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R v C (Unreported, Southwark Crown Court) 8 June 2017
On 8 June 2017 an HMRC test case was brought to an abrupt end at Southwark when HHJ Tomlinson dismissed an indictment against the Defendant C alleging that he had committed fraud by false representation contrary to section 2 of the Fraud Act 2006.
HMRC spent a considerable time deciding whether to seek a voluntary bill of indictment against C, but in the spring of 2018, finally announced they would not.
The allegation against C was that he had represented to HMRC during a civil tax enquiry that he had entered into a Contract for Difference (CFD) with Pendulum Investment Corporation for the purposes of long-term capital appreciation when in fact the main purpose, or one of the main purposes, was to secure a tax advantage contrary to s.16A of the Taxation of Chargeable Gains Act 1992.
Ten years ago, the tax planning industry, as it called itself, was aggressively advertising to high net worth individuals with the promise of lawfully reducing their tax liability through avoidance measures which usually required entry into a scheme of some description.
In that respect Montpelier, the advisors in this case, were typical of that period. One such scheme offered by Montpelier related to the purchase of a Contract for Difference as part of an investment decision to obtain a long-term exposure to the FTSE for a period up to 10 years.
On the facts of this case, the Defendant purchased two CFD’s from Pendulum Investment Corporation through his advisors at Montpelier which taken in conjunction were a classic hedge against market volatility. This in itself was unremarkable but there were some curious features to this acquisition.
Firstly, the issue value of the CFD’s were £600k and £400k respectively (with an initial margin call of £27k and £18k) but the remainder of the monies due were met by an interest free 80-year loan from a 3rd party investment company to whom fees would only be payable if a profit was made on the CFD’s.
Secondly, the Defendant was entitled to issue a demand against Pendulum Investment Corporation which required them to re-purchase the CFD’s at market value, either in full or in part, at any time.
Thirdly, if this option was exercised, as the Defendant did in part very shortly after the acquisition, then the market value would in all likelihood be substantially less than the issue value which would mean that the Defendant would have suffered a large capital loss. In this case the capital loss was in the region of £490,000 on the basis of a 50% disposal of each CFD.
These capital losses were claimed in the Defendant’s tax return in 2006/2007 and led to the HMRC enquiry. In one piece of correspondence to the Defendant it was stated by HMRC that
I note that the part disposals were made after the 6th December 2006. Section 16A TCGA disallows Capital Gains tax losses where there are ‘arrangements’ and ‘the main purpose, or one of the main purposes’ of the ‘arrangements’ is to ‘secure a tax advantage’. Here the circumstances of this case with a combination of a Capital Gain arising and the loss claimed suggest the arrangements were in fact made to obtain tax relief rather than anything else. Please let me have your comments on this point’.
The Defendant’s response, which was drafted by his advisors at Montpelier, and simply printed and signed by the Defendant, stated that
‘The Capital loss that has arisen by the part disposal of the contract is a by-product by the overriding investment decision by me to seek a long-term position in the UK stock markets by means of contracts based on the FTSE index with a view to capital appreciation’
and subsequently in a further letter
‘I do not consider Para 16A of the TCGA 1992 applies to my situation. I do not believe that any arrangement exists of which one of the main purposes is to secure a tax advantage’.
It was the contents of these two letters that were said to be the dishonest representations which formed the basis of the criminal case against him.
The prosecution made a number of concessions in the criminal proceedings.
They did not suggest that the Scheme itself was a ‘sham’ as defined in Snook v London and West Riding Investments  2 QB 786. This was because they had specifically declined to argue that the scheme was a sham in a case which had been brought before the First Tier Tax Tribunal by a taxpayer who had invested in exactly the same Scheme (see Anthony Bayliss v HMRC, TC/2015/06609)
Secondly, when the Defendant entered into the CFD’s and thereafter submitted his tax return for 2006/2007, the prosecution conceded he did so in good faith on the basis of the advice given to him. The prosecution did not seek to challenge the bona fides of the Defendant or his advisors at that stage.
