Rogue barristers are enabling a billion pound tax fraud – and the Bar won’t act

A small number of KCs and junior barristers are enabling large-scale tax fraud. They do it by providing tax opinions backing schemes designed to “avoid” tax on wages paid to contractors. The schemes have no real technical basis, but the promoters behind the schemes use the opinions as a badge of credibility – and, more importantly, as a shield. When HMRC shuts a scheme down, the promoters point to the KC’s advice, making any criminal prosecution difficult or even impossible.

In reality, these schemes have no realistic prospect of success. All the KC opinions we’ve seen on these schemes rest on assumptions that are plainly untrue, ignore basic principles of tax law, and don’t bother to address statutory rules designed to stop exactly this kind of arrangement. The opinions aren’t there to be right, and aren’t really legal advice at all – they’re just cover.

This report analyses a new case involving one of these schemes, “Purity”. It was backed by a KC opinion – but the scheme was hopeless. None of the remuneration tax specialists we spoke to thought it had any prospect of success. One respected senior tax KC (not involved in these schemes) described the Purity scheme as “incompetent and impossible”. A senior tax lawyer specialising in remuneration tax told us the scheme was “unbelievably bad”. Yet a KC – identity currently unknown – provided an opinion that the scheme worked. Just as KCs have done for the dozens of prior contractor schemes.

The contractors using the schemes never see the KC’s opinion. They usually don’t even realise they are avoiding tax – they’re presented with complex and often deliberately opaque documents to sign, and never told what’s going on. If they were told what was really going on, most of them would walk away.

The whole business is corrupt. It plausibly costs the UK £1bn+ in “avoided” tax and leaves workers facing liabilities they neither understood nor expected. The KCs are facilitating what is realistically tax fraud, and what they should know involves the deception of the individual contractors.

The behaviour of this handful of KCs has been public knowledge for at least fourteen years, but nothing has been done. It’s time for the Bar to confront the small number of rogue barristers whose false tax opinions are enabling fraud. And if the Bar won’t act, Parliament should.

Glossary

KC (King’s Counsel)

A senior barrister appointed as King’s Counsel. In tax avoidance schemes, promoters often use a KC’s written “opinion” as a badge of credibility and (they claim) protection against criminal scrutiny.

What is KC?

Tax opinion

Written legal advice from a KC (a “KC opinion”) or a junior barrister). Provides assurance that a scheme is lawful, even where the underlying facts and law make that implausible.

Our view of KC opinions

Promoter

A person or business that designs, markets and runs a tax avoidance scheme (often through a corporate vehicle), typically taking a fee from the “tax saving”.

Latest rules on tackling promoters

PAYE

Pay As You Earn: the system under which employers deduct income tax and National Insurance from wages and pay it over to HMRC.

HMRC: PAYE for employers

Umbrella company

A company that employs agency workers and operates payroll for them (PAYE), typically sitting between the worker and the end client. Some umbrellas are used to run avoidance/fraud schemes.

HMRC: mini-umbrella company fraud

Disguised remuneration

Arrangements designed to pay what is, in substance, earnings via something else (often loans), to avoid income tax and National Insurance. Specific anti-avoidance rules target these structures.

ITA 2003 Part 7A overview

DOTAS

Disclosure of Tax Avoidance Schemes: rules requiring certain marketed avoidance schemes to be disclosed to HMRC early, so HMRC can respond quickly (including by issuing scheme reference numbers).

Lee Ellis and Cristiana Bulbuc article

GAAR

The General Anti-Abuse Rule: a rule that can counteract tax advantages from arrangements that cannot reasonably be regarded as a reasonable course of action (the “double reasonableness” test).

Helen McGhee article

Purposive construction

The modern approach to interpreting tax legislation by looking at the purpose of the statute, not just literal wording. This makes technical avoidance arguments less likely to succeed.

Article by Dominic Stuttaford

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The Purity scheme

A High Court judgment was published just before Christmas which encapsulates the problem. It concerns an “umbrella company” called Purity Limited.

