• Hovis on his magic carpet

  Hovis, the Incumbent at No 10 Downing Street has now admitted that he is trying to collect National Insurance Contributions that he is legally not entitled to. December 2nd 2004 Pre-Budget speech. We have now had two members of Parliament write to  Rt. Hon Dawn Primarolo, the Paymaster General at the Treasury about the Inland Revenue's actions in this matter. They are David Laws, MP for South Somerset and Rt. Hon Oliver Letwin, MP for West Dorset. We have also noted Mr Harnett of the Treasury's answer to Question 109 to the Select Committee on Economic Affairs in House of Lords on June 20th 2005. What a way to try & include oriental carpets by comparing them to platinum sponges used for catalytic converters on cars. He should realise that he will get splinters in his foot without carpets on his floor or does he think oriental carpets are a mode of transport.

Open Letter to Oliver Letwin MP, Shadow Chancellor - November 2004 FOR THE ATTENTION OF OLIVER LETWIN MP  Please excuse us for taking the liberty of writing to you in the next door constituency but we felt as Shadow Chancellor that there is a ridiculous state of affairs happening within the Inland Revenue. As you are aware the Inland Revenue over the last few years has been collecting National Insurance Contributions. We have 49 client companies who, as a result of Mrs Thatcher's admirable Social Security Act 1979, paid their staff bonuses in "Benefits in Kind". Of the 1200 cases written by one of our sister companies paying in Oriental Carpets the Inland Revenue belatedly started to demand payment of NIC on 5% of them. The basis under which they were written was no different than the remaining 95%, which have not been challenged. The last case was written in November 1996 and the Inland Revenue have never been able to get any Legal Judgement on these transactions. However they held up any determination in the hope of getting a Judgement. What the Inland Revenue did not realise was that under Section 9(I) of the Statute of Limitation 1980 they had to inaugurate Legal Proceedings on NIC payment "within 6 years of the date of causation". In most cases they failed to do this. Because of this they are "time barred" from collecting the NIC's if they were ever deemed to be due. They are still demanding that those 49 companies submit an "appeal" to Commissioners to ascertain whether they could have demanded those NIC's. On their own admission lawyers representing each of those appeals would cost the Revenue ( and therefore the taxpayer) £5,000 that is without the other costs and time involved. In some cases they are trying to ascertain collections of as little as £1100. With no legal means of collection they are willing to spend £245,000 on lawyers. The overall costs would be in excess of £500,000. This they are doing in the name of procedure. Maybe they are advertising for more staff to lighten their heavy workload. We are requesting that they prove to the Courts that they are not "time barred" before running up ridiculous costs on this matter. They refuse. As a large desperate appeal we are writing to you as these actions are the direct result of the Chancellor giving £6 million in last year's budget (2003) to try and collect money from tax avoidance. We run a website on this matter on www.ukinformedinvestor.co.uk/page8.html where the situation is explained in full Trusting you may assist in this matter. Response from Rt. Hon Oliver Letwin MP on 29th December 2004 Thank you for your email of 29th November. I am sorry to be so late in replying. I must say that the tale you have to tell is a very extraordinary one and I have written the attached letter to Dawn Primarolo about it, in the hope this may lead to her calling off the dogs of war. Letter from Rt. Hon Oliver Letwin MP to  Rt. Hon Dawn Primarolo, Paymaster General, Treasury Chambers, Parliament Street, London, SW1P 3AG I attach a copy of an email I have received from Drummond & Co, 16 High Street, Chard, Somerset TA20 1QB. As you will see, it tells a rather extraordinary tale in relation to the Inland Revenue. I should be most grateful if you could let me know whether it is really the intention of Ministers that such matters should be pursued in this way.  The Dogs of War

