In 2002 D’Arcy entered into a ‘gilt repo’ scheme devised by tax adviser Philip Shirley that allowed her to take a £1.5m tax loss.

The scheme worked through the purchase and subsequent sale of gilts, claiming an expense on the purchase and creating relief on the gains.

The scheme would have allowed D’Arcy to cut £600,000 from her income tax bill and was challenged by HM Revenue & Customs in the special commissioners, where D’Arcy won. HMRC appealed in the High Court where D’Arcy was again victorious.

Following the back-to-back defeats, HMRC has now given up on further litigation and also closed enquiries into similar ‘gilt repo’ schemes, which have since been blocked by legislation. But although the case will no longer be pursued further through the courts, it has provoked intense debate within the profession about what is an artificial scheme and what isn’t.

The argument has raged whether D’Arcy should have been allowed to claim the tax loss by exploiting a gap in very detailed legislation.

Following the High Court judgment, which emerged in February last year, then CIoT president John Cullinane said the D’Arcy case was an example of how complex legislation could do more harm than good to tax collection.

In his judgment, Justice Henderson agreed: ‘This is, in my view, one of those cases, which will inevitably occur from time to time in a tax system as complicated as ours, where a well-advised taxpayer has been able to take advantage of an unintended gap left by the interaction between two different sets of statutory provisions.’

But in the 2007 Hardman Lecture, Mike Truman, editor of taxation, took a different view, and argued that the scheme used by D’Arcy was clearly artificial.

He said courts should be given room to form a realistic view of a tax scheme rather than interpret legislation to the letter and so accept schemes that from any other point of view look contrived.

D’Arcy may no longer have to worry about her case, but for tax advisers and inspectors its repercussions are set to dominate debate for some time to come.

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