Umbrella companies

Before the 2000s, people wanting to undertake agency work signed up to a recruitment agency. These days, for reasons that are not entirely clear¹, many recruitment agencies have no workers on their books. Instead, the workers are hired by an “umbrella company”, each of which has hundreds or thousands of employees. The end user will be a legitimate business (say Tesco). When Tesco wants to hire temporary workers, it approaches a recruitment company. The recruitment company then asks an array of umbrella companies to bid to provide workers, and usually picks the umbrella company that provided the lowest bid. The umbrella then sorts out admin, and applies PAYE income tax/national insurance.

Here’s how that umbrella company should work:

There’s nothing improper about this structure; but the incentives the whole setup creates are inherently dangerous. The reason: the bidding process. There should in theory be little difference between the bids the various umbrella companies put in to the recruitment company: each umbrella company is paying market wages (often minimum wage), operating PAYE, and has administrative costs and wishes to make a profit. There is not much room for one company to underbid another – there’s only so far administration and costs can be squeezed.

But there is another way: don’t pay the tax. In some cases it’s just simple fraud: the umbrella companies invoice the recruitment company for the wages plus tax, pay the wages to the employees, and never pay the PAYE tax to HMRC:

They win the bid, and run off with the money. But it’s a high risk endeavour – if caught, prosecution and jail are likely outcomes.

So a much smarter way to commit fraud is to dress it up as tax avoidance. Claim to have a structure that means that the employees’ remuneration isn’t taxed, and so you can lawfully not pay the PAYE tax to HMRC. The same result as the simple fraud, but with the distinct advantage that, when you’re caught, you can say it’s only a civil tax dispute.

The end user (e.g. Tesco) will have no idea this is going on, and increasing businesses are taking steps to try to police their supply chain – but it’s not straightforward.

The scheme

The Purity scheme worked like this:

• Purity had about 700 workers on its books.²
• These were highly paid workers – about £50/hour (so around £100k/year).
• 10% of the workers were paid normally.
• The rest were paid the minimum wage as a salary; the rest of their remuneration was provided as a “loan” from Purity.³ The claim was that the loan wasn’t taxable; therefore significant tax and national insurance was saved – about £30k per worker per year. Around half of that “tax saving” was retained by Purity as a fee; some of it went to the workers (it’s unclear how much); it’s likely some of it was passed to the recruitment agency that hired Purity, i.e. with Purity charging a lower rate for the worker that it otherwise would.
• Purity paid part of its earnings into a Dubai-based pooled investment scheme – the idea was that investment returns would take this to a point where employees’ loans could be repaid (although application of scheme funds for this purpose was discretionary).

In other words:

The consequences

None of the remuneration tax specialists we spoke to thought it had any prospect of success, for these key reasons:

• The employees could choose whether or not to take their remuneration in the form of a “loan”. If an employee is entitled to the full amount as earnings, and merely elects to receive part of it in another form, the amount remains earnings from employment. So this was straightforwardly remuneration. ⁴ No further analysis is required.
• The structure doesn’t make any sense. No rational employee would agree that, instead of being paid by their employer, they take a loan, regardless of what extra-contractual assurances are made about the unlikelihood of the loan being called (and a “discretionary” fund that might or might not help repay the loan would not be very reassuring).⁵ Hence the “loans” can’t, realistically, have been loans at all. Either the arrangement was a sham or the “loans” were, in substance, remuneration.
• The investment scheme introduces an additional tax problem: the “disguised remuneration” rules likely apply both at the point money is placed into the fund, and the point it’s applied for the benefit of the employees. In reality, HMRC had no need to apply the disguised remuneration rules, because the remuneration was taxable on general principles (and there’s a rule that generally prevents a double charge). But in the (highly implausible) scenario where the scheme worked and the investment fund was correctly funded/structured, there would be both up-front tax (on the initial contribution to the investment fund) and tax when funds were distributed to employees.
• Since 2013, the UK has had a “general anti-abuse rule” – the GAAR. The GAAR applies only where a scheme can’t reasonably be regarded as a reasonable course of action to take – the “double reasonableness test“. The GAAR has in practice never been applied by a court or tribunal, because almost every tax avoidance scheme of the last 20 years has failed in the courts on the basis of specific tax rules or general principles.⁶ However, in the very unlikely event that the Purity scheme survived the problems above, we expect that it would be countered by the GAAR.⁷⁸
• The scheme was required to be disclosed to HMRC under “DOTAS” – rules requiring that avoidance schemes are disclosed at an early stage to HMRC, so that they can counter them. Purity simply ignored DOTAS. We can see no proper basis for this.

