Gaines-Cooper case does NOT show futility of HMRC guidance

What it shows is the futility of trying to exploit HMRC general guidance for tax avoidance purposes.

Robert Gaines-Cooper has been challenging HMRC's demands that he pay UK taxes despite his attempts to become non-UK resident in 1976. And I have commented on his continued failure to overturn HMRC's decision in previous blog posts.

Accountancy Age have headlined their latest article on the story: "Gaines-Cooper ruling shows futility of guidance".

I disagree, hence my statement above. As Accountancy Age note towards the end of their article:

Gaines-Cooper left the UK partly to mitigate his tax liabilities; there is £30m at stake; and lest we forget this is a trial that has already lasted six years and looks set to run further. In other words, this is not a run-of-the-mill case. Guidance, on the other hand, is meant for run-of-the-mill cases – the "ordinary sophisticated taxpayer",

And that taxpayers are not not able to rely much on guidance when an action is undertaken in contentious areas because:

it is not in HMRC's interests to provide clear guidance for these cases. Taxpayers and advisors in these situations will have to argue on case law and legislation – a lesson Gaines Cooper has learnt the hard way.

Even this isn't news. It has long been recognised that HMRC guidance, statements of practice and concessions do not have the force of law. They help resolve issues and to provide comfort for most people affected, most of the time. But when tax avoidance plans rely on such non-statutory notices then all bets are off. And no one should be surprised.

Previous relevant posts

• 2010 - Gaines-Cooper judicial review residence case won by HMRC
• 2009 - Tax Tease of the week - resident or non-resident?
• 2008 - Gaines-Cooper loses in Court of Appeal - Residence rules revisited

What sort of tax authority do you want?

I have long enjoyed reading the writings of Robert Maas, that doyen of the tax world whom I am also proud to call a friend. It was he who first got me involved in the LSCA and ICAEW Tax committees and who persuaded me to remain active in the tax profession when I considered moving on in 2001.

In addition to his prodigious published output Robert has also been blogging online about tax matters for even longer than me. He has just published the fourth of what may be a sadly lengthy series of pieces under the title: "What sort of tax authority do you want?"

It feels pretentious to say this but I hope that by referencing the series here it will get an even wider audience - as it deserves.

In the 'Journals of Robert Maas' this series highlights a number of tax cases. Each of them shows HMRC in a poor light. Or as Robert puts it:

"it intrigues me that HMRC felt it worth the damage to their reputation to take the cases before the Tribunal."

In the fourth of his series Robert highlights the following 3 cases:

• Cameron v HMRC - where the taxpayer was effectively penalised for getting his tax return in early;
• Wessex Continental Travel Co Ltd v HMRC - A VAT officer gave misleading advice and HMRC did not comply with it's Charter obligations to "Help and support you to get things right”.
• Chamberlain v HMRC - HMRC argued to bankrupt a professional person who they knew the legislation had not intended to tax.

The first blog post in the series focused on the case of R (on the application of Valentines Homes & Construction Ltd) v HMRC. In his commentary on this case Robert's challenges included:

Is that the sort of tax authority you want? One that gleefully puts a pregnant woman under the stress of believing that they intend to collect tax in excess of that decreed by parliament and then at the latest possible date, just before the Court hearing, say that they don’t intend to do so after all. It is not the sort that I want.

Is that the sort of tax authority that you want? One that seeks to avoid payment of a reasonable claim by taking technical legal points rather than approaching the claim on its merits – and in order to do so seems happy to wash in public what seems to be very dirty linen indeed. As both a citizen and a taxpayer, it is not the sort of tax authority that I want.

You get the idea.

Pensions liberation scheme decimates modest pension pot

It's not just the super rich who get tempted into dubious tax avoidance schemes.

The first tier tribunal recently decided a case that involved, what was described as, a ‘pensions liberation scheme’. The taxpayer concerned had a very modest pension pot of just £55,000 in two approved pension schemes.

In 2001, after he was cold called by promoters of the tax avoidance ploy, his accrued pension benefits of around £55,000 were transferred into the Holme Limited Pension Plan (HLPP). This was administered by a company named Holme Limited, which had been set up by a third party.

The promise here was that the taxpayer could get his hands on 80% of his £55,000 accrued pension benefits. The financial cost of doing so was a 20% commission (about £11,000) to the promoter. The taxpayer was also obliged to obtain employment with Holme Limited.

