Many firms involved in marketing tax schemes became ecstatic on Thursday 8th October 2009 when the High Court judgment in the case of Mayes –v- HMRC was published.
This case was the first victory in the High Court for a marketed artificial tax avoidance scheme. The scheme in question was called "SHIPS 2". Basically the scheme tried to make use of a very special type of loss on an Offshore Life Bond. The Bond was acquired by a Jersey Resident, sold to a Luxembourg Company who then put large sums of money in the scheme and withdrew them all within the space of a month. The Bond was then sold to a UK Resident.
The objective was that the UK Resident would then surrender the Bond and claim Income Tax Relief on the artificial loss generated. There was also potential to use this Bond to generate a Capital Gains Tax loss.
The judgment of Mrs Justice Proudman was that this scheme was effective because she could not see any artificial steps within it! The judgment therefore has made tax scheme sellers ecstatic in that there seems to be hope for their products, having previously found no favour in the Courts (following the two landmark House of Lord's decision in 2004 of Barclays Mercantile Business Finance Limited –v- Mawson and Scottish Provident Institution). Those cases took the so called Ramsay Principle a step further and said a "purposive interpretation" was to be applied to any tax scheme to see whether it was effective.
Daniel Feingold, Senior Partner of Strategic Tax Planning Partnership commented:
"Mrs Justice Proudman's decision in this case is astonishing and may reflect the fact that she is a relatively new Judge and has little experience of complex tax law. Her judgment does not even mention the Scottish Provident case and seems to rely on older cases, rather than considering (as the House of Lords recommended), the IRC Commissioners –v- Scottish Provident Institution and Barclays Mercantile Business Finance Limited –v- Mawson cases together as constituting the basis of the "purposive approach" to analysing tax schemes".
Ironically, the following day the Court of Appeal gave their judgment in another tax avoidance case, Astall and Edwards –v- HMRC. This involved a special type of debt instrument known as a "Deep Discounted Security" which was artificially bought and sold to realise a loss against Income Tax for UK tax payers. The same legal analysis of the "purposive approach" was made by the Lord Justices of Appeal and they considered more fully the Scottish Provident Institution case. Their clearer analysis demonstrates that when dealing with a scheme with artificial steps in it (such as the "SHIPS 2" scheme), the application of the "purposive approach" would lead to the conclusion that the scheme could not succeed.
Daniel Feingold, Senior Partner of Strategic Tax Planning Partnership said that:
"the disparity in this judgment where the "purposive approach" is correctly applied and the High Court judgment of Mrs Justice Proudman is striking. Since the Court of Appeal is the second highest Court in the land and the tax law in question is virtually identical, it is clear that the Mayes case will not be successful and does not provide the opportunity tax scheme sellers were hoping for!
The correct conclusion in my view is that the Mayes decision represents a legal "blip". The approach adopted by the Court of Appeal in Astall and Edwards demonstrates that artificial tax schemes are not viable and will be struck out by the Courts. Sadly, it is highly possible that the judgment in Mayes will be banded about and used by tax scheme sellers to demonstrate their products have some validity. They should be mindful of HMRC's Litigation and Settlements strategy that means this case will be taken all the way to the Supreme Court, if necessary.
Only success in the Supreme Court could alter the chances for these types of schemes.
Anyone contemplating undertaking complex tax planning should take proper independent tax law advice as to the true state of the law and what acceptable tax planning options are available".
Strategic Tax Planning Partnership
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