Letter from David Laws MP for South Somerset to  Rt.Hon. Dawn Primarolo, Paymaster General, HM Treasury , 1 Horseguards Road, London, SW1A 2HQ 16th December 2004 I am writing to you on behalf of my constituent. He came to see me at my advice centre in Chard on 11th December 2004, to raise a number of concerns that he has about recent actions by the Inland Revenue.  I should explain that Drummond & Co are tax advisers with many years experience and have advised a number of companies about issues relating to National Insurance Contributions on benefits in kind, going back to the 1980s and 1990s. They tell me that in spite of the fact that National Insurance Contributions are covered by the Statute of Limitations, the Inland Revenue is pursuing many cases across the country prior to 1998 - and going back as far as 1991, where they are trying to penalize people for tax structures that sought to minimize National Insurance obligations, which I understand were perfectly legal at that time. They point out that this is not only causing a lot of distress to people who run businesses including small businesses as well as large businesses, but it appears to be running up a huge volume of legal costs in spit of the fact that there would appear to be a time bar which does not allow the Inland Revenue to go back over these cases. I would be grateful if you could let me know what your views are on this matter, and whether it is sensible for the Inland Revenue to commit a great deal of resources to these types of cases when it may not be possible, under the law, to retrieve  any National Insurance Contributions which were legally avoided. Dawn & Hovis Response from Dawn Primarolo MP, Paymaster General to David Laws 18th January 2005 Dear David, Thank you for your letter of 16 December on behalf of your constituent Drummond & Co of 16 High Street, Chard regarding benefits in kind and the collection of National Insurance Contributions (NICs). I understand that the Inland Revenue (HMRC) has for some time been looking at the use of payment/reward schemes promoted by Drummond & Co. Drummond & Co has suggested to you that the HMRC are pursuing cases which are subject to a "time bar". In England and Wales, collection of NICs is subject to the Limitation Act 1980. This means that action to recover NICs debts must be brought within 6 years of the cause of action (e.g. failure to pay on the relevant due date). Where we consider that it will not be possible to conclude a case within the limitation period, perhaps because of an appeal likely to take more than 6 years, the HMRC protects the debt by starting proceedings in the county court ( known as issuing a protective claim) and immediately seeking an adjournment until the outcome of the appeal is determined. Thus, while the HMRC would not seek to collect NIC debts subject to the 6 year time bar, they are able to collect debts more than 6 years after the due date where these debts have been protected.

Drummond & Co has also alleged that the HMRC are seeking to penalise people for tax structures which sought legitimately to minimise payment of NIC's. Under Regulation 19(1) (d) of the Social Security (Contributions) Regulations 1979 a "payment in kind" was, with certain exceptions, exempt from liability for NICs. However, it is the view of the HMRC that some advisors have stretched the definition of payment in kind beyond its limit - it is not accepted that all schemes successfully avoided NICs. The HMRC has a duty to protect public revenues and to collect duties that are legally due. It is therefore the aim of the HMRC to test schemes, each of which has its own individual features, through the relevant processes. Various schemes have so far been tested before the General or Special Commissioners and in some cases before the Courts. I am afraid that I am not able to comment in any more detail because Drummond & co has only described concerns in very broad terms. However, with assistance from Drummond & Co, it would be possible for the HMRC to bring matters to a close more quickly. I hope that Drummond & co will find this helpful. Yours, Dawn Dawn Primarolo MP Further Letter to David Laws MP From Drummond & Co Dear David, Re HCM/Misc Cases 0   Thank you for your letter and copy of letter received from the Paymaster-General received this am .   I am sure that you will agree that your letter has not been answered. We know what the law is in regard to the Statute of Limitations and it is our contention that the Inland Revenue are wasting tax payers money by pursuing cases where they have either not even applied for a protective writ ( An example Ki-Hara Chemicals Ltd) or have applied for the Protective writ out of time (Excalibur Plastics Ltd). In those example cases and 49 others they have failed to prove that they instigated proceedings within six years from the "date of causation" as proscribed by the Statute of Limitations 1980.   I have mentioned 2 cases as example specifics. It is also interesting to note the statement "stretched the definition of payment in kind beyond its limit". We can not understand why these small businesses ( mainly in a corridor between Wolverhampton and Manchester) have been singled out as being any different to the other 95% of Croxton Ltd's clients, who did exactly the same. Especially as most of these businesses are family run and the controlling directors used the benefits in kind system to enhance their final pensions. As controlling Directors they could have taken dividends and still not pay National Insurance Contributions. Many cases of "benefits in kind" in the £millions using the carpets have not been challenged. But some as little as £10,000 ( final NIC bill approx. £1100) have been.   These cases are obviously selective and in specific areas. We have no cases in the South ,or South East. In the case of Excalibur Plastics Ltd the Judge asked the Inland Revenue to prove that they were not "time barred" before the case could proceed. The onus of proof is on the plaintiffs (Inland Revenue) - this they have failed to do but still continue with the costly business of an appeal.   The case of Ki-Hara Chemicals Ltd and several others is more blatant as there has never been even an outdated protective writ.   These are 2 specifics as an example- we have 49 others of similar nature. Thanking you for your assistance   Drummond & Co, 16 High Street, CHARD, Somerset TA20 1QB Tel : 0870 199 3871 www.ukinformedinvestor.co.uk

