Presented by © McGrigors LLP 2010 Dispute Resolution in anti-avoidance cases James Bullock Partner,...

© McGrigors LLP 2010

Presented by

Dispute Resolution in anti-avoidance cases

James Bullock

Partner, McGrigors LLP

12 May 2010

2© McGrigors LLP 2010

What is Tax Avoidance?

• “Minimising the tax burden though legal means”

• BUT – Must be seen in the context of

The Tax Gap


What is The Tax Gap

• The gap between what taxpayers might be expected to pay in tax

and what they actually pay

• HMRC’s Pre-Budget Report - 15% of the tax gap attributable to

“avoidance”

• HMRC focus on “closing the tax gap”


Where are the lines drawn (1)?

Burton & others –v- HMRC [2009] UKFTT 203 (TC)

– CGT. Offshore settlements – “flip-flop” scheme

– Section 86 and section 87 TCGA 1992 – Attribution of gains to

beneficiaries

– “Interest in a settlement” – extended definition? Does not apply

– “Benefit” and meaning of “payment” – split Tribunal, but Presiding Judge

(Wallace) found value of benefit was “nil”

– Win for Taxpayers. HMRC appealed to Upper Tribunal, but case has

been settled in the meantime.



Mayes –v- HMRC [2009] EWHC 2443 (Ch)

Proudman J

“To say that there is no premium and no particular surrender, that those steps should be ignored, is in my judgment simply to sidestep the question of construction altogether. The pre-arranged and self-cancelling nature of the question was no different and no more extreme than that in MacNiven”

– HMRC’s appeal to the Court of Appeal is due to be heard 28-30 July, 2010



Mayes –v- HMRC [2009] EWHC 2443 (Ch)

– Availability of “Corresponding Deficiency Relief” (on second-hand insurance policies)– Transaction was structured with tax planning in mind– Taxpayer lost (on substantive issue) before Special Commissioners but appealed to

High Court

Proudman J

“I sympathise with the instinctive reaction that such an obvious scheme ought not to succeed. However, I cannot extract from the legislation any underlying or overriding purpose enabling me to conclude that parts of the scheme can be ignored. To do so would conflate the definition of a chargeable event with the concept of an actual charge to tax and would … revert to an acceptance of the type of submission that was soundly rejected in MacNiven”


Litigation and Settlement Strategy

• Published Summer 2007

• Underpins HMRC’s policy on reaching settlement – or on

litigating appeals

• Key to strategy for taxpayers to be informed as regarding HMRC

procedure


What is a dispute?

• “all types of dispute about liability to pay taxes or duties, or entitlement to tax credits”

• Broadly covers whole situation from an appeal being lodged until final resolution

• Focus for all parties must be settlement without recourse to

Tribunal or the Courts


Settlement

• HMRC do not enter into “package deals” (i.e. range of issues settled for single payment not subdivided amongst individual disputes)

• Disputes with “all-or-nothing character” (including single point of law to be decided one way or another with no middle ground) should be

settled on “all or nothing” basis.


Effect

• Significant impediment to settlement

• Technical points (interpretation of law) – HMRC will not contemplate a settlement under which the financial difference between the parties is “split”

• N.B. ability to “cut a deal” not popular with HMRC

• Putative effect – reduction of the tax rate through advancing a dispute


Will HMRC “drop the case”?

N.B. Advice to inspectors

• “If, following initial investigations, you do not find good evidence of material understatement of tax, drop the case. Do not pursue minor or questionable points in order to avoid a nil settlement”

• “Similarly, in a legal dispute, if HMRC’s arguments are not strong and/or the point at issue is not an important one, drop the case”


Avoidance Issues

• “War on avoidance” continues – see Pre-Budget Report 2009 and reference to “tax gap”. Unlikely to change under the new “regime”

– where legal advice “strong” – do not accept settlements for less than 100% of tax and interest

– where legal arguments are poor – “drop the case”!

BUT “all factors” – including preserving the integrity of the tax system – should be taken into account.


Avoidance cases – in practice

• Will HMRC, in practice, back down?

• Chances of success are the dominant factor

• HMRC adopt a “no compromise” stance in negotiations

• Litigating when prospects of success less than 50% “justified by particular circumstances”

e.g. large amount of tax at stake or fundamental point of principle at issue

• Priority given to litigating against taxpayers who have set out to undermine the purpose of the tax legislation


So … what is the taxpayer’s strategy?

• “Persuade” HMRC to take legal advice

– and do so at earliest opportunity

– how does HMRC do this?

– who gives HMRC the advice?


Taxpayer Groups

• Multiple taxpayers (e.g. purchase of a marketed “scheme”)

• Role of “Promoter”

• Fighting fund

• Steering Committee

• Role of taxpayer vis-à-vis Group

• Settlement/dissolution of Group


HMRC Review

• Is it appropriate for avoidance cases?

• Who conducts the review?

• Means of teasing out a settlement?


Registration of an appeal

• Who has conduct at HMRC?

• Role of Solicitor and General Counsel

• Case categorisation

– Effect?

– Upper Tribunal Transfer


“Pressure Points” for settlement

• Need to establish specific Directions

Three Stages

• Pleadings phase (usually settled by Leading Counsel)

• Evidential phase

– Agreed Statement of Facts and Issues (see Burton and Others v HMRC)

– Witness Statements

– N.B. FTT is Tribunal of Fact

• Trial Preparation

(N.B. “door of the tribunal” settlements)


Alternative Dispute Resolution

• Tribunal’s duty to consider in every case

• HMRC will now entertain it

• But does it impact on LSS?

• Approach in Avoidance Cases?

• Mediation or Arbitration?


Striking Out, Penalties and Costs

• Regulation 8 Tribunal Rules. Appellant can be “struck out” for non-compliance where direction given with that sanction

• HMRC barred from taking further role in proceedings

• Costs regime for “unreasonable behaviour”

Presented by © McGrigors LLP 2010 Dispute Resolution in anti-avoidance cases James Bullock Partner,...

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