XTX Battles Double Taxation in £22.5M Supreme Court Dispute

XTX Battles Double Taxation in UK Supreme Court over complex profit-sharing scheme and deferred compensation structure. Alex Gerko, the billionaire founder of high-frequency trading firm XTX Markets, is contesting a £22.5 million tax bill in the UK’s Supreme Court this week, challenging the way British tax authorities treat complex profit-sharing schemes in the financial sector.

XTX Battles Double Taxation Over Traders’ Compensation Structure

The two-day hearing includes Gerko and 12 other ex-employees of hedge fund GSA Capital, who are disputing the tax treatment of their deferred compensation. At the core is a profit-sharing arrangement that allowed traders to receive up to 50% of profits from their trading activities, staggered over three years, while employed in GSA’s high-frequency foreign exchange division from 2010 to 2015.

The central issue questions whether authorities should tax these payouts under personal income tax rates or the initially applied lower corporate tax rates. HM Revenue and Customs successfully argued in earlier court rulings that the higher individual tax rates should apply, resulting in the multimillion-pound bill now under Supreme Court review.

“The judgment results in massive double taxation and has wider implications for the financial industry,” Gerko said after losing his case in the Court of Appeal last year. He stated the effective tax rate reached approximately 70%.

Dispute Over GSA Capital’s Complex Partnership Setup

The case centers on a sophisticated compensation mechanism at GSA Capital that involved a limited liability partnership named HFFX LLP. This structure included individual traders who designed automated trading algorithms, as well as corporate partners like GSA Member Limited.

Under this scheme, the corporate entity held part of the traders’ earnings, reinvested them into GSA’s funds, gradually liquidated the investments over three years, and paid the proceeds to the traders as “Special Capital.”

The intended tax structure had the corporate partner pay corporation tax on the retained earnings, allowing individual traders to receive their share without paying additional income tax. HMRC rejected this approach and asserted that the funds should have faced personal income tax from the start.

Five Supreme Court justices are reviewing the case, which could reshape how the UK taxes deferred compensation in financial services. The court is examining partnership taxation and whether corporate partners’ retained profits should count as personal income when later distributed to individuals.

Significant Financial Stakes for UK’s Top Taxpayer

The dispute involves major financial stakes for Gerko, one of Britain’s most prominent entrepreneurs. With an estimated net worth of £14.9 billion, Gerko has been the UK’s top taxpayer in recent years, reportedly paying £664 million in taxes in 2023 and £487 million in 2022.

“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 following the 2024 Court of Appeal decision.

After departing GSA Capital in 2015, Gerko launched XTX Markets, which has grown into one of the globe’s largest trading firms. XTX processes $250 billion in daily transactions across asset classes such as equities, currencies, commodities, and bonds—rivaling industry leaders like Citadel Securities.

Last year, XTX’s profits soared by 53% to a record £1.3 billion, making it one of the UK’s most lucrative private companies. The firm employs machine learning algorithms in place of human traders to execute deals in 35 countries.

Gerko’s legal battle is part of a broader trend of financial firms losing tax disputes over deferred compensation strategies. In December, BlueCrest Capital partners were ordered to pay income tax on a 2008 pay plan after losing a similar case.

These rulings underscore an ongoing struggle between financial institutions and HMRC over incentive structures designed to delay compensation and encourage retention. Many of these plans include clawback clauses for regulatory penalties, such as one instance where a $100,000 fine was reclaimed from a trader’s bonus.

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