HMRC Wins Tax Case Against Negligent Directors

The courts have closed another bolt hole for British taxpayers looking to shelter their money in complicated avoidance schemes.

Two company directors were found as acting negligently when looking to save money in a special scheme set up by Isle of Man tax planners Montpelier.

Appealing to a First-tier tribunal against tax demands for thousands of pounds from HM Revenue & Customs (HMRC), Bernard Litman and Ann Newall had tried to avoid capital gains tax on the disposal of business property.

HMRC objected to the scheme to save tax devised by Montpelier and told the pair they should pay £118,000 in capital gains tax. HMRC also wanted a 25% tax penalty from Litman and another of 20% from Newall.

The couple appealed the decision and took the case to the tribunal.

Tax penalties

However, the tribunal ruled in HMRC’s favour but did reduce the tax penalties.

The result means taxpayers trying to shelter behind tax avoidance schemes could face hefty tax penalties.

Litman and Newall told HMRC they were sheltering the gain in the scheme.

The tribunal heard they relied on professional advisers when submitting their returns.

However the tribunal ruled they should have checked that money was exchanged and they were responsible for the information in their tax returns.

But the penalties were reduced to 10% of the tax due – £11,800 each. The two have already paid the £118,000 capital gains tax bill plus interest.

The case is seen as a landmark against tax avoidance planning, making the taxpayer responsible for making sure the advice they had taken was correct.

Packaged tax scheme

Litman and Newall argued they did not have the knowledge or experience to carry out due diligence, but the tribunal ignored their plea.

The tribunal judgement said: “The failure to inquire into the basic commercial reality of the transactions entered into by these taxpayers is negligence for these purposes and that a reasonable taxpayer, including one prepared to enter into a packaged scheme like this, would have ensured that the commercial elements of the transaction, including the loan in particular, stood up to some commercial scrutiny and had been properly implemented.

“The taxpayers should not have claimed the capital losses on their tax returns without at least understanding that an actual transaction had been entered into, that some money had moved and that the transaction was not a sham.”

HMRC has carried out a long-term investigation into tax advice given to Montpelier clients.

Around 650 clients are alleged to have sheltered up to £8.8 million on the firm’s advice and at least 200 have faced tax inquiries.

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