The Law is not an ass.  It is a quadruped, designed by a committee, who, over many years and many different committee members, cannot quite recall whether they were designing a camel, a horse or a spaceship.

  1. Hands up all those who believe the Rule of Law is important?
  1. Hands up (in Magna Carta year) all those who think the Law should be applied consistently?
  1. Hands up all those who believe that professional tax advice should be clear and based on proper interpretation of the Law?

Hopefully, I have everyone’s hands up for each question?  At least mentally?  Those too embarrassed to react or having a quiet lunch snooze should, I hope, still have made a genuine twitch towards acceptance.  If not, please say.  I genuinely would be interested to know why.

I now move on to the recent cases of Gemsupa and Trigg.  They would make a superb exam question in terms of ‘compare and contrast’.

In Gemsupa, the Courts agreed with the taxpayer that the CGT legislation was so clear that, even though various steps were taken for tax avoidance purposes, this did not meant that they were ineffective legally (the case was pre-GAAR so query whether those new rules may have an impact?)

And Compare:

Trigg(onometry) and Lawyers

The Trigg case heard in the First Tier Tribunal concerned the definition of Qualifying Corporate Bonds for tax purposes.  This may sound esoteric and technical, but in fact they raise some very interesting issues.  [Remember ‘Tax is Fun’].

Amongst the reasons the case is interesting is that it may have an impact on both future and historic Commercial, Corporate Sale and Purchase agreements where some of the consideration is deferred in the form of loan notes.  As will be generally known, (at least in esoteric tax and legal circles) the loan note form of deferred consideration makes a profound different on the way it is taxed.

In Trigg, HMRC lost, which seems to have widened the definition of QCBs.  This could have a profound impact on Sales and Purchase Agreements so Solicitors need to beware!

Having reviewed many Sales and Purchase agreements over the years, I fear that sometimes matters may be glossed over.  Perhaps so because of infrequent HMRC review of the detailed documentation?  This is understandable, from a commercial perspective.  A precedent has worked in the past, so just tweak it?

The ‘purposive’ approach in Trigg contrasts with the legalistic interpretation adopted by Gemsupa.  Which is correct?  Which ought to be correct?  Bearing in mind most of us just wish to get commercial deals done to help business people achieve their commercial objectives, how many professionals believe the objectives suggested in 1-3 above are being achieved?

As they used to say in exam questions – Discuss!

The courts continue to find in favour of HMRC in cases involving avoidance schemes, with the most recent example being Vaccine Research Limited Partnership and another v CRC at the Upper Tribunal.

With so many cases going against such scheme providers, questions are raised as to whether the various new powers that HMRC is seeking on avoidance and other matters are really necessary?  Perhaps using the existing HMRC powers to more effectively challenge such schemes is all that is really needed.

Vaccine Research Limited Partnership and another v CRC

The case in question concerned an R&D avoidance scheme, with a partnership being established in Jersey. The taxpayer partnership entered into an agreement whereby it paid another entity, Numology Ltd, £193m to purportedly carry out research and development (R&D).

Numology paid a very small proportion of this (£14m) to a subcontractor, PepTCell, who actually undertook the work and then contributed £86m to the taxpayer business itself.  The partners claimed for a loss of £193m in respect of R&D capital allowances.

The Upper Tribunal unheld the First-Tier Tribunal’s decision, finding that the funds were put into an artificial loop and effectively only the £14m paid to the subcontractor was genuinely incurred for R&D.  The Tribunal noted that the FTT was right to conclude “that Numology Ltd’s contribution represented funds put into a loop as part of a tax avoidance scheme, and [was] not in reality spent on research and development”.

The evidence of recent case law suggests that the existing provisions available to HMRC are sufficient to close down avoidance schemes and yet they continue to seek new powers in the name of cracking down on tax avoidance.  It is concerning that HMRC continue to amass new powers, such as attempting to take funds directly from bank accounts and issuing non-appealable tax demands, on the premise that they are needed when it appears that they are not.  Please feel free to share your own thoughts below.

We wrote recently about HMRC’s consultation on ‘Raising the Stakes on Tax Avoidance’, with new proposals to target the promoters of avoidance schemes.
Two recent cases heard by the courts considered whether two such complex schemes were actually effective.
Tower Radio
The First Tier Tribunal (FTT) ruled that PAYE tax and National Insurance Contributions should have been paid on bonuses paid to directors through companies which were specially set up to receive funds, and then be liquidated, paying out the cash in the process.
The scheme was promoted by accountancy firm Barnes Roffe LLP, and would presumably be the target of the new rules, with the scheme having been used by 104 other companies to try to avoid PAYE/NICs on bonus payments.  The scheme was DOTAS registered however.
The defendants’ case revolved around the Ramsay principle but this was dismissed; the tribunal ruled that the scheme had no commercial purpose, other than the intended obtaining of a tax advantage.  As such PAYE/NICs was found to be payable on the bonuses.
P&O avoidance scheme
British shipping company P&O also lost its case, concerning a convoluted international tax avoidance scheme, designed to avoid paying corporation tax.
P&O had attempted to gain £14m in tax relief by artificially boosting the tax credit due on dividend income.
The scheme was found to fail by the FTT, who ruled that the transactions were all part of an “elaborate trick” that was “designed and implemented for no reason other than tax avoidance.”
Conclusion
In both cases, the fact that the schemes were implemented for no reason other than tax avoidance was found to be of importance by the courts.  This is before the new General Anti-Abuse Rule (GAAR) is even taken into account.
With the courts already finding against such schemes, and the new GAAR set to undermine such schemes still further, it is reasonable to question whether any new provisions on avoidance are really needed.