One respected senior tax KC (not involved in these schemes) described the Purity structure as “incompetent and impossible”. A senior tax lawyer specialising in remuneration tax told us it was “unbelievably bad”.

We are therefore not in the traditional tax avoidance scheme territory of an attempt to find a loophole. The structure simply fails. What’s more, it involves deception – the “loans” that were not really loans. This raises the question as to whether what’s going on was really tax fraud (“cheating the revenue“).

Other elements of the structure suggest criminal offences may have been committed.

• Employees were misled or misinformed about the nature of the arrangements (presumably because they would have been alarmed if they’d realised that, whatever assurances they were being given, they’d be in serious financial/legal jeopardy when the loans fell to be repaid). It is a criminal offence to intentionally and dishonestly make a false representation with the intention of making a gain.
• The sole shareholder of Purity claimed she didn’t know she was a shareholder. If that’s true, then somebody may have filed a false document with Companies House, a criminal offence. If not true, the shareholder may have committed perjury.
• Under FSMA and The Regulated Activities Order 2001, it is prohibited for an unregulated person (in the course of their business) to make loans to individuals, other than for the purposes of those individuals’ businesses. These were not business loans (they were remuneration for work; a different thing).⁹ The likely consequence is that the “loans” were unenforceable¹⁰ and that Purity and the individuals running it committed a criminal offence.
• The investment scheme could never have repaid the loans. Purity made £45m of loans in one year but had contributed only £470k to the investment scheme. There was no realistic prospect that investment returns would enable the scheme to eventually repay the loans. The employees were misled.
• The Dubai arrangement was likely contrary to FSMA, as we expect it was an unauthorised collective investment scheme.¹¹ Purity was establishing/operating a collective investment scheme, a regulated activity under the Regulated Activities Order 2001. Purity had no FCA authorisation, and so breached the general prohibition in s19 FSMA, exposing those responsible to criminal liability under s23 FSMA. Promoting the scheme to UK workers was also unlawful.

All of this suggests to us that the Purity structure was dishonest in its design and implementation.

But, according to the Purity High Court judgment, Purity was advised by a KC:

We understand that the people behind Purity received a KC opinion confirming that the scheme worked – despite everything suggesting that it wouldn’t. In our view, that opinion was false.

The KC opinion

We don’t believe any reasonable tax adviser would think this scheme works. Indeed any reasonable tax adviser would know that any remuneration scheme of this nature would fail. As tax barrister Patrick Cannon says, it was clear to advisers from (at the latest) 2010 that anyone engaging in a disguised remuneration scheme would be acting contrary to the intention of Parliament (and that rarely ends well). HMRC said back in 2017 that HMRC would challenge users of these schemes, investigate their affairs and apply the GAAR.

So how could a KC provide an opinion backing the structure?

