Tax planning: HMRC attack strategies

These days, the public’s general perception of ‘tax avoidance’ possibly evokes thoughts of ‘dodgy’ schemes offered by unscrupulous advisers. This is perhaps unsurprising, given the extent of negative media exposure on the subject.

Unfortunately, the line between tax avoidance and tax planning seems to be more blurred than ever. The situation has probably not been helped by generalisations from the government and HM Revenue and Customs (HMRC), such as the popular mantra that everyone should pay their ‘fair share’ of tax. This expression has been followed by the term ‘excessive tax planning’, which seems to describe circumstances falling somewhere between tax avoidance and what HMRC regards as acceptable tax planning.

Tax avoidance and excessive tax planning (referred to here as ‘arrangements’ for convenience) are both open to challenge from HMRC in a number of different ways. For example, HMRC will probably consider whether the arrangements are caught by targeted anti-avoidance legislation. Alternatively, where arrangements involve a number of transactions, HMRC has historically sought to apply the Ramsay anti-avoidance doctrine (W T Ramsay Ltd v IRC [1982] AC 300) in construing tax legislation purposively, and HMRC now also has the general anti-abuse rule provisions at its disposal (FA 2013, Pt 5, Sch 4; NICA 2014, ss 10-11).     

However, HMRC sometimes adopts different attack strategies, which it perhaps perceives to be potential ‘easy wins’ against the taxpayer, compared with complex technical challenges based on the tax legislation. For example, HMRC may contend that one or more transactions in an arrangement are a ‘sham’, which should therefore be disregarded. Another line of attack is for HMRC to challenge the implementation of arrangements, such as by arguing that the relevant documentation is defective.

Not a ‘sham’

A recent criminal case, R v Quillan & Ors [2015] EWCA Crim 538, considered (among other things) whether a particular element in a tax planning scheme was a ‘sham’. The allegations against the defendants were that two schemes were set up with the dishonest intention of securing income tax relief at source from HMRC, by paying the same sum of money into pension schemes over and over again, each time causing the payment of tax relief from HMRC to the schemes.

The prosecution argued that both schemes were a sham, for various reasons. These included that the defendants’ aim was to establish schemes that recycled the same capital and generated large amounts of tax relief at source; that the defendants were principally after the tax relief at source money, which was the only real money in the scheme once the initial funding was repaid; and that almost all of the tax relief at source was extracted from the scheme by way of payments to the defendants disguised as administration fees, costs and other payments or through repayments to those who had provided the initial funding for the scheme.

The Court of Appeal addressed each of the allegations against the defendants. On the charge of conspiracy to cheat, it was alleged that the schemes were fraudulent from the outset because the sums paid as tax relief at source were never lawfully due. However, the Court considered that the prosecution’s arguments about the arrangements being a sham were not good enough, as they were ‘high-level’ and not particularised. It would have been necessary for the prosecution to satisfy the jury (to the criminal standard of proof) that the contributions lacked any true legal substance, notwithstanding their payment into the registered pension schemes of which the scheme promoters’ clients were members. It would be impossible to make good any contention of this nature without also establishing that the clients were conscious participators in the sham transactions. It was noted that a sham must reflect the comment intention of all the parties to the impugned transaction.

The court concluded overall that based on the prosecution’s arguments, the defendants had no case to answer.

Poor documentation

Any tax planning is only as good as its implementation. For example, the documentation for some tax avoidance schemes may be better than others. However, poorly drafted documentation is not necessarily fatal to a scheme. Nor does it mean that a taxpayer is ‘careless’ if the scheme proves to be unsuccessful, in terms of the penalties legislation for errors in tax returns, etc. (FA 2007, Sch 24).

In Herefordshire Property Company v Revenue & Customs [2015] UKFTT 79 (TC), the appellant company’s director shareholder decided that the company should sell its investment property and distribute the proceeds to him. He sought advice from a firm of tax consultants as to whether he could mitigate the potential tax charges. The tax consultants suggested a scheme (the ‘capital redemption policy scheme’) that it believed should create an allowable capital loss, which the appellant could realise and offset against the gain on the property. However, after the scheme was implemented, it was held in Drummond v HMRC [2009] EWCA Civ 608 that the type of scheme undertaken by the appellant failed. The appellant conceded that its own scheme failed. The claim for the capital loss was withdrawn, and the tax resulting from the property disposal was paid. HMRC subsequently decided to charge the appellant a penalty for negligently submitting its tax return. The appellant appealed.

HMRC argued (among other things) that the tax consultants’ scheme would have failed because of ‘implementation defects’ or possibly because ‘nothing happened at all’ and users of that scheme ought to have appreciated this. The First-tier Tribunal criticised the scheme documentation as having been very badly prepared, but commented that this did not mean that the documentation was necessarily ineffective. Nor did the tribunal accept HMRC’s contention that nothing actually happened. The scheme was implemented in a ‘manifestly artificial’ way, but the tribunal observed that same must surely have applied to the equally artificial (if better documented) other schemes, in relation to which negligence was not asserted by HMRC and no penalties had been imposed.

With regard to the negligence issue, the tribunal concluded that the appellant’s controlling director was more than entitled to think (as he did) that the scheme would operate as expected, and held that the appellant had not been negligent in submitting its tax return as it did. The appellant's appeal was allowed.

Be careful

In allowing the appeal, the tribunal judge in Herefordshire Property Company commented: ‘We are not remotely saying that a scheme cannot fail for implementation failures. It plainly can do, and many have done.’ However, the two decisions above suggest that HMRC challenges of schemes or arrangements on the basis of sham or implementation failures is perhaps not the ‘easy win’ that HMRC may anticipate in many cases.

Having said that, due diligence is required before and during any tax planning exercise. Those taxpayers who, despite HMRC’s aggressive stance against tax avoidance schemes, remain undeterred should seek professional advice to ensure that the documentation is capable of withstanding scrutiny by HMRC, and possibly the tax tribunal as well.


Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is a consultant to professional firms with Mark McLaughlin Associates Ltd ( Mark is also Managing Editor of TaxationWeb ( He can also be contacted via Twitter and LinkedIn Mark authors numerous titles for Bloomsbury Professional

Written by Ellie MacKenzie

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