Once his pension funds were transferred the intention was that HLPP would buy an annuity which he could use as security for an interest-free loan. HMRC argued that the annuity would never be paid to the employee and the loan would never be called in.

The taxpayer argued that the employment was genuine and that he had not participated in the pension arrangements. The Tribunal considered him to be an unreliable witness and the employment contract to be a sham.

The Tribunal found that, as there was no employment contract, there was an unauthorised transfer of funds out of the authorised pension schemes. This resulted in the taxpayer being liable for tax of over £18,000 on the funds concerned together with a 30% penalty for negligently filing an incorrect tax return.

According to my maths this means that overall, having started with accrued pension benefits of £55,000 , the taxpayer was left with only £20,000 and lost the potential of any future tax free growth in his pension fund.

The promoter meanwhile secured around £18,000 and had probably shared none of the worry leading upto the Tribunal hearing. And I'll bet he assured the poor taxpayer that the scheme was all above board, fully disclosed and had been very successful for many other clients. Don't they always?

"Raise the white flag" - Are tax schemes worth the effort any more?

I believe the sentiment of this week's Accountancy Age Comment piece deserves a wider audience. It was penned by Lynton Stock, of accountants Shelley Stock Hutter. They were Accountancy Age medium sized firm of the year in 2008.

Regular readers will know that I agree with his views. Do you?
Lynton starts by stating:

"I'm not a quitter. I have never run away from a fight of any sort. However when it comes to tax avoidance schemes, the anti-avoidance legislation is no so onerous (and the interpretation of that legislation by the courts seems so weighted against the taxpayer) that the days of artificial tax schemes succeeding seem to be over."

Lynton goes on to refer to the Disclosure of Tax Avoidance Schemes (DOTAS) legislation - which we now know is to be tightened even further. By way of example he recalls reading Counsel's opinion about a tax scheme where it seemed certain that the taxpayer was bound to win a case going through the Courts. In the event however, not for the first time in such circumstances, the Revenue won.

"Then there is the case of Drummond v HMRC. This related to a tax avoidance scheme in which an artificial capital loss was claimed. Again, some of the largest accountancy firms were promoting this scheme and the tax opinions that I read would have made you think it was game, set and match to the taxpayer before the first ball was struck. Again the taxpayer lost all the way to the Court of Appeal."

Next Lynton highlights the Government's willingness to introduce retrospective tax legislation to counter tax avoidance schemes.

He also reluctantly accepts that "tax schemes are here to stay" and references the new 50% income tax rate and clients' requirement for what, is inevitably, "more and more aggressive" tax planning. By way of example he quotes a typical conversation:

Client: "I want to save tax and I want you to come up with a tax scheme to help me"
Adviser: "In all honesty, from my experience, the tax schemes I have seen don't work. They are expensive, there are no guarantees as to success and you will have no certainty for many years in view of HMRC's stated policy that they are willing to litigate."
Client: "If you can't help me - I'll go to somewhere else to someone who can."

Lynton concludes by suggesting that:

"The real problem, however, is that when the dust actually settles and the tax scheme undoubtedly fails, it really doesn't help to say to your irate client: 'I told you so'."

When I was in practice I was conscious of three further related problems:

1. The accountant wants to charge fees for his related time commitment. This starts with discussing the idea with the client and includes trying to ensure that the client's eyes are fully open. Clients do not however take kindly to being charged fees for their accountant discouraging them from trying to save tax! I developed such a talent for this that it contributed to my decision to stop giving tax advice myself!
   
2. Assuming the client goes ahead anyway the accountant has further time costs related to his involvement - however peripherally - in reporting the transactions on the client's tax return and for liaising with the promoters. However the client is only inclined to pay the latter for their advice and intellectual property re the scheme. And a hefty fee that is too (a substantial proportion of the tax saved/avoided). The client is not inclined to pay his adviser for anything related to this especially as he was not supportive of the client's involvement.
3. The relationship with the client will invariably worsen as the promoter's approach differs from that of the accountant. This will start by reference to their alleged naivety and inability to understand why the scheme is the best thing since sliced bread. It will continue if there is any disagreement as to how the scheme transactions and additional information are disclosed on the client's tax return. And eventually it will spill over into frustration when preparing the client for a Tribunal hearing and any subsequent court case.

What are your experiences and views on this type of situation?

