One of the UK’s largest taxpayers, billionaire quant trader Alex Gerko lost a legal dispute with British authorities over the tax treatment of a deferred payment plan. Appeal judges ruled that Gerko and other traders, while they were still running high-frequency trading strategies at GSA Capital Partners between 2010 and 2015, should pay income tax on their share of the trading profits from the fund. The total size of the tax bill is some £22.5 million ($29.1 million).
Gerko said he’d chosen to challenge HM Revenue & Customs because the case results in what he called “massive double taxation.” He said he was looking at ways to continue the litigation.
“The amounts involved are small compared to the billions of pounds in tax I have paid, and been happy to pay, over the years,” Gerko said in a statement. His net worth has almost doubled to $11.7 billion since the start of last year, according to the Bloomberg Billionaires Index.
The appeal considered the structuring of the plan, where “significant” profits were allocated to an internal investment unit before they were ultimately distributed to the traders, coders and developers over a three year period. The fund paid corporation tax when the amounts were first allocated, but HMRC successfully argued that the payouts to traders should additionally be treated as the higher rated income tax.
It’s the second time in recent months that appeal judges have sided with HMRC when considering deferred payouts for traders. Michael Platt’s BlueCrest Capital Partners lost a similar ruling over a partnership incentive plan, with the judges declaring that the “special capital” awarded to traders should actually be subject to income tax.
In this case, the payout plan was negotiated with GSA to ensure that the traders would ultimately be paid as much as a 50% share of the profits over a three year period. The deferred payouts were designed to ensure traders were retained as well as
to “punish ‘bad’ behavior,” Gerko said in a witness statement at a previous hearing. The plan allowed GSA to claw back funds if regulatory fines were imposed, according to a lower tribunal ruling, which said a fine of $100,000 had been returned from a trader’s bonus by GSA.
Gerko told the tribunal that he hadn’t structured the plan for tax purposes. He said he’d have preferred not to defer the payout at all, saying that “he did not consider it very attractive to work 60-70 hour weeks and have the entirety of the bonus effectively deferred.”
“I chose litigation rather than settling many years ago for a much smaller amount because I believe HMRC case was built on an interpretation of complex and ambiguous tax law that led to a highly unreasonable result,” Gerko said in the statement. “I fundamentally disagree with the judgment which results in massive double taxation and has wider implications for the financial industry.”
Gerko went on to found a new quantitative trading fund named XTX Markets in early 2015. He began his career trading equities at Deutsche Bank AG before later shifting to foreign exchange.
He’s since become one of the UK’s biggest taxpayers and developed a reputation as a prominent philanthropist, providing a multi million-pound donation for an initiative to improve mathematics instruction at English schools while also providing funds to London Symphony Orchestra and a UK nature reserve.
