Landmark Penalties in Failed Tax Avoidance Case

The presumption that taxpayers who have used a failed DOTAS registered tax avoidance scheme will not face penalties may have been overturned by a recent landmark Tax Tribunal decision.

Many promoters of tax mitigation arrangements have told clients that, even if the scheme ultimately fails and the tax is due, then no penalties would be charged.  And until now that has been true.  However in a decision given by the First Tier Tribunal on 16 January, two users of an unsuccessful DOTAS scheme – Bernard Litman and Ann Newall – were charged penalties for negligence of £24,000; after claiming tax relief on a marketed scheme, which the Tribunal decided lacked commercial reality.

The Facts
The well-known (and troubled) Isle of Man based tax mitigation scheme promoters Montpellier Group, had sold an off the shelf tax avoidance scheme to the pair – in order to create losses of £400,000, which would then be offset against their capital gains tax liability. The tax wheeze involved: the creation of several trusts; the use of a number of special purpose vehicle companies; and an interest free and unsecured “loan” for £400K – which was purportedly advanced to buy Capital Redemption Policies; which would then be surrendered, and the loan repaid.  They included DOTAS numbers on their SA Tax Returns: in compliance with the law, thus alerting HMRC to what they had done.

Following a Court of Appeal decision in a similar case, the taxpayers accepted that the scheme was not effective, and attempted to conclude a negotiated settlement with HMRC. Not satisfied with collecting the extra tax and interest, HMRC launched a tax enquiry: following which it decided to charge the pair tax-geared penalties of £59,000 (i.e. 25% and 20% respectively, of the extra tax due) in respect of their negligent behaviour.  Mr Litman and Mrs Newall appealed against these penalties to the Tax Tribunal.

The Hearing
It is notable that little evidence was put before the Tribunal on behalf of the taxpayers.  Further, they did not appear as witnesses themselves.  Their main, and indeed seemingly only, defence was that they had relied on professional advice – and so could not be treated as negligent.

HMRC argued the taxpayers failed to properly consider “straightforward, ordinary, commercial documents”, which had “glaring omissions”; and that they should have been aware that the transactions portrayed were either not actually carried out; or at least not in the way described in the documents.

The Outcome

The Tribunal decided that, as the taxpayers had taken professional advice, they could not be considered to be negligent for failing to understand the legal and tax consequences of the arrangements. However, the Tribunal were highly sceptical that the loan had any real existence.  The Tribunal decided that penalties should apply due to Litman and Newall’s “failure to enquire into the basic commercial reality of the transactions”.  The Tribunal did reduce the penalty loading to 10% each, creating overall penalties of approximately £24,000.

The Wider Consequences

This case has potentially very wide implications.

Traditionally, HMRC have not sought penalties in cases of failed tax avoidance schemes.  This was noted by the Tribunal judges who stated all the previously decided authorities on this point dealt with circumstances in which taxpayers had put incorrect numbers on a return, or failed to understand a complex area of law. The judges were not aware of any authorities dealing with a taxpayer’s obligations in respect of a complex packaged tax avoidance scheme, such as this.

This case in itself heralds a new aggressive approach by HMRC towards penalties in tax avoidance situations.  Secondly, no doubt the taxman will be emboldened by this decision, and we can expect to see the taxman attempting to charge penalties in many more failed DOTAS cases in future.  Thirdly, taxpayers in any tax dispute which is found in HMRC’s favour on the basis of the facts, rather than the technical tax issues, are now susceptible to a charge of negligence (or carelessness) and could now face significant tax geared penalties.

All cases, of course, stand on their own facts.  And one very distinctive feature of this case seems to be that very few facts, or points in mitigation, were put forward on behalf of the taxpayers in their defence.  Other cases, even quite similar ones, could have very dissimilar outcomes – if presented differently to the Tribunal.

How Can Lynam Tax Appeal Experts Help Me?

The taxman uses specialist ‘Appeals’ teams to lead its cases at Tribunal.  Lynam Tax Dispute Specialists have decades of experience in handling contentious tax appeals, and can assist taxpayers and their accountants with the process; in order to achieve the optimum results.
*If you need help with a difficult tax dispute or a contentious tax appeal call now for a confidential and no obligation discussion –

Paul Lynam: 0845 643 9997

Andrew Nutbrown: 07718 778710