Previous relevant posts:

• Give me pure tax evasion any day
• Discovery assessments issued re film schemes in 2003-04
  
• HMRC challenge sideways loss relief tax avoidance
• HMRC confuse tax avoidance and tax evasion again
• Beware of HMRC spotlights - EBTs now included
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules

Why did the BBC's Sian Williams' appeal get to the Tax Tribunal?

Sian Williams, one of the hosts of BBC Breakfast has been in the news this week after it became apparent that she had a claim for tax relief in respect of clothes and hairstyling rejected by the Tax Tribunal.

Sian claimed that the items should be tax deductible because it was part of her job to look good on screen. Many of the media reports focused on one of the arguments used in case, that she would be prepared to read the news without clothes and only wears clothes because her employer requires it. As the Daily Express reluctantly notes however, "Mother-of-four Miss Williams has ...assured viewers that there is no danger of her actually presenting naked”.

Such claims for tax deductible clothing have long been a cause for dispute. One of the most famous cases involved a blonde Barrister (now Labour Peer), Ann Mallalieu and reached the House of Lords almost 30 years ago. She claimed tax relief for the black clothes that she was obliged to wear in court as she claimed she would never buy or wear such clothes for any other purpose. She lost the case because, the court ruled, the clothes were not purchased exclusively because she had to wear them in court, but also for the subconscious reasons of warmth and modesty.

We should bear in mind that Ann Mallalieu was self-employed and that Sian Williams was, in contrast, seeking to offset the cost of buying and laundering professional clothing etc against her employment income from the BBC. Thus her claim had to satisfy the notoriously restrictive test that the costs were involved “wholly, exclusively and necessarily" in the performance of the duties of her employment. As such her claim was almost bound to fail. As was the alternate claim being pursued that the clothes be treated as 'plant and machinery' qualifying for capital allowances.

Unsurprisingly the Tribunal first dismissed the claim for tax relief in respect of hairstyling. They noted that Sian did not have her hair done and coloured immediately before performing her duties as newsreader, and then changed back again immediately after finishing reading the news.

The failure of Sian's main claim was also quite predictable and one wonders who persuaded her that it was worth pursuing and on what grounds? Her situation was no different to many other employees (whether engaged to appear on TV or otherwise). There were not even any clear contractual obligations on Sian to acquire and wear a succession of appropriate outfits when she appeared on screen.

What do you think?

Official: You can't rely on HMRC guidance

To be fair we have known this for some time. The Courts and the the Tribunal (and previously the Commissioners) will always focus on the wording of the law. HMRC's statements of practice, concessions and guidance notes are as they are described 'on the tin'. They are intended to be helpful but they are not the law.

The judgment in a recent Tribunal case reinforced this position. The facts of the case are not relevant to this blog post - other than to note that the taxpayers, Parnalls Solicitors, had sought, to rely on HMRC guidance notes when arguing their case.

In a concluding statement the Tribunal judge, Roger Berner stated:

"Mr Harvey referred us to a number of extracts from HMRC publications and other materials in support of an argument that HMRC were guilty of inconsistency in arguing the case against the Appellant. We do not consider that these were material to our decision, which depends on the law as we have found it and not on any interpretation which might be attributed to HMRC. We do not therefore refer to such materials in our decision, and we make no comment on their validity or otherwise."

HMRC's guidance can be helpful. It may be right, but it may be wrong. And it is of no relevance when it comes to arguing a point of law. In practice any appeal starts with negotiations directly with HMRC. At this stage, if their guidance is helpful by all means refer to it. But such arguments cease to be relevant once your appeal gets to the Tribunal.

Gaines-Cooper judical review residence case won by HMRC

Many readers of this blog may be confused by today's media stories about a tax case involving Robert Gaines-Cooper. The Times report is typical: Entrepreneur faces £30m tax demand after residency ruling leaves thousands exposed.

If you didn't know any better you might assume that the Court of Appeal had just decided against Mr Gaines-Cooper. It's certainly true that the Court of Appeal found him to have retained his residence in Britain during what he claimed to be a period of non-residence - dating back to 1976.

Here's the thing though. I wrote about the Court of Appeal's decision in this case back in October 2008! - Gaines-Cooper loses in Court of Appeal - Residence rules revisited

So how is it that his appeal seems to have been heard again by the Court of Appeal?

What the papers have omitted to note is that the most recent case was a Judicial Review. In effect a challenge to the way in which the decision had been made, rather than the rights and wrongs of the conclusion reached. Here the main focus was whether HMRC had failed to correctly apply the tests in the IR20 leaflet. The Court found in favour of HMRC. Quelle suprise!

