£6m tax threat to Phones4U founder

He drives a Bentley Azure, flies himself to business meetings in a private plane and has a 64-foot Sunseeker yacht moored in the Mediterranean. These are the trappings. And the colourful Phones4U tycoon John Caudwell has the fortune to match - an estimated £1 billion.

But the man who famously banned staff from sending e-mails at work could be about to have a nasty hole punched in his wealth. He has lost the latest round in a battle with the Inland Revenue and it could cost him more than £6 million in back tax and interest.

And while Caudwell may be the one spearheading the fight to retain a widely used - and perfectly legal - tax avoidance scheme, there are plenty of Premiership footballers, private businesses and City dealers whose luxury lifestyles are under threat.

Indeed, if the latest Appeal Court ruling against the scheme is upheld, it is estimated that hundreds of millions of pounds of tax will have to be paid.

Caudwell, a 51-year-old former car salesman who built his immense fortune in only 20 years, is renowned for his generous charity fund-raising and bonus schemes for his 2,500 staff. But he is distinctly less enthusiastic about paying tax.

For six years in the Nineties, he and his brother Brian - co-owner of Caudwell Holdings which, as Europe's largest mobile phone distributor, notches up sales of about £2 billion a year - paid themselves mostly in gold bars and fine wine. The aim was to avoid National Insurance contributions.

But when Chancellor Gordon Brown decided in 1997 to kill off these tax loopholes, Caudwell and his younger brother became big users of offshore employee benefit trusts (EBTs), an elaborate if entirely legitimate way for companies and employees to avoid handing over more than the bare minimum to the Inland Revenue.

Though the use of such trusts was banned by Brown in last year's Finance Act, many schemes, including Caudwell's, continued to exploit the tax loophole because an Inland Revenue challenge was rejected by the High Court.

EBTs have been a win-win wheeze for employees and the companies they work for - Arsenal football club was one. Essentially, companies pay money into the trusts which then 'lend' money to the employee.

And as long as the loan carries interest, no tax is paid by the company or the employee. There are some exotic variations on the theme used by City banks that, in the heyday of mega bonuses, wanted to help their star dealers and analysts keep their tax bills to a minimum.

Some schemes invested in property, paying employees 'dividends' which were then taxed at 25% rather than the 40% income tax rate. Others bought Lamborghinis and Ferraris that were made available to staff.

Though tax would be paid on the benefit, it was substantially lower than if the Revenue had caught sight of their pay packets.

'These schemes were very, very clever,' said one individual with knowledge of the arrangements. 'Companies can get a tax break because they are buying things and they don't pay National Insurance on the bonuses either, which can be substantial. And the employee pays a much lower rate of tax, if at all.'

Caudwell's companies paid more than £23 million into a Jersey trust from 1998 onwards. Had that been paid straight to him and his brother, they would have been taxed at 40%.

Between 1998 and 2001, John Caudwell was allocated £11.3 million by the trust from which he received tax-free loans of £2.3 million. His brother was allocated £4 million and borrowed £1.7 million.

Caudwell Holdings received an immediate 30% tax relief on the £15 million paid. Had the Caudwells received that as bonuses, they would have had to pay income tax of £6 million.

The company's accounts disclose that another £5.6 million was paid into the trust in 2002. That year the trust awarded benefits of £4.3 million to one director --thought to be John Caudwell - compared with £4 million the year before.

But last month, the Appeal Court ruled against the payments. The company has until the end of the month to appeal, but has not said if it will take action. 'Since we are considering an appeal in the

House of Lords, it would be inappropriate to make any comment at this stage,' a Caudwell spokesman declared.

And while Caudwell weighs up his options, others with potentially enormous tax bills are sitting on their hands. A few companies have settled with the Inland Revenue, but the majority are waiting and watching.

This is a risky strategy because, if the Appeal Court ruling is upheld, their potential interest bill on the unpaid tax will rise by the day. And that could run into millions.

When the Treasury started looking at closing the loophole, it was estimated that about £1 billion in tax had been lost to the Government's coffers.

In contrast to the huge sums at stake, the Appeal Court decision turned on the meaning of only four words - 'with a view to' - in the 1989 Finance Act.

Three judges held that this meant that payments to an EBT were 'potential emoluments' - profits arising from employment - and corporation tax relief could not be given until an employee actually received a taxable benefit.

With only days to decide whether to take his argument to the highest court in the land, John Caudwell is unlikely to be worrying that he will have to take out a mortgage on Broughton Hall, his Jacobean mansion near Stoke-on-Trent.

But even for someone of his vast wealth, the prospect of a tax bill that runs into seven figures might tempt him to reach for a glass or two of his fine wine 'salary'.