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Alex Gerko Loses Legal Appeal Against HMRC Over Deferred Payment Plan Taxation

Alex Gerko, billionaire founder of British trading firm XTX Markets, has lost a legal appeal against HM Revenue and Customs (HMRC) regarding the taxation of a deferred payment plan. Gerko, alongside other traders, challenged HMRC over payments related to their work at hedge fund GSA.


Alex Gerko Loses Legal Appeal Against HMRC Over Deferred Payment Plan Taxation

Represented by UK law firm Macfarlanes, Gerko contested HMRC's position on deferred trading profits. According to The Sunday Times, Gerko was the UK's largest taxpayer in 2023, paying a total of £664.5 million in tax.


The case was heard at the civil division of the Court of Appeal on July 9 and 10, with the judgment handed down on July 19. The appeal was from the tax and chancery chamber of the Upper Tribunal. Lady Justice Asplin, Lady Justice Whipple, and Lady Justice Falk presided over the case.


Macfarlanes instructed Kevin Prosser KC and David Yates KC of Pump Court Tax Chambers to represent the appellants. HMRC was represented by Thomas Chacko of Pump Court Tax Chambers and James Kirby of Ten Old Square.


The appeals concerned incentivization arrangements set up in October 2010 when GSA transferred its high-frequency foreign currency trading team to a limited liability partnership called HFFX. HFFX’s business was to second team members to GSA Capital Partners, GSA’s primary trading entity. This restructuring meant that GSA team members who joined HFFX were treated for tax purposes as self-employed partners rather than employees.


Company Formation

Under the arrangements with GSA, the overall payout from the profits earned for GSA was increased, but a proportion was deferred through a ‘capital allocation plan’ (CAP). The CAP allocated 50% of the payout that the team would otherwise have received to a corporate member of HFFX, GSA Member (GSAM). GSAM then invested those amounts in funds managed by GSA.


According to the judgment, on the first, second, and third anniversaries of the allocation, GSAM sold a third of the investments and contributed the net proceeds back to HFFX as “special capital.” GSAM then decided to reallocate the special capital to individual members, who were able to withdraw it.


The intended tax analysis was that GSAM would be taxed at corporation tax rates rather than the traders being taxed individually at higher income tax rates. The subsequent reallocation of special capital was not supposed to give rise to tax for the individual members. However, the judges ruled that the traders should pay income tax on their share of trading profits.


“The individual members’ rights under the partnership deed, combined with decisions taken in their favour to reallocate special capital, amounted to a source from which the receipt of the special capital pursuant to those decisions was derived. The receipt is accordingly taxable under s.687 [of the Income Tax (Trading and Other Income) Act 2005],” stated judge Falk. Judges Asplin and Whipple agreed.


“I fundamentally disagree with the judgment, which results in massive double taxation and has wider implications for the financial industry,” Gerko reportedly said in a statement. He also indicated he was considering options “to continue with the litigation route.”


Last week, the UK’s First-tier Tribunal denied a £665,000 R&D tax credit claim by technology company Tills Plus in a separate case brought against HMRC.

By fLEXI tEAM

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