Whatever the merits of Mr Gaines-Cooper's arguments there are few tax advisers who seriously expected the Judicial Review to succeed. Beyond this case the newer residence rules have been enshrined in what is now HMRC6: Residence, Domicile and the Remittance Basis.

The only good news is that there are moves to establish a statutory residence test that would largely remove the worries about how much discretion HMRC have in future to determine the facts long after the event.

IR35 avoidance scheme - Dispute between the promoters

Full details of an old IR35 tax avoidance scheme are explained in the judgment from September 2009 of Montpelier v Jones and Morris.

The case centered on a dispute between various parties who had arguably either conceived, funded or promoted the scheme. The judgment includes:

• a summary of the background to the scheme which followed the introduction of 'IR35' in 1999;
• an explanation as to the development and promotion of the scheme from 2000-2003;
• names of all the companies involved including Montpelier Tax Planning (Isle of Man) Limited, Westwood, OMPS Limited, Contractor Solutions Limited ("CSL"), Executive Solutions Limited ("ESL"), MTM Consultants Limited, MTM (Isle of Man) Limited ('MTM') and www.suomotu.com.
  
• reference to Counsel's opinions (including those of David Milne QC, Philip Baker, Adrian Shipwright and Robert Argles) and extracts from some settled notes of conferences with Counsel;
• reference to E&Y London instructing E&Y IoM to withdraw from participation in the scheme, which was allegedly described as a "political hot potato";
• reference to alternative structures involving the use of Employee Benefit Trusts (EBTs);
• Montpelier's claims of breach of confidence, breach of copyright, passing off and procuring breaches of contract;
• The counterclaim by Mr Jones and Mr Morris that Montpelier repudiated contractual arrangements.

Although this was not a tax case the level of detail contained in the judgment will be of interest to anyone who advises on tax avoidance schemes. And also to those who shy away from them.

As I've indicated in previous posts here, the existence of Counsel's opinion does not guarantee that a scheme will succeed. The ultimate decision in this regard will rarely be known with certainty until after it has been tested in the courts. And that often means a long wait.

Tax Tangle - "a vague and very likely muddled arrangement"

This tax tangle was apparent from the decision of a recent VAT tribunal case. Balkwill v Revenue & Customs [2009] UKFTT 314 (TC) (19 November 2009)

The case concerned a plumber who claimed that he sold his business and retired in 2001. He deregistered from VAT but continued to declare profits from the business on his personal tax returns. HMRC noted that the turnover being disclosed was just above the VAT registration threshold and claimed that he should have remained registered until 2004.

The evidence pointed to a most unusual arrangement between the ‘retired’ plumber and the Mr Smith to whom the business was sold in 2001. According to the Tribunal Judge "it very much sounded as if no accountant or solicitor had been involved in clarifying the form of what at best may have been a vague and very likely muddled arrangement".

At the time of the Tribunal hearing in July 2009, the plumber was over 80 years of age, in poor health and recently out of hospital. The taxpayer contended that he was living off the state pension and was unable in any case to pay a VAT assessment for over £19,000 plus interest.

The Tribunal judge accepted that HMRC had acted in proper manner and had evidence that VAT was properly due. However, it was not evident that the taxpayer made false claims but rather significantly misunderstood his filing requirements.

"we suspect that whatever the arrangement was it will have been vague and entirely capable of being misunderstood."

"this is not a case where we have fundamentally dis-believed all the Appellant's evidence. We frankly do not know what happened in this case, but we believe that there was probably some vague arrangement between the Appellant and Mr. Smith, and that the current confused state of affairs probably results from misunderstandings, rather than simply from a false claim by the Appellant who appreciates that he was trading at all times until 2004."

"we very much hope that HMRC will not proceed to try to collect any of the tax in dispute. "

As will be apparent from these quotes the taxpayer's appeal was dismissed but was accompanied by a strong plea from the Tribunal Judge that HMRC show considerable restraint in seeking payment of the assessment and penalties due and not proceed to collect any tax due.

Sadly I fear that the Tribunal Judge's plea will fall on deaf ears. We know that HMRC consider that they have no power to exercise such discretion. Recently they even planned to end their long standing practice to only pursue an 'equitable liability'. What chance they will agree not to pursue a liability that has been confirmed by the Tribunal.