Accountancy Age Page 2  January 20th 2005 OUTRAGE OVER NI ON BENEFITS IN KIND

The Inland Revenue is seeking payments from scores of companies it feels have avoided national insurance by paying their employment bonuses through benefits in kind, such as expensive rugs and fine wines, writes David Rae. Tax advisers representing the companies claim the Revenue's efforts are pointless because the bonuses were paid more than six years ago, and are therefore outside the six-year statutory time limit. "despite this, the Revenue is demanding that all 51 companies go through the appeal process which will cost them both time and money and the tax payer at least £500,000 for a debt they cannot legally collect." said Michael Davey of Drummond & Co tax advisers. Davey initially established many of the benefits-in-kind schemes in the eighties and nineties, when he was chairman of tax consultant Croxtons. In a letter to Shadow Chancellor Oliver Letwin, Davey said: " We are requesting that (the Revenue) prove to the courts that they are not "time barred" before running up ridiculous costs on this matter." Letwin - together with Davey's constituent MP, Liberal Democrat David Laws - has since written to Paymaster-General Dawn Primarolo in the hope that it "may lead to her calling off the dogs of war!" The Revenue was unable to comment

October 2004

• 
  
• CROXTONS “Director’s Cut “ORIENTAL CARPET SCHEME
  
    NIC Mitigation
  
  
  Thank you for your letter dated  October 2004 addressed to our clients, which has been received by us today.
  Whilst we appreciate that the Inland Revenue has procedures we are most perturbed in regards the inconstancy of their actions in regards Oriental Carpets.
  
    The facts in this case are so simple that even a first year law student would understand it.
  
  A)    All cases written utilizing the use of Oriental Carpets as a “Benefit In Kind” were completed over six years ago and are now time banned under the 1980 Statute of Limitation. Even in cases where the Inland Revenue applied for protective writs they failed to have them issued in time or to renew them in time. In a recent case in regards to Excalibur Plastics Ltd (Claim No: 4SQ01947 in the Stoke on Trent County Court) the judge stated for the matter to go ahead the Revenue must prove that it is not time barred before the case can be heard. The Revenue has failed to prove this.
  B)    Ms Nicky Potts (In your Newcastle office) informed us in April that the cost to the Revenue for barristers to attend an appeal is in excess of £5000. As the amounts being sought are minimal (In one case £1100) the Revenue is wasting Taxpayers money on these farces of appeals, as there is no means of collection.
  C)    Under the case of Furniss v Dawson (19840 55 TC 324.) Justice Wilberforce stated that presumption of intent could not be utilized in such cases. Therefore unless you have definite proof that the Oriental Carpet Scheme was set up for the purpose of avoiding NIC you can not proceed.. If you have such proof then you will have to show it to a Court of Law. The burden of proof is on the Inland Revenue not for our client to appeal against. Therefore the appeal is an irrelevance.
  D)    We consider that the actions by the Revenue are no more than common harassments on our clients and we are advising our clients to report the individuals who sign letters or make phone calls to be reported for harassment under S.40 of the Administration of Justices Act 1970.
  
  
    We shall not waste taxpayer’s money by answering these ridiculous epistles about appeal procedures. They are time barred and irrelevant and the threat of fines which can not be collected outside a Court of Law are laughable. We are only interested in proceedings in a Court of Law, which are commenced within six years of date of causation. Otherwise our clients do not wish to discuss this matter further.