The third problem the prosecution faced was that those who devised the Scheme and assisted and advised the Defendant were not facing prosecution and nor would they.
The basis of the prosecution case against the Defendant was that after HMRC had drawn his attention to the existence of s.16A TCGA whilst challenging the tax return in which the CFD’s were included, they said that it was dishonest for him in his reply to misrepresent his subjective intentions at the time he entered into the CFD’s and subsequently filed his tax return. The defence submitted that no jury, properly directed in law, could find that the Defendant was dishonest in these circumstances.
In addition, it was submitted by the Defence that, whilst the old concept of a deception having to operate on the mind of the person being deceived under s.16 of the Theft Act 1968 had been consigned to history, it was a troubling feature of this case that the representations made to HMRC in this case occurred in circumstances of apparent transparency in that HMRC and Montpelier’s positions were well known to each other and had become entrenched. This was a proposition that HHJ Tomlinson accepted that he had ‘difficulty with’ and which was made more difficult when it was conceded by the prosecution that the representation had been drafted by a professional advisor who did not and would not face prosecution.
It was submitted by the defence that the taxpayer’s subjective motivations for entering into the arrangement were irrelevant as the arrangements had to be considered on an objective basis pursuant to the case of MacNiven v Westmoreland Investments Ltd  1 AC 311 HL. The prosecution disavowed this approach, relying on Snell v HMRC  S.T.C. 1279 (Ch D.). They argued the fact that as the ‘arrangements’ were inanimate ‘without purposes of their own’ that the concept of the ‘main purpose … of the arrangements’ must refer to the main purpose(s) of the people involved in the arrangements, of which a principal one, was the Defendant’.
HHJ Tomlinson declined to resolve the much debated issue as to whether the test of a taxpayers motivations should be a subjective/objective one and instead focused on the facts and concessions made by the prosecution in this case.
The judge held that whilst it would not be ‘unreasonable for any reader to form the impression that much of what was asserted in those letters [by the Defendant] was – at the very least – disingenuous’ , it was ‘impossible to ignore the default position, namely that the prosecution conceded that those who devised the CFD’s were not dishonest at the time of their creation and similarly the Defendant was not being dishonest at the time he submitted his tax return in respect of his financial affairs. The judge found that ‘a properly directed jury would struggle with the idea that a Defendant who made a tax return and was not acting dishonestly at the time he made it nonetheless became dishonest when he later sought to justify and further argue it’. ‘The supposed tipping point that the recently implemented s.16A had by then – however unambiguously – been brought to the Defendant’s attention before he made [those] further representations, cannot in my view suffice to create a case to answer where none existed before’. On that basis, HHJ Tomlinson dismissed the indictment against the Defendant.
When they announced they were abandoning the Voluntary Bill, HMRC confirmed they would not be bringing any further charges against other investors who featured in the investigation. According to the CPS the discontinuance notice was filed as a ‘direct result’of HHJ Tomlinson’s decision.
Interestingly, the CPS decision not to proceed was taken notwithstanding the Supreme Court’s revised interpretation of the definition of dishonesty in Ivey v Genting Casinos (UK) Ltd  UKSC 67 handed down in October 2017. This simplified the dishonesty test employed in criminal trials by bringing it in line with the civil definition. It seems that this significant change in the law did not persuade the CPS that grounds existed to justify another attempt at bringing a case against C.
The question remains however whether this is the end or just the thin end of the wedge? Significant additional funding has been given to HMRC to investigate and pass cases to the Crown Prosecution Service with a view to prosecution. It is likely that, whilst HMRC will see the decision in this case as a set-back, it will be viewed as a temporary one and they will remain emboldened by the additional funding and current political climate to devise new ‘novel’ methods to ensure that cases end up before the criminal courts.
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