The lesson for all is to avoid informal, muddled business arrangements. They invariably lead to trouble with the taxman.

Tax avoidance scheme of the week 27 Nov

I wasn't intending to make this a weekly feature but circumstances have intervened!

This week though we're back in the UK - well almost. The scheme in question was one intended to avoid Stamp Duty. The amount of Duty at stake? £54 million.

This was the amount of Stamp Duty that would otherwise have been payable in 2003 when HBOS undertook a transaction with AIG. HBOS set up of a holding company in the Cayman Islands and, surprise, surprise, HMRC argued that this set up was nothing more than a “ruse to avoid tax”.

In April, Britain's first-tier tax tribunal allowed the bank to keep the proceeds of its "highly artificial" transactions. HBOS is of course now owned by Lloyds Banking Group, which is 43% state-owned.

The judge presiding over the case last month did not accept HBOS argument that setting up the overseas company was for commercial purposes. Instead he said that all the evidence shown to him confirms that the project arose from a marketed tax avoidance scheme.

I don't know but I suspect that this evidence includes correspondence and emails that refer to the tax advantages of using a Cayman Islands holding company.

Of course the promoters and probably the tax advisers and maybe even the auditors would all have been complicit in attempting to focus attention on supposedly business rather than tax reasons for basing a holding company in the Cayman Islands. It would be interesting to know how seriously anyone takes that assertion. And, even if it makes sense in the banking world it's hard to imagine any arguments that would sustain such a position in the the normal commercial world.

Some will say that this doesn't matter as tax motives are not (yet) enough to deny a taxpayer from the hoped for benefit of a tax avoidance scheme. We don't have purposive tax rules here. The Duke of Westminster rules (this being the classic case which established that a taxpayer may organise his affairs in any legal way he wishes so as to minimise tax. And that tax avoidance is perfectly legal.

The corollary is the more recently well established principle that, in any case where a predetermined series of transactions contains steps which are only there for the purpose of avoiding tax, the tax is to be calculated on the effect of the composite transaction as a whole.

The key question has become therefore, how does HMRC and the Courts know whether any steps have been inserted only for the purpose of avoiding tax? Well, clearly they will want to see all related correspondence including emails, paperwork and agreements related to the transactions in question. Many a tax avoidance plan can be quickly and easily struck down by examining such paperwork.

And I've long believed that the day was coming when we would see greater publicity given to the impact that such paperwork has on the outcome of tax cases. No doubt some promoters of tax schemes are explaining away the absence of marketing materials as a necessity to avoid(!) their scheme being struck down due to it's overt tax avoidance motives. As long as the promoters are slick salesmen or otherwise convincing professionals such an approach may work.

Of course it means there will be even less cause for complaint or recourse in the event that the scheme is blocked or the hoped for tax savings are reversed.

My final comment on this case is to flag, once again, the time scale involved. The transactions in question took place over 6 years ago. I wonder for how long all the parties thought the scheme had been successful......?

How much should you disclose in the 'white space' on tax returns?

Most people are keen to minimise the prospect of HMRC opening an enquiry into their tax affairs. A recent case may make this more difficult in the future.

Where, as is often the way, the tax return or the underlying accounts include the use of any judgment a question arises if there is any possibility of the taxman taking a different view: To disclose or not to disclose?

If you disclose the uncertainty - which would include details of the transactions involved in an avoidance scheme, you may feel that you are increasing the risk of an enquiry. However this would only transpire if a suitably experienced tax officer actually reads and understands the implications of your 'white space' disclosure. Surprisingly this is quite rare so as long as your disclosure is sufficiently detailed you should only have to wait until the end of the normal enquiry window to achieve 'certainty' as regards your tax position for the period covered by your tax return. In most cases this is now simply 12 months from the submission of your tax return.

If you don't disclose the uncertainty you are at risk of the taxman making a later 'discovery' - this could occur some time into the future - certainly long after the end of the normal enquiry window.

The issues relevant to this choice changed in the light of the 2004 case of Langham v Veltema. The decision in favour of HMRC caused concern in the profession. Eventually HMRC clarified the position with Statement of Practice 01/06 which is now contained in EM3261 - Reopening Earlier Years: Discovery in SA Years. In effect this set out the level of disclosure that is required to protect taxpayers from later discovery assessments.

Last month the Scottish Court of Session again found in favour of HMRC despite the taxpayer having made what appeared to be a full disclosure on his tax return. He had 'invested' in a tax avoidance scheme and wanted to deny HMRC the right to issue a section 20 discovery notice seeking disclosure of all relevant paperwork.