  ---

  So far we have written to the following employees of The Inland Revenue with the above letter warning them about harassment::

  D.J.Alcock Employer Compliance Manager	Worcester and Hereford Area Compliance, Block A, Governmant Buildfings, Whittington Road, Worcester, WR5 2LE
  B.R.Bartlett Employer Compliance Officer	NW Midlands & Shropshire Area Compliance, Pattison House, Midland Road, Walsall, WS1 3TX
  Mrs.G.Handley  Employer Compliance Officer	Staffordshire Area Compliance, Blackburn House, Old Hall Street, Hanley, Stoke On Trent, ST1 3BS
  A.Kirkup  Employer Compliance Manager	Notts & Derbyshire Area Compliance, Mowbray House, Castle Meadow Road, Nottingham, NG2 1BQ
  Nick Macartney Employer Compliance Officer	Norfolk Area Compliance, St Cuthbert's House,7 Upper Street, Norwich, NR3 1UX
  A.Mitchell Employer Compliance Officer	East Lancashire Area Compliance, Stone Cross House, 21-27 Churchgate, Bolton, BL1 1YA
  D.J.Reader	Manchester Area Office Compliance, Albert Bridge House, 1 Bridge Street, Manchester, M60 9AF
  Neil Shepherd, Compliance Executive	Bradford Midland Compliance, Centenary Court, 1 Blaise Way, Bradford, BD1 4XY

• ---

  
  May 24th 2003- 

Good News for all NIC Schemes




• Oriental Carpet Scheme
We have received a copy of the "Notice of Allocation to
the Fast Track" in regards the case of "Inland Revenue Ni Contributions Office-v-Duvine Developments Ltd."( Claim Number CB300566 in the CambridgeCounty Court) in which the Inland Revenue are claiming NIC Contributions on an Oriental Carpet "benefit" paid to employees of the company.

The notice  reads that it is ordered "...............
3. Defendant to file and serve a fully pleaded defence relating to limitation act arguments as well as any other points, no later than 4.00pm 12th June 2003.....................
11. The matter be listed for final hearing before a District Judge or Circuit Judge with a time estimate of one day in the trial window commencing 6th October 2003 and ending on 27th October 2003."................................"

We believe that this case opens the way for the Inland Revenue Ni Contributions Office to prove their case before the Courts . This places the onus of proof on the plaintiffs. We further believe that the existence of this case makes any appeals in regards to Oriental carpets as "benefits in kind" unnecessary and we   recommend  that all pending appeals be adjourned on the outcome of this case. We shall be notifying all clients, and inspectors of taxes concerned 

---


We also believe that we can show the courts the fundermental differences between the existing cases they are quoting where trusts and platinum sponges were utilised. Oriental carpets,coins, jewelery,antique clocks and wines are a completely different matter. Our fighting fund team are prepared to act for any company who utilised any of the above.


---


Call us on 0870 199 3871 for up to date information on the Oriental Carpet Scheme or Fax your letters from DSS or Revenue to us.   Thousands of carpets schemes have been accepted. They ALL should be.
 
• Do not accept a decision against you or ask for a Secretary of State's decision or an appeal as their hearings are more like inquisitions. Just refuse to pay and take the cases to law.  Recently Drummond & Co have been acting for several companies who participated. The cost to each company is £250. So far over £100,000 has been saved in potential NIC payments the Inland Revenue were demanding. Most of the local Inland Revenue Officers dealing on these cases have little clue to what they are writing. They are just topping & tailing letters from some anonymous so-called lawyer. These demands are little short of harassment as no Class 1 NIC liability exists.

 
• If you have recently received a letter in regards to the six year limitation Act do NOT agree.   Instead defend the case stating that the moneys are not owed and the plaintiffs have had six years to produce documentation. Ask for the action to be dismissed. These actions are County Court actions and are a cheap way to defend. Further we have learnt that where a company paid on a without prejudice basis , the Revenue forgot to invoke a protective writ under the Limitation Act. Now in breach of the common law they are refusing to return the money. If any other company has had such dealings please contact us.

