areas of Practice: International Regulation and Corporate Crime, Fraud and Business Crime, Civil Fraud, Corporate Investigations

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