We haven’t seen the Purity opinion, but the opinions we have seen have all followed this approach:

• Make unrealistic assumptions that eliminate the rules/principles that would otherwise undo the scheme. For example, the KC could assume that the loans have real substance and the parties expect them to be repaid (via the investment fund). Any experienced lawyer should know this cannot be the case: no rational employee would replace normal remuneration with a loan they’re required to repay, with vague assurances about future discretionary payments from an investment fund they know nothing about. A moment’s thought reveals that properly funding the investment scheme would require more cash than Purity had.¹²
• Ignore tax principles which would defeat the scheme. Over time, and particularly since the early 2000s, the courts adopted a purposive approach to the interpretation of tax statutes. As a result, almost no¹³ tax avoidance schemes have prevailed in court in the last 20 years. The avoidance scheme opinions we’ve reviewed deal with this by simply not mentioning the courts’ modern approach to construing tax statutes.
• Take extremely technical and narrow approaches to interpreting the relevant tax rules – a task made much easier by ignoring the way in which courts actually approach statutory construction.
• Ignore other tax rules that might apply: for example the GAAR or DOTAS.
• Ignore the potential fraud of third parties involved in the scheme. The KC would surely know that an employee who fully understood the loan would not enter into the arrangement. The KC should have realised the investment scheme would not be properly funded. The obvious conclusion: the scheme users were being misled.

You can see an example of such an opinion in our investigation of a different umbrella scheme backed by an opinion from Giles Goodfellow KC.¹⁴ That scheme was, in a different way, just as outrageous as the scheme here, with unrealistic assumptions, no analysis of caselaw or inconvenient rules, and it also involved putting unrepresented individuals in legal and tax jeopardy.

These opinions are “false” in the sense that, if the scheme comes before a court, it will almost certainly fail. The KC surely knows this, given the history of tax avoidance schemes in the last 20 years.

Most lawyers go out of their way to not issue incorrect opinions. Quite aside from ethics and professional pride, there are obvious adverse consequences: an angry client, and potentially a negligence claim. However a scheme promoter is very unlikely to be angry when their scheme fails – they expected it. The opinion was for a very specific purpose: to provide cover against the possibility of criminal prosecution.

So do these KCs issue false opinions?

This is a psychological rather than legal question, but in our view it’s a mixture of bad incentives (fees for issuing the opinion; no downside when the opinion turns out to be wrong)¹⁵ and arrogance (“my view of the law is correct; the courts just keep getting it wrong”).

Chartered accountants, chartered tax advisers and solicitors are prohibited from facilitating abusive tax avoidance schemes, because their regulators require them to adhere to the Professional Conduct in Relation To Taxation (PCRT). Barristers are not. This is an anomaly it is hard to justify. However, it means that the small number of barristers¹⁶ issuing these false opinions believe they are untouchable.

How do the promoters respond?

There are very few cases of umbrella companies, or indeed anyone, defending their scheme before a tribunal. The users of the scheme generally rely on the promoter to liaise with HMRC, and their aim is to delay and frustrate HMRC, not to provide substantive responses. What tends to happen is that HMRC issue a “stop notice” and/or a DOTAS notice, and the companies respond with delaying tactics and frivolous arguments.¹⁷

The umbrella companies mysteriously have enough money to run these delaying arguments (sometimes including expensive judicial reviews) but, once those arguments fail, usually run out of money, and become insolvent, never defending the scheme itself. In fact we’re unaware of a single case where one of these remuneration schemes has been defended before a tax tribunal.

The point of the delaying tactics is to keep the money rolling in for as long as possible. Purity avoided tax on over £45m of remuneration, retaining a fee of £9m which it paid to its shareholders – but by the time it was put into liquidation, it had almost no cash – owing HMRC £26m:

In Purity, things were a little different. HMRC used a new power under section 85 of Finance Act 2022, which enables HMRC to present a winding up petition against the promoter of a tax avoidance scheme where a scheme doesn’t work and HMRC believe that it’s in the public interest for the promoter to be wound up. Purity is the first time that power has been used.

Purity played the usual game of delaying tactics. It commenced an appeal against HMRC’s assessment but then dropped it. It commenced a judicial review in 2024 to try to halt, or at least pause, HMRC’s section 85 proceeding. Judicial reviews are expensive undertakings; Purity seems to have had no problem funding multiple applications and appearances. However after the judicial review failed, Purity was left to go insolvent, and it ended up not defending the section 85 application. Another company running the same scheme, Alpha Republic, played the same game.