 
• In regards the provisions of the Limitation Act 1980 we have found that many of these protective writs were applied for out of time. The Act states in section 9(1) that the time limit shall be "six years from the date on which the cause of action accrued". Obviously the "cause of action" in the Oriental Carpet scheme was caused when the participating company GAVE THE ORIENTAL CARPETS AS "BENEFIT IN KIND" TO THE RECIPIENTS. Most of the protective writs have been taken out to co-incide with the end of the tax year or the Inland Revenue's accounting period. Both of those dates are inapplicable.  So carefully check the date of the protective writ. If you have not had a protective writ put on the claim then the Revenue are out of time anyway.

 
• The recent cases on which the DSS got a result was based on platinum sponges. There is no relevance to these cases to oriental carpets despite what the DSS says. The DSS has had in excess of 8 years to try and produce an even reasonable case against the Oriental Carpet Scheme. This they have failed to do. The Limitation Act 1980 was put into place to protect the public against these long running non substantive claims. The last Oriental CaRPET scheme WAS WRITTEN IN NOVEMBER 1996. tHE 6 YEAR PERIOD IS UP.   However to confuse the select committee on Economic Affairs on June 20th 2005 Mr.Harnett of the Treasury continued to mislead by combining Oriental Carpets with revisionary interests in trusts, shares and platinum sponges. We presume he lives on bare boards- he should watch out for the splinters they can be very painful. Would you send him out to post a letter? (ref: Question 109).  Maybe he does keep jars of platinum sponges in his larder!

 
• If you have an appeal pending drop it and then refuse to pay the NIC. The proof that Class 1 NIC liability debt exists in a court of law is a matter for the plaintiff. If the DSS are foolish enough to take the participating company to court for the NIC then the onus of proof is on the DSS.As things stand if there is an appeal then this administrative tribunal asks that the participating company prove that Class 1 NIC NIC liability does not exist. Also remember there is no obligation for companies to retain paperwork for more than seven years. This means that they can no longer answer questions on matters written more than seven years ago. It may also be that the section (49) that the appeals have been placed under only applies to Income Tax and not NIC.

• Recent copycat letters from the Inland Revenue have stated they are relying on judgements reached in the NMB Holdings Ltd and Westmoreland Investments cases and the use of the Ramsay argument. The Inland Revenue takes the view that the Ramsay  principle  applies to what they call "off the shelf" avoidance schemes where non cash assets are provided. They say that they consider the Oriental Carpet Scheme is similar to the platinum sponge scheme in so far as the provision of the asset was simply a means to reward employees in cash. However the reason they are giving has no relevance to the Oriental carpet scheme. 

 
• They state that Lord Hoffman in the Westmoreland case says: "I have no doubt that Langley.J. was right when he recently decided in NMR Holdings Ltd v Secretary of State for Social Security that a payment of bonuses to directors in the form of platinum sponge held in a bank, accompanied by arrangements under which they could immediately sell it for cash to the bank, was not a payment in kind which fell to be disregarded for the purposes of NICs. In commercial terms the directors were paid in money. It is obvious that such a transaction was not what the Social Security Regulations contemplated as a payment in kind"

 
• They go on to state that they view the Oriental Carpet Scheme as a series of paper transactions, which had no business purpose other than the avoidance of NICs.

1. In response it is our opinion that the Oriental carpets were bought by many companies as were other products like wines by companies who took possession of them. They then decided to give those carpets/wines to employees and directors as proscribed by law. Those carpets/wines were those to give, not paper transactions. Title then passed to the recipients who accepted them without reservation. There was never any agreement between the providers and the recipients to sell them back. In fact the providers of the carpets/wines had the option to utilise the carpets/wines, keep them as an investment or sell them to any purchaser including the original provider at the going market value.

 
2. There was no bank or third party holding the carpets/wines. They were just stored in a bonded warehouse in the name of the recipient or actually held by the recipient. Therefore in no way can Lord Hoffman's statement be relevant.

 
3. Secondly if the directors were also shareholders they could not be seen to be avoiding NICs they would not have had to pay if they had opted to take as dividends. One can not avoid a "tax" that they did not have to pay in the first place. On this basis the revenue would be unsuccessful in trying to utilise the  "Ramsey" principle. In fact as  shown in our brochure "The Directors Cut" (See below) there never was an "arrangement" for the Oriental Carpet Scheme. It was utilised to benefit pension rights or other reasons. Nowhere in our folders did we set out the scheme to avoid NIC, in fact by utilising the scheme it would have meant better pension rights and less eventual cost to the DSS.