The taxpayer had made what he and his advisers considered to be a full disclosure of the scheme and the tax consequences using the 'white space' on his 2003/04 tax return.

The Court held that the discovery notice was valid despite the disclosures made on the tax return as to the Capital Redemption Contract, the relevant legislation and all of the steps involved in the transaction. Such disclosures had been made in a deliberate attempt to deny HMRC the facility to make a discovery assessment after the normal deadline for enquiries into 2003/04 tax returns.

The Court determined that the disclosure in the taxpayer's tax return was insufficient and that HMRC had 'discovered' the taxpayer was involved in a specific type of packaged tax avoidance scheme. The Court also determined that the tax return disclosure did not contain sufficient detailed information about the scheme to provide the hoped for protection from a discovery notice.

There is already much misunderstanding as to when HMRC are entitled to make a 'discovery' about underpayments of tax. Many people wrongly assume that they are 'safe' after a year or two. Equally HMRC have been known to attempt to make a 'discovery' and charge extra tax when they are not permitted to do so. Even so, this latest case gives HMRC more ammunition I think. R(on the application of Pattullo) v CRC

UK tax law ruled illegal by EU Court

To be fair this concerns a tax that will affect very few of us - stamp duty reserve tax (SDRT). The principle though has wide implications. The case in question involves HSBC which has just won what is predicted to be the right to a tax repayment of £27m after the European Court of Justice ruled that a tax [HMRC] has collected since 1986 is illegal.

It seems that elements of the law concerning SDRT have always been incompatible with EU law such that refunds will be available dating back to when the tax was introduced. In the light of this decision the government scrapped the tax on some share transactions yesterday after the European Court of Justice ruled it breaks EU law. The Telegraph reports that the UK Treasury (ie: the taxpayer) could be "forced to repay as much as £20bn to companies" as a result of this ruling.

One of the arguments employed in the battle against abusive tax avoidance and tax evasion is the rule of law. We should all comply with it. And of course we should. Equally so should the Government.

There are numerous cases however making their way to or through the European Court because the Government has not complied with European law - when framing or amending UK tax laws.

Where such allegations are made the cases are staunchly defended by HMRC on behalf of the Government. Many such cases are the subject of Group Litigation Orders - where a number of taxpayers claim that the UK law is incompatible with European law and thus the tax in question should not be paid or should be repaid to them.

As is well known I am no fan of abusive tax avoidance schemes. I am even handed however and am also disappointed when HMRC pursues cases that should never have come to court.

I'm no lawyer so would not presume to construct a legal test. However I do see a difference between those cases where:

• the EU law was not properly considered when the UK law was framed; and those cases where,
  
• after full consideration, the UK law was crafted in an effort to avoid the restrictions imposed by EU law.

Some might argue that the latter can be compared with contrived avoidance schemes and that consistent principles should be applied to deny both types of cases from having the desired impact - partly to discourage future such attempts to achieve the same ends. The alternative view, which I tend to prefer, is that it is perfectly proper for a sovereign state to want to retain the power to impose taxes and that to do so it has to examine the EU law to ensure that it is not breached. Occasionally the wrong conclusions will be drawn.

The real problem however comes when others take a contrary view and secure convincing legal backing for this. I imagine that HMRC does not want to have to admit that it's advice or parliamentary draughtsman made a mistake. Rather let the Court decide even in the face of compelling evidence. This ensures that the issue takes years to resolve even if it also costs hundreds of thousands of pounds in legal fees. My heart says this is what must happen in practice but my head tells me to believe that HMRC no longer pursue cases where they have been advised they have a less than 60% chance of winning. The sums involved in cases such as this however probably make the gamble worthwhile as the cost of fighting (even with only a small chance of winning) is so low - relative to the cost of losing or of giving in before going to Court.

In this latest case HSBC has won its case that the UK stamp duty reserve tax it was charged when it bought CCF, the French bank, contravened EU law. HSBC was fighting for, we are told, a refund of £27m. The full tax at stake - reports the Telegraph, could be nearer to £20bn. If this is right we should not be surprised that HMRC fought it all the way.

There have been other such cases in the past and there will be more in the future.

Tax avoidance is a card game - the metaphors multiply

I've long been of the view that if someone is intent upon undertaking any form of structured tax avoidance they need to play straight. And that means placing all of their cards face up on the table.

