The Finance Act 2014 conferred on HM Revenue and Customs (HMRC) draconian powers to tackle tax avoidance. However, in relieving a businessman of a tax demand for over £8.7 million, the Court of Appeal made plain that those powers are not without limit.
A family trust established by the businessman owned shares in a company which merged with another before the resulting group was floated on the stock market. On the basis of tax planning advice, the Jersey-based trustees of the trust retired and the trust became registered in Mauritius. Shortly after the flotation, the Mauritian trustees in turn retired and UK-based trustees were appointed in their place.
Due to those arrangements, which hinged on the terms of a double taxation treaty between the UK and Mauritius, the businessman asserted that the proceeds of the sale of all the trust’s shares in the company, as part of the flotation in 2000, were free from Capital Gains Tax (CGT). The effect of the arrangements, however, came into question following a 2010 decision of the Court of Appeal in a similar case, which also centred on the UK/Mauritius double tax treaty.
In 2016, HMRC exercised powers under the Act to issue the businessman with a follower notice, which required him to counteract or surrender the tax advantage he had received. He was also served with an accelerated payment notice, requiring up-front payment of the disputed tax. HMRC sought payment of £8,786,288, on a capital gain of almost £22 million, and warned the businessman that failure to pay promptly could result in a penalty of up to 50 per cent of the tax due. His judicial review challenge to the notices was rejected by the High Court.
In upholding his appeal against that decision, however, the Court of Appeal found that HMRC had misunderstood and overstated the significance of the 2010 decision. Before serving the notices, HMRC had to be satisfied that the principles established in that case would deny the tax advantage sought by the businessman, not merely that they would be more likely than not to do so. In those respects, HMRC had misdirected themselves and the notices therefore could not stand.
The Court acknowledged the importance of HMRC having adequate powers to deal with tax avoidance. However, given the draconian nature of the powers conferred by the Act – not least because of their impact on access to the courts and the rule of law – it was right that they should be carefully circumscribed by way of judicial review.