Friday, August 02, 2013

Do HMRC (and the State) Encourage Tax Avoidance

BLOG 140


That’s not intended solely to grab your attention. It is a serious question.  It is prompted by my belated reading of the High Court decision of Mr Justice Silber in Mehjoo v Harben Barker.  The decision was released at the beginning of June, but I make no excuses for writing about it now.  It is very long – I have read shorter novels – and I have a great many other things that I need to read.


Mehjoo is a professional negligence case.  It raises a number of important issues, some of which I propose to address before returning to the possible complicity of HMRC in tax avoidance.  Accountancy Age said, “in a judgement that ran to just shy of 66,000 words, Judge Justice Silber ruled practitioners have a duty to advise clients to avoid tax”.  The Times interpreted it in the same way.  Richard Murphy’s Tax Research UK website headed his blog post, “The High Court rules that accountants have a duty to undertake tax abuse”.  He said, “The time has come for the government to protect ethical accountants.  These bearer warrant schemes were based on an incredibly dubious premise – it was a load of make believe.  I know.  I knew of it.  KPMG, at least marketed it”.


A respondent on the ICAEW Tax Faculty’s website pleaded for people to be a little less alarmist and focus on the facts.  “It is clear that the negligence was not in respect of failing to advise the client to enter into a tax avoidance scheme, but was in respect of failing to advise him to seek specialist tax advice”.  That is correct, but the quantum of damages was based on the premise that had he done so, Mr Mehjoo would have been advised to enter into an artificial tax avoidance scheme in order to avoid the 10% CGT charge and, as the judge felt that HMRC would not have challenged the scheme, Harben Barker was liable not only for the tax and interest thereon but also Mr Mehjoo’s costs of entering into an artificial tax avoidance scheme that did not work, in a vain attempt to seek later to shelter the capital gain.  That certainly looks to me to be saying that someone (albeit not Harben Barker) should have advised Mr Mehjoo to enter into the tax avoidance scheme.


This is one of the fairly rare occasions where I agree with Richard Murphy.  I think that the scheme that Mr Justice Silber decided was virtually bound to succeed was an artificial avoidance scheme that should not have worked because it falls within the Ramsay doctrine.  I am fairly horrified at the thought of having an obligation to promote such schemes imposed on me.


But let’s start with the facts.  Mr Mehjoo was born in Iran.  He came to the UK aged 12 in 1971 to go to boarding school and has lived here ever since.  In 1981 he claimed refugee status and was given leave to remain in the UK.  Mr Mehjoo set up a UK retail business in around 1981.  In February 2003 he merged it with a similar business owned by a friend, Mr Scott, and the combined business was sold in April 2005 for £22million of which Mr Mehjoo’s share was £8.5million.


Mr Mehjoo met Mr Purnell of Purnell & Co in 1981 and they became close friends over the years.  Purnell & Co merged with Harben Barker in 1991.  In 1999 Mr Purnell sent Mr Mehjoo a new engagement letter which said, inter alia, that Harben Barker would give him “general tax-planning advice on the best use of reliefs [and would be] willing to provide, if we are not already doing so, a more extensive tax and personal financial planning service”.  Unfortunately Mr Purnell seems to have told him orally that the new engagement letter was just a formality.  Mr Justice Silber certainly seems to have felt that the engagement letter did not put Mr Mehjoo on notice that if he wanted tax planning advice from Harben Barker, he needed to ask for it.  He was entitled to rely on the fact that Mr Purnell had provided him with minor tax planning advice from time to time and by doing so had accepted a responsibility to advise in relation to an £8.5million deal!


The next oddity is that, although the test of negligence is what an ordinary professional accountant would and should have done, the expert witness for Mr Mehjoo, on whose testimony Mr Justice Silber heavily relied, was a partner in KPMG, a big four accountancy firm, who was not himself a Chartered Accountant but a solicitor and had previously worked for a top ten law firm.  Mr Justice Silber thought he was “adequately qualified to give evidence relating to what a reasonably competent generalist Chartered Accountant would have known on issues such as ascertaining whether the Claimant had or very probably had or might have had non-dom status.  The way in which Mr Kilshaw has acquired knowledge of what generalist accountants know was because he had much experience of working with Chartered Accountants and knowledge of practices and expertise”.  With all due respect to both Mr Kilshaw and Mr Justice Silber, I would have thought that Mr Kilshaw’s expertise of what a sole practitioner Chartered Accountant such as Mr Purnell might be expected to do is limited to the tiny minority of such people who opt to consult a very large firm of accountants or solicitors.  I doubt that is a reasonable test of what the average sole practitioner might be expected to do.