In a recent tax case Malcolm Gammie QC also used a card playing analogy:

The tax scheme, he said, was a game and he then described a game of bridge:

"... assume that North, East, South and West enter a room and sit at a table. North (the employer) holds cash that he has already said he will share (as an annual bonus) with West (his employee). The common understanding and intention of all concerned is that North will hand the cash to East, East will hand the cash to South and South will hand the cash to West. If the question is asked, has North paid West his annual cash bonus, the answer is quite clearly yes. ...

The answer does not change just because North produces a pack of cards so that the cash can pass from North to East to South to West under the cover of a card game."

The case involved PA Consulting, their EBT schemes (from 1995 and 1999) and bonus payments for 2000/01, 2001/02 and 2002/03. (TC00063: PA Holdings Ltd and Kully Janjuah).

For the record the tribunal determined that the disputed payments were both distributions and earnings. However the tribunal had to also accept that because the sums were taxable as distributions they could not also be taxed as remuneration. So as regards this element of the appeal they found in favour of the taxpayer. However, in respect of the NIC contributions, the tribunal found for HMRC and commented that there was no bar in law which prevented the tribunal reaching the conclusion that the payments received were in fact earnings.

Gaines-Cooper loses in Court of Appeal - Residence rules revisited

Two years ago the Special Commissioners determined that Robert Gaines-Cooper had retained his domicile of origin and that the frequency of his visits to the UK meant that he was resident and taxable here.

The Commissioners decision was upheld by the High Court and now also by the Court of Appeal. The Judges dismissed Mr Gaines-Cooper's appeal as 'nothing more than an illegitimate attempt to reargue the facts.'

Perversely the case may not be wholly good news for HMRC. In stressing the hurdles that need to be overcome to lose one's domicile of origin, the case also makes it more difficult for HMRC to successfully challenge the claims of non-doms in the UK that they retain their domiciles of origin overseas.

This case was the catalyst for the new rules for determining residence and domicile for tax purposes. These were announced in the 1997 Pre-Budget Report and then, after much backtracking and clarification they were introduced in the 2008 Budget and Finance Act.

In the meantime the Residence and Domicile 'bible' for advisers, IR20, has become out of date. However, as reported previously on the TaxBuzz blog, HMRC are inviting advisers to suggest the issues that an updated IR20 should cover.

The Court of Appeal decision may be the end of the road for Mr Gaines-Cooper although one assumes that his legal advisers thought there was a strong enough case to appeal this far. Whether he has the stomach for an appeal to the House of Lords, or will be granted leave to make such an appeal seems unlikely.

Doesn't the taxman trust tax advisers?

A recent Special Commissioners decision contains a number of important lessons for accountants and tax advisers as it effectively revolves around the issue of whether HMRC believe assertions made by accountants.

You can access the full facts and details of the case of Mr M Ransom v Revenue & Customs [2008] UKSPC SPC00708 if you have time to read them. If you do and you have any further observations, please add them by way of comments to this blog post.

The only matter on which the Special Commissioner had to reach a decision was whether an amended tax return for 2000/01 had been filed before the effective deadline of 31 January 2003. The taxpayer's accountant claimed that the return had been hand delivered to the Woking Tax enquiry office on the evening of Friday 31 January 2003. The Revenue however argued that the amended return was posted to the office and did not arrive until 7 February 2003.

For the record the return was being amended to reflect the decision in Mansworth v Jelley. This was only published in December 2002. And let's remember that many accountants and tax advisers were under extreme pressure in January 2003. Everyone was trying to complete the necessary amendments and claims for clients who could benefit from the Revenue's published interpretation of the implications of the decision.

Returning to the present. What are the lessons that accountants and tax advisers can learn from the Ransom case?

1 - As I have recorded on this blog before (in the context of discovery assessments), it is crucial to be able to evidence all statements that are to be made before the Commissioners. There will be no second chance to represent the evidence;

2 - It is risky waiting until 31 January to file paper based tax returns and amendments to tax returns. Given the new 31 October deadline for paper based returns this issue is less likely to recur;

3 - The time lag between the start of a dispute or a challenge with HMRC and the case reaching the Commissioners can be years. In this case the argument started FIVE years ago. And this was a relatively straightforward question: When was the amended tax return filed?