 
4.  Croxtons can show the real intention thus  DSS & Revenue's presumption can not be utilised as stated by Justice Wilberforce in Furniss v Dawson {1984}STC 153.  
5. If one takes Justice Wilberforce's decision one step further it appears to us that the DSS/Revenue are presuming tax avoidance. If this is so then it can not be utilised.

 
6. The DSS accepted many hundreds of the Oriental Carpet purchases. They only contested a few that were transacted in 1995/6 and 1996/7. In some cases the same companies gave carpets more than once (as recipients were so pleased to receive them). The original "carpet benefits in kind" were accepted by the DSS and subsequent ones were not. The DSS and the Inland Revenue have failed to explain why there are such discrepancies in their decisions.

 
7. As stated before there is no substance to the Revenue's argument. Read on for earlier points of law and opinions.
8. As shown the Revenue are now sending out the same letter regardless of the case. One client had golden jewellery mentioned as the "benefit in kind" when they had in fact bought oriental carpets. 

 
9. Remember UNITED WE STAND.

Croxtons Ltd.
March 6th 2003

In the Social Security ( Contributions) Regulations 1979 Regulation 19(1) was enacted. It provided:
"For the purposes of earnings related contributions , there shall be excluded from the computation of a person's earnings in respect of any employed earner's employment any payment insofar as it is ..... (d) any payment in kind".

This legislation was in place throughout the period that Croxtons Ltd. were recommending their plans.
 
 

Both plans were submitted to Counsel initially and also subsequent to ongoing legislation. At conferences held with Counsel the principals of the providing companies were invited and questioned by Counsel on the practices of their trades.

In regards to any dealings after April 1994 on Counsel's advice it was made clear to prospective users of the plans that they were for NIC purposes  and that there should be no benefit in regards to PAYE.

On September 27th 1994 Croxtons Ltd. obtained Counsel's Opinion regards the Oriental Carpet Scheme . The full context of Counsel's Opinion is attached to this statement of fact and legal argument. Counsel' David Ewart  of Pump Court Chambers , 16 Bedford Row, London, WC1R 4EB stated as follows.

"11. these arrangements are certain to be closely scrutinised and probably challenged by the Revenue. there is a serious possibility that this challenge may succeed in the Courts. Croxtons’ advertising material ought to make it clear that, while the NIC position is clear, the PAYE position is not nearly so certain. Employers must take their own view, based on their own legal advice, on how to deal with the bonus in relation to PAYE. this all, however, summarise the effect of the PAYE provisions if the Carpet payments are caught by the new section 203F"

In consequence the following was printed in the explanation folder.

"The above information is based on our interpretation of the regulations. Whilst Counsel's Opinion on NIC is clear, the PAYE position is not nearly so certain. You may wish to seek confirmation from your own advisers. Croxtons Ltd. and M.Shokri & Associates Ltd. cannot accept responsibility for the information contained herein".

 Croxtons Ltd. acted as an introducer between professional advisers and providers for their schemes.

One such provider was M.Shokri & Associates Ltd. Croxtons Ltd. were paid on an agreed sliding scale of commissions on these introductions. This commission was paid by the providing company. It appears that in November 1998  Croxtons Ltd, and several of the introducing financial intermediaries were visited by the Inland Revenue stating that they were " seeking evidence" in regards to Oriental Carpet Schemes. On following this up Croxtons Ltd ascertained that the Inland Revenue were in no way questioning the scheme as devised by Croxtons Ltd. They were looking into the affairs of a carpet provider. They were trying to ascertain that the transactions were indeed actual. To date no further developments have happened on that front.

However all contracts and agreements were made by the ultimate purchasers and the providers. No contracts or moneys were passed between Croxtons Ltd. and the purchasing companies. In fact there was little or no contact between Croxtons Ltd. and the purchasing companies. There was no contact by Croxtons Ltd. and the ultimate recipients. Croxtons Ltd. had no way of knowing who they were.