Mr Justice Silber was also very impressed that Mr Kilshaw had extensive experience of what he called the BWP scheme – hardly surprising if Richard Murphy is right in suggesting that the scheme was being marketed (and, I suspect, possibly devised) by KPMG.  It is odd if a person is especially qualified even to say what a reasonably competent non-dom specialist would have done if he is a person part of whose job it is to sell an aggressive tax scheme aimed at non-doms.  Mr Justice Silber gave little weight to the expert evidence of Mike Warburton, a tax partner in a Grant Thornton regional office – and as such likely to have a fair amount of experience of small practitioners – largely because he admitted that he had never implemented a BWP scheme (perhaps because, like me, he had advised against it).  I regard myself as a reasonably competent non-dom specialist, but I would not have recommended the scheme because I was sceptical that it worked.  I would have told the client to accept a 10% tax charge rather than take the risk of getting involved in a full scale HMRC investigation that often arises where people enter into tax schemes.


Which brings me back to whether HMRC – albeit unwittingly – encourage the use of tax avoidance schemes.  Mr Kilshaw’s evidence was that HMRC had never successfully challenged the use of the BWP scheme.  Mr Justice Silber stressed the scheme’s “proven record of robustness and its lack of artificiality which overcomes the views of those who have doubted its efficacy”.  Well, that puts me in my place!!  But I still doubt its efficacy.  I think that HMRC’s resources are limited and it only challenges tax schemes when it feels that the tax being lost by the use of the scheme reaches an unacceptable level.  In the case of BWP, they asked the government to introduce amending legislation to stop future use of the scheme.  Sometimes they both do this and continue to challenge past use of the scheme.  The fact that they chose not to challenge past use is what seems to have prompted Mr Justice Silber to regard the scheme as robust.


Obviously HMRC have a dilemma here.  If the government will not give them the resources needed to challenge all tax avoidance schemes but the courts regard the resultant lack of a challenge as demonstrating that the scheme works, HMRC are in an impossible position.  But so is the public.  The position is aggravated by an HMRC policy not to seek to become involved in civil court disputes to which they are not a party.  It would surely have been in the public interest for HMRC to have made their position clear, rather than leave Mr Justice Silber to assume that they accepted that the scheme was robust.


I can see however a problem in their doing so, namely that the sole forum that Parliament has laid down for resolving disputes over tax schemes is the Tax Tribunals, not the High Court.  Accordingly for HMRC to intervene in a High Court case on a tax issue could be taken as undermining this parliamentary decision.  Where the outcome of a High Court case involves making a judgement about the efficacy of a tax scheme, it would be far more sensible if the High Court were to refer that issue to the Upper Tribunal (Tax), which has the same legal status as the High Court, and some of whose members are also High Court judges.  The Tribunal could then give an authorative answer on the tax issue, to inform the High Court decision on the wider issues.  That would of course require a change in the law, but it is surely a change that would be in the public interest, rather than leave non-tax judges to give their blessing to aggressive tax schemes because of their own ignorance of tax law.  Actually, I think that Mr Justice Silber already has the discretion to do this, but chose not to do so.  Presumably on the basis that he regards his own knowledge of tax avoidance schemes adequate to be able to pronounce on their efficacy. A second best alternative, that would not require a change of law, would be for the judicial authorities to allocate cases that involve tax issues to a judge who is also a member of the Upper Tribunal (Tax) so that he can at least bring his own knowledge of tax legislation and cases to the party.


A further interesting issue is that the BWP scheme needed the agreement of Mr Scott, who is not non-dom and would obtain no benefit from the scheme.  Again on the basis of Mr Kilshaw’s evidence, Mr Justice Silber thought that Mr Scott would want to seek a tax clearance but that this would be readily given by HMRC.  A tax clearance is not worth the paper it is written on unless it fully discloses the facts.  Accordingly if I acted for Mr Scott, I would have wanted the clearance letter to say, “This is a tax avoidance scheme being entered into for the benefit of my co-shareholder, Mr Mehjoo, who owns 38.6% of the company, but I am getting no benefit from going along with it, so please confirm that you accept that the scheme is being entered into for bona-fide commercial reasons and that it does not form part of a scheme or arrangement of which one of the main purposes is avoidance of liability to CGT”.  That is what TCGA 1992, s 137 looks at.  The issue is not whether Mr Scott is seeking to avoid tax but whether the scheme itself is intended to do so.  If Mr Justice Silber is right in thinking that HMRC would readily have given clearance, that surely calls into question HMRC’s real desire to stop tax avoidance.  The report does not say if KPMG in fact used to routinely apply for, and get, section 137 clearance.  If they did, then HMRC’s definition of tax avoidance is far removed from my own, and clearly bears no resemblance whatsoever to Richard Murphy’s!