The tax office challenged the scheme at a tribunal after specialist investigators unearthed evidence of serious wrongdoing.
The team discovered a series of complex transactions involving loan notes worth £6 million which were intended to exploit tax regulations.
Based on the evidence presented at the trial, it was determined that the transactions only involved signing pieces of paper and making entries into accounts.
As a result, it meant that money was moving around in a circle and, were the situation to have gone undetected, users would only have had to pay income tax on a voluntary basis.
Reflecting on the results of the tribunal, David Gauke, Exchequer Secretary to the Treasury, said: "The government is committed to tackling tax avoidance schemes like this one which are artificial and work against the rules set by Parliament.
"These schemes are an affront to the vast majority of businesses and people who pay what they owe. We will pursue the minority who do not play by the rules."
This view has been echoed by HMRC Director General for Business Tax Jim Harra, who said that the penalty imposed in this case should serve to deter people from entering into tax avoidance schemes.
"HMRC will challenge these schemes, however complex they appear to be. We have the skills and the expertise to effectively challenge tax avoidance and we will continue to do so," he commented.
Earlier this week, the tax office explained how it plans to step up its fight against tax fraud in the UK.
Mike Hainey, the Head of Analytics at HMRC, told computing.co.uk that its new analytics system should help to expose wrongdoers.
He said that popular social networking sites like Facebook and Twitter can be used to help combat tax fraud.
Posted by Jacob Williams