Tax Avoidance Schemes – Take Care

Entering into tax avoidance schemes is not for the faint-hearted and, once embarked upon, they can be very difficult to leave. In one case, participants in two such schemes failed to convince the High Court to turn back the clock and free them from the potentially serious financial consequences of their involvement.

The participants had entered into the schemes on the advice of a firm of tax and accountancy advisers. HM Revenue and Customs (HMRC) had raised assessments against them for unpaid tax, interest and penalties on the basis that neither scheme was effective.

In order to strengthen their hand in resisting at least the claims for penalties and interest, the participants argued that the contracts by which they joined the schemes were not worth the paper they were written on and should be rescinded. Their application was strenuously resisted by HMRC on the basis that a ruling in the participants’ favour could have wide implications for other cases.

It had been established in previous litigation that, unbeknown to the participants, the advisers had received secret commissions – effectively bribes – from an intermediary which stood between it and the providers of the schemes. However, the providers were not involved in that wrongdoing and the Court found no reason why the contracts between them and the participants should be rescinded.

Arguments that rescission was justified by undue influence being brought to bear on the participants by the firm of advisers were also rejected, as were claims that the validity of the contracts was undermined by common mistake. The ruling means that the only recourse to compensation for the participants in the schemes will be to launch legal action for damages against the firm.

HMRC have gained a number of victories recently in their court cases involving tax avoidance schemes. In one such case, a ruling was made which should net the Exchequer nearly £500 million.