4 - If HMRC have reason to question your honesty or your judgment they will pursue the matter. Ultimately the Revenue's position in this case effectively impugnes the character of the accountant in question;

5 - Even when you are in the right, do not under estimate the time and effort that will be required to produce all necessary evidence to support your contentions. In this case the accountant and four colleagues all gave evidence to counter the Revenue's challenge;

Do you have any observations about the implications of this case? Please add your comments to this blog post.

Contractors continue to lose out - Dragonfly case is just a symptom not a problem

The press have given plenty of space to the High Court decision last week in the case of Dragonfly Consultancy Ltd v HM Revenue & Customs. The case concerned a contractor, who had provided his services through both his own intermediary company and an agency to the AA. I will use this case to highlight some key points relevant to anyone who supplies their services to an 'employer' (or a company that would be their employer were it not for some special arrangements).

Raw facts
Mr Bessell, the contractor in question, had been working on the assumption that his company was not caught by IR35. HMRC believed otherwise and succeeded in their claim both before the special commissioner and the High Court. HMRC's argument was that Mr Bessell would have been an employee of the AA but for the imposition of his company (Dragonfly Consulting Ltd). HMRC's success means that the company is liable to account for tax in accordance with what we know as the IR35 rules.

Consequences
What does all this mean? Well, even if you're familiar with IR35 and the various indicators of an employment relationship, you would be forgiven for finding some of the reports a little confusing. (The case is complicated also be the fact that an agency was supplying the services of Dragonfly/Mr Bessell to the AA).

It is by no means clear why the taxpayer was encouraged to take his appeal to the High Court. As is generally well known, such appeals have to be on points of law. No new facts can be introduced. This is one of the reasons why it is SO critical to present the best possible case before the Commissioners. You get no second chances. Many taxpayers have come unstuck when considering an appeal only to find that their case was poorly presented and argued before the Commissioners.

Substitution
The detailed facts in this case are too complex to set out in this blog. Suffice it to say that, as reported in the press, the Judge placed particular emphasis on the lack of a 'right of substitution'. This was in the context of the contract between the agency and the AA - even though there was a right of substitution in the contract between Dragonfly and the agency. The Judge held that this right was ineffective in practice for a number of reasons. (eg: it wasn't replicated in the other contract, it never happened and was never likely to happen as the AA wanted the services of Mr Bessell personally).

Lessons
What this all seems to mean is that anyone involved in cases where the IR35 rules could be in prospect needs to be more confident than ever that:
- ALL of the contracts in the chain are watertight - ie they avoid any deemed employment status between the contractor and the end-user 'employer';
- The FACTS accord with the contractual terms;
- The end user 'employer' is also clear and consistent as regards the contractual terms and the facts. Thus, for example managers responsible for the contractor would need to treat him/her as an independent contractor.

Unchanged
As ever the most frustrating aspect of all such cases is the lack of joined up thinking as between employment law and tax law.

End user 'employers' are keen to avoid engaging contractors as employees. This is invariably due to a combination of:
a) the onerous legal obligations imposed on employers by employment laws; and
b) the obligations to pay employers' NIC at 12.8% of all staff pay. This is, in effect, seen as a payroll tax and best avoided by NOT taking on staff.
However it is the onerous obligations imposed by employment law that really drives the 'employer'. It must be as the daily rates received by independent contractors are often much, MUCH higher than the same people would earn if on 'staff'.

Underlying problem
Employers suffer few disadvantages if they refuse to engage workers as employees. That is as long as the 'employer' doesn't pay the independent contractors direct. If they do and HMRC successfully challenge the arrangements, then it is the 'employer' who is penalised.

This is what drove the rise of personal service companies. 'Employers' avoid the prospect of being liable for payroll taxes by refusing to engage independent contractors direct. In effect the 'employers' insist that the contractor forms their own company. This means that if there is a problem with the taxman it is down to the contractor and his personal service company to resolve.

For some years the tax system relevant to contractors who ran their business through such a company was very attractive. It favoured the extraction of income from such companies by way of dividends and this reduced the tax payable by the contractors on their earnings. And this led to the introduction of the IR35 rules (so called because they were initially set out in the 35th press release issued by the Inland Revenue on Budget Day 1999) . The aim of the legislation foreshadowed by that press release is to ensure that if someone is, in reality, an employee of the end user 'employer' the personal service (intermediary) company must effectively tax their income as earnings. This limits the possibilities to reduce taxes by drawing money out of the company by way of dividends.

In effect the only person who can lose is the contractor.