How much money is lost to these schemes?

The Purity scheme and the related Alpha Republic scheme both cost £26m in lost tax. There are many such schemes. HMRC publish a list of named tax avoidance schemes and promoters, almost all of which are remuneration schemes like Purity:

This list currently has 165 entries (dating from 2022¹⁸); around 50 are being added every year. If every scheme is responsible for a similar tax loss to Purity, that implies (very approximately) about £1bn every year – and these are just the schemes identified by HMRC.

The figure may be higher. We’ve spoken to informed sources within the “remuneration scheme” world who estimate several billion of tax is lost every year.

We’ve spoken to people at HMRC who believe these schemes could be one of the reasons for this:

Note how the large business and medium business tax gaps have fallen significantly over the last twenty years. The small business tax gap has risen, with a dramatic change from 2017/18 – representing billions of pounds of lost tax revenue. One plausible explanation for at least some of that increase is remuneration schemes (which are essentially being misclassified as small businesses). More on this here, with links to the underlying HMRC tax gap data.

Ending whack-a-mole

Currently HMRC is playing “whack-a-mole“. A promoter starts a scheme. Usually within a year, HMRC discovers the scheme and starts to issue a DOTAS number and/or a stop notice. The promoter employs the usual delaying tactics and, when these eventually fail, they wind up the company and move onto the next one. The individuals controlling these schemes are unknown to the public and often unknown to HMRC – they increasingly use stooges as directors to hide their identity.

None of this should be permitted. Aside from the lost tax, it’s harmful to the workers who get caught up in the scheme, and it wastes considerable HMRC and court/tribunal resources.

The Government published a series of proposals in the Autumn Budget aimed at promoters, with the intention of ending “whack-a-mole”. Most significantly, HMRC will be able to issue a “universal stop notice”, making promotion of particular schemes a criminal offence (currently stop notices have to be issued on a per-promoter basis). There will also be a general criminal offence of promoting tax avoidance schemes that have no realistic prospect of success.

However we fear that promoters will attempt to escape these rules by obtaining opinions from compliant KCs.¹⁹

The game will only truly end when barristers face professional and/or legal consequences for issuing knowingly or recklessly false opinions:

• The Bar Standards Board could make clear that it is a disciplinary matter for a barrister to provide an opinion which facilitates a tax scheme that has no realistic prospect of success. Specifically, where the barrister recklessly or knowingly makes key factual assumptions that he should have realised are probably untrue, or recklessly or knowingly adopts arguments that have no realistic foundation, it breaches a barrister’s core duty to act with honesty and integrity.
• In cases like Purity, HMRC could use its information powers to obtain copies of the KC advice, applying the iniquity exception from legal privilege.²⁰ If the advice is improper, HMRC could pass it to the Bar Standards Board.²¹
• In suitably serious cases, HMRC could prefer the barrister for prosecution for tax evasion. Barristers have been prosecuted for tax evasion before – but, as far as we’re aware, that was always for their own taxes. We’re not aware of any case of a barrister being prosecuted for facilitating tax evasion by a client. The standard view is that an insuperable difficulty is that the KC’s advice is privileged. In cases like Purity, we believe prosecution should be considered. The scheme is either fraud or close to fraud – so there are grounds to believe that the iniquity exception from privilege applies.²²

Jolyon Maugham wrote about this problem fourteen years ago. He’s not alone – many barristers, and many tax barristers²³, are appalled by what their colleagues are up to. But nothing has changed. If the Bar Standards Board can’t or won’t act, Parliament should.

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Thanks to the remuneration tax experts who provided their insights on the schemes, legislation and caselaw, particularly T, B and V. Many thanks to M for alerting us to the case, to K and B for advice on the FSMA aspects, and to P for their privilege expertise. Thanks most of all to our sources in the recruitment world.