In most cases the only record that Croxtons Ltd. had was by way of commission statements provided by the provider. This list showed the amount, the name of the purchasing company, the name of the professional adviser and the commission earned.

To this date no scheme has been successfully contested, however the DSS in their wisdom have conducted a war of attrition on a few later written cases. Croxtons Ltd. advised on such schemes and still stand by the Counsel's opinion on the scheme. This war of attrition is the more remarkable as over 99% of the schemes written and  were accepted by the DSS as proper and legal. In fact to our knowledge only 3 cases have become subject to a Secretary of State's determination and two of them seem to be no different to those that have been accepted.
 

We have recently been advised that a Company had asked the Secretary of State for Social Security whether the conferment of interests in oriental carpets are earnings for the purposes of liability for National Insurance Contributions.

The response by the Secretary of State for Social Security is that an inquiry on one case should be held on this matter. This inquiry was heard on September 28th ,29th and 30th  1998 at the Britannia Hotel, Portland Street, Manchester, M1 3LA.

My reading of the questions asked of me,  at that hearing, can be summed up as follows- I show my comment to the questions:

It is interesting to note that the Inquirer is using the following cases as possible relevance. W T Ramsay v Inland Revenue Commissioners {1981} STC 174, through Furniss v Dawson {1984}STC 153to Inland Revenue Commissioners v McGuckian {1977} STC 908 and in considering to what extent the transactions presently under inquiry should be treated as if they were, and in the same way as, tax avoidance schemes having no commercial purpose.

The new tact of using the recent case of Inland Revenue Commissioners v McGuckian [1977] STC 908 was predictable but inapplicable in most cases as the recipients of the carpets were on the whole both Directors and controlling shareholders of the relevant companies.

They would have had the option of taking a dividend in similar amounts That dividend would not have been subject to National Insurance Contributions. One therefore fails to understand how a person or company can be seen to be using this scheme to avoid a tax (NIC) that they did not have to pay in the first place if they had elected to take dividends.

Further the case of McGuchian is judiciously unreliable as the cases ofCraven v White, Gregory v Bayliss,Fitzwilliam and Bowater were never considered in that decision.

It has already been ascertained that Inland Revenue Commissioners v McGuckian [1977] STC 908 was not applicable to VAT and there is not, to our knowledge, any authority that says that it is applicable to NIC.

The reason most Directors used the scheme was to enhance their Pension rights or in regards to Corporation tax rights. If they had taken the dividends those amounts would not have enhanced their pensions or helped in marginal corporation tax rates.

It so follows in regards pensions that in the fullness of time it is the DSS who would have benefited as the recipient would not have to rely on the state.

 In turn, the DSS are trying to claim moneys that they would never have received if the director /shareholders of the company had taken the dividend route.

Therefore it follows that the premise of Inland Revenue Commissioners  v McGuckian [1997] STC 908 should be considered as a tax avoidance scheme is not relevant, especially as in the case in matter the full Income tax has been paid as it would have been under the dividend route.

The commercial purpose was in fact the enhancement of pension rights or corporation tax. It seems that the DSS is trying to move the goalposts by stating that once a decision had been made to take a discretionary ” benefit in kind” then the decision was made to avoid NIC by using carpets.

The fact is that the starting point is the Directors deciding between dividends and discretionary ” benefits in Kind”. It was that choice that Croxtons Ltd. put forward in their "Director's Cut" folder at the time. This reason was  also mentioned in the National Press when reported on in the autumn of 1994.( copies of which are attached) 

 What the recipient did subsequent to receiving the carpets is no matter concerning the purchasing company. The recipient had a completely free hand with those carpets.

However in the case of Furniss v Dawson {1984} STC 153 Justice Wilberforce stated that interpretation of intent could not be presumed. This was backed up by DPP v Bagney.

It should be further noted that the folders describing both the Grapevine scheme and the Oriental Carpet scheme made no mention of any time limit  for holding the investments. Both wines and carpets were recommended for investment purposes and no prescribed time limit was discussed or recommended by Croxtons Ltd. or their suppliers. Nor did Croxtons Limited knowingly have any dealings with the recipients of the investments.

One should also question whether in the legislation there is any reference to the timing of purchase, transference or sale of investments. A trader in the City can buy and sell investments many times in a few hours.

