If you’re lucky, the failure of that tax avoidance scheme that seemed like a good idea when the sharp-suited silver-tongued salesman sold it to you many years ago has no worse consequence than the payment of the tax you hoped to avoid, plus some interest on late payment (and, of course, the loss of the hefty fee you paid to the no-longer-to-be-found promoter of the scheme).
But not infrequently, it turns out that you are worse off – sometimes eye-wateringly worse off – than if you had paid the right amount of tax in the first place.
Occasionally – especially if there is doubt as to the strength of their case or if you are at an early stage in the choreography of a tax dispute – HMRC may agree to treat the scheme as a nonentity and to settle on the basis that it never happened. More often they won’t.
The last resort in such a case may be to put forward the argument that the transactions that you appeared to undertake (and on which you would of course have relied had the scheme worked) are illusory and were never effective. Or, if they did happen, that they can and should be set aside on the grounds of mistake.
As a matter of law, the propositions that a transaction is variously void or voidable or unlawful or procedurally flawed or mistaken all raise quite separate and distinct considerations. But regardless of the precise point of law, what is sought to be achieved is that the unexpected and unwelcome tax consequences don’t eventuate.
A couple of recent cases do not give much encouragement to such an approach.
Chalcot Training
Chalcot Training v HMRC [2021] EWCA Civ 795 concerned the use of an ‘E Shares scheme’. Under this scheme a company would pay a director a large amount of money on condition that the same amount would be subscribed for new shares – which were duly issued 1% paid, leaving 99% of the amount in the hands of the director.
Following a change in circumstances (and a marriage breakdown) the directors and the company sought to set the whole thing aside on the grounds that the shares had been issued at a discount: a claim that the Court of Appeal (upholding the High Court decision) rejected in May.
Dukeries Healthcare
More recently, the High Court had to consider in Dukeries Healthcare Ltd [2021] EWHC 2086 (Ch) a ‘Remuneration Trust’ which had turned out to have had very unfortunate tax consequences. Here, the company argued first that defective drafting of the trust had the result that the trustees had been wrong to accept the contributions in question (which they therefore were said to hold on resulting trusts for the company): and second that if they had not been wrong as a matter of trust law to accept them, the company was nonetheless entitled to have its money back on the basis that a mistake had been made. Readers of a certain age will think of Doyle Lonnegan in The Sting.
On the first point, the High Court held that the drafting of the trust was such that the trustees were entitled to accept the contributions in question.
As to mistake, the High Court’s decision will be particularly discouraging to anyone seeking to use mistake as a ground to set aside planning that proves with hindsight to have been unwise:
‘Furthermore, the schemes are properly characterised as being artificial tax avoidance. Even if there was no actual assumption of risk, it is reasonable in this case, based upon the factors I have summarised above, to conclude that Mr Levack and the companies must be taken to have accepted the risks of the schemes failing.
‘Looking at the claims in the round, and the overall merits, I do not consider that this is a conclusion that is unjust. Put another way, the claimants have not shown that it would be unconscionable for them to remain bound by the schemes.’
The cases suggest that having made one’s tax-avoidance bed, escaping from lying in it, for good or ill, may prove difficult.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
This article was republished in Tax Journal (Issue 1544) and is also available on the Tax Journal website.