Where is the line between unacceptable tax avoidance, and acceptable tax planning? In light of increasing political rhetoric and pressure on HMRC to raise revenues through enforcement, it is important to know when to stand your ground in interactions with the Revenue.
Last year I had the great privilege of spending time working alongside leading tax counsel, Laurent Sykes, at Gray’s Inn Tax Chambers. My objective was to gain a greater understanding of the tax litigation process and valuable experience in court proceedings at all levels. Such knowledge and experience certainly informs my approach to my advisory work but also helps me to better support my clients if disputes with Her Majesty's Revenue and Customs (HMRC) arise.
My expectations of the time in Chambers were certainly met, but what surprised me was how some matters ever got as far as they did in the litigation process, due to HMRC’s dogged pursuit. We have all seen the headlines about unacceptable tax avoidance and indeed we as a firm take a firm stance against artificial schemes to avoid tax. But are innocent taxpayers also suffering from the implications of this change in HMRC approach?
When I first started my career (rather too many years ago to mention now) we relied on the principle set out in this famous quote by Lord Tomlin in the Duke of Westminster case:
“Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue and his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
This principle has certainly been eroded in recent times and I think the trend is not likely to reverse anytime soon. A spokesman for HMRC has recently said "Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended,". Clearly understanding Parliament’s intention is now important, but it’s not always as easy as you might think; and HMRC are quite capable of taking a view that suits their own purpose.
As all political parties in the run up to the general election seem to be relying on raising funds from tackling tax avoidance to help restore the country’s finances, HMRC will undoubtedly be under even greater pressure to increase tax revenues. Whilst we can expect to see more headline grabbing cases and more celebrities named and shamed, the implications will also be felt throughout the taxpaying community as HMRC continue to get tougher.
My experience in Chambers certainly highlighted to me cases where HMRC refused to apply common sense and were relentless in their pursuit of some innocent taxpayers. I was reminded of the importance of challenging HMRC’s view of the legislation even where all their guidance and some text books supported that view. One case involved the successful challenge of HMRCs application of the ordinary four year time limit (s34 TMA 1970) preventing the filing of a self-assessment tax return. Refusal to process the return prevented the client from recovering overpaid tax. The court accepted our view that the ordinary time limit did not apply to a self-assessment tax return so the return should be processed - a very satisfying result.
In another case, HMRC initially refused to accept that an election had been made in time denying the taxpayer relief that had significant tax consequences. However, it was sufficient to prove that, on the balance of probabilities, the election was posted by the taxpayer; there was no requirement to prove that it was received by HMRC - HMRC take on the risk of non-receipt by allowing service by post of tax documents (s115(2) TMA 1970). HMRC eventually backed down in this case and allowed the election, but only days before the hearing.
If I came away with one overriding impression, it has to be that standing your ground with HMRC is important and may just be unavoidable if you are unlucky enough to make an innocent mistake or are facing unjustified scrutiny for undertaking straightforward planning. Unfortunately I expect we will see more cases where this will be necessary.