Once a recipient has received "a benefit in  kind" there appears to be no legislation in place  to curtail his freedom of action to make up his mind to sell regardless of doing so immediately or after a passage of time. The recipient is a free agent to deal with "the benefit in kind" as he/she wishes. 

In all schemes one has to accept that the providers of the goods are people who are genuine traders and respected in their given trade. Previous schemes have utilised gold held offshore, various precious metals, diamonds, gilts, unit trusts and wines.

Croxtons Ltd. did their provenance check on all providers. As mentioned before Croxtons Ltd. even took the two main providers to Counsel in order to satisfy themselves that the schemes were properly constructed.

In fact another scheme was submitted to Counsel and rejected on Counsel's advice.

 Whilst Croxtons Ltd. did not check on every consignment. Spot checks were made at random. In order to ensure that dealings  in oriental carpets were operated properly Croxtons Ltd. asked a director, Charles Sayer, to make sure that the paperwork was operated properly.

From my position ,as Chairman, I can only say that there was only a limited amount of carpet available and many applications for carpets for the Oriental Carpet Scheme were refused because of the lack of stocks.

To try and rectify the position I met with several other carpet dealers. However in little over two years the scheme was running the total of sales was approx. £57 million. The average sale was approx. £103,000. Therefore the overall turnover was very modest and well controlled.

The inquiry took the form of an Inquisition by Counsel acting on behalf of the DSS. Whilst the hearing was meant to pertain to matters in regards NIC it was noticeable that the questions asked by Counsel went far beyond NIC matters.

This included asking  a current Director how he had evaluated a payout for shares to the widow of a deceased director. This shows that it is imperative that companies have a legal representative at such inquiries.

In asking these questions the DSS is presuming that the payments were bonuses. It is far better to consider them as Discretionary ” Benefits in Kind”.

On all instances they took Counsel's advice before proceeding with their plans.  Of the many hundreds of schemes they advised on only a handful ever came under any scrutiny. Therefore it was with shock and disbelief that two of their former directors were awoken at 6 am one morning in the autumn of 1998 by the metropolitan police in cohorts with officials from the special compliance office of the inland revenue. The only reason for these raids given was that the officials were "seeking evidence".
They took away papers and computers pertaining to Croxtons Ltd.

Within the next few days Accountants and Financial Advisers who had recommended the Croxtons schemes had similar visits as did the companies who partook of them. To this day the revenue have failed to return papers taken from at least one firm of Financial Advisers.

There can be only one explanation for those actions and that was to get an unfair advantage in contesting these cases. These facts should be brought up in every legal hearing on the Oriental Carpet Scheme. There may even be  a case against the Revenue of harassment under Section 40 of the Administration of Justice Act 1970. This defines harassment as trying to coerce a person to pay an alleged debt by making demands for payment that are calculated to subject a person to "alarm, distress or humiliation, because of their frequency or publicity or manner".

Then silence. Obviously the Accountants, Financial advisers and Companies raided all felt that Croxtons had done something wrong. As a consequence they were loathe to do more business with Croxtons. Their business had been ruined and they did not know why.

Eventually the chairman of Croxtons Ltd ( who had never been contacted by the Inland Revenue Special Compliance Office) managed to arrange a visit with a  Keith Moore and Beth Smith from the Special Compliance Office from Salford Quays in Manchester for 11th August 1999 at Somerset House in London.  As the meeting opened Keith Moore stated that they had no interest or complaint  in the dealings, activities or legal standings of Croxtons schemes whatsoever. The rest of the meeting consisted of the Inland Revenue representatives asking the Chairman of Croxtons Ltd about one firm of dealers in Oriental carpets.
When asked if they knew the result of their damaging raids the representatives of the Inland Revenue apologized. End of Story?
Or are there any bright lawyers out there who feel they can get recompense for Croxtons Ltd ?
We shall be pleased to publish any reply by the Inland Revenue on this matter.

 This information sheet was created by Michael Davey to assist those who had used the schemes. However neither Croxtons Ltd. or their suppliers take any responsibility for these opinions in any specific case as conditions may vary from case to case.

October 2002