Raise the white flag

I’m not a quitter. I have never run away from a fight of any sort. However,
when it comes to tax avoidance schemes, the anti-avoidance legislation is now so
onerous (and the interpretation of that legislation by the courts seems so
weighted against the taxpayer) that the days of artificial tax schemes
succeeding seem to be over.

Why? All we have to do is turn to the evidence that is available to us. The
requirement of the Disclosure, Tax Avoidance Scheme (DOTAS) certainly puts a
dampener on tax schemes. Long gone are the good old days when some bright spark
could dream up a good old tax scheme and it would take years for HMRC to catch
up and legislate against it. DOTAS is akin to Sir Alex Ferguson setting out his
game plan and then handing this over, in the clearest possible terms to the
opposing manager before the game has even started.

Secondly, many of these schemes just don’t seem to succeed when they are
actually tested in the courts. One example is the case of Irving v HMRC (2008).

While the facts are not relevant, I remember reading counsel’s opinion, which
seemed certain that the taxpayer had to win. The taxpayer lost all the way to
the Court of Appeal and was refused leave to appeal to the House of Lords.
However, what was interesting in that case is that one of the judges criticised
the legislation, saying that “not for the first time, we have had to go to
Bannockburn by way of Brighton Pier. This is not how the legislation should be
written”. Very helpful.

Then there is the case of Drummond v HMRC. This related to a tax avoidance
scheme in which an artificial capital loss was claimed. Again, some of the
largest accountancy firms were promoting this scheme and the tax opinions that I
read would have made you think it was game, set and match to the taxpayer before
the first ball was struck. Again, the taxpayer lost all the way to the Court of
Appeal.

If that is not enough evidence for you, then what about the government’s
history in introducing retrospective tax legislation? The Pre-Owned Asset
Legislation introduced in 2004 changed the law retrospectively to 1986.
Regardless of my protestations, tax schemes are here to stay because in the
light of the new 50% income tax rate, clients seem to want to be more and more
aggressive in their tax planning. For instance, how many of you professional
advisers out there have had this conversation?

Client: “I want to save tax and I want you to come up with a tax scheme to
help me.”

Adviser: “In all honesty, from my experience, the tax schemes I have seen
don’t seem to work. They are expensive, there are no guarantees as to success
and you will have no certainty for many years in view of HMRC’s stated policy
that they are willing to litigate.”

Client: “If you can’t help me – I’ll go somewhere else to someone who can.”

The real problem, however, is that when the dust actually settles and the tax
scheme undoubtedly fails, it really doesn’t help to say to your irate client: “I
told you so.”

Lynton Stock is a partner at Shelley Stock Hutter.