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Tax Planning Gone "Bad" - Has your thermometer popped?

When considering the frenzied press reports about morality of tax schemes, it appears that trying to reduce a tax bill by legal means is more or less standard practice for those breaking the higher tax threshold.

Tax planning strategies are ubiquitous and so are the HMRC Enquiries which ultimately follow them. With around an estimated 40 years of costly tax litigation, should HMRC take their current case load of enquiries to tax tribunal, the temperature is rising in HMRC’s kitchen.

For some, who have done nothing illegal, they are trapped in the heat of an HMRC anti avoidance and fraud, Code of Practice 8, tax investigation and the thermometer has popped.

Some celebrities in the spotlight have been advised to conduct their “financial affairs much more responsibly” but what about those in the troposphere left with an HMRC enquiry whereby the tax scheme vendor has popped off?

Purely for illustration purposes below, the two fundamental HMRC Code of Practice 8 (and 9) lines of attack are 1.Anti Avoidance and 2. Fraud.

1. Anti Avoidance

The essence of such tax schemes, assuming that they work in principle, is to get the paperwork formally right and this is 'beautifully' illustrated at paragraph 68 in the judicial review proceedings at Mercury Tax Group v HMRC.

At the time events took place, Mercury had apparently identified and exploited a technical loophole in the tax legislation. Presumably, participators in the scheme were found by the vendor supply chain which paid commissions to the selling agents.

The series of Mercury’s tax strategy involved the purchase, granting of options over and onward sale of gilt strips in order to generate tax losses which could be offset against income tax.

It appears HMRC suspected fraudulent irregularities in the execution of the scheme particularly focusing on the chronology of the contractual documentation. For practical implementation and timing purposes, Mercury had arranged for participants to sign pages of early drafts of the purchase and sale contracts for the gilt strips. Later, these contracts were amended by inserting pricing information, the identity of the purchaser and the identity of the gilt strip to be purchased. The earlier signature pages were then added to the final contracts which represented the executed documents. At paragraph 13 Mercury argued "that the procedure followed – i.e. of obtaining the client's signature to a draft but subsequently transferring it to the final version – is ordinary office practice and wholly unobjectionable”. HMRC considered that these documents were not properly executed.

It appears that there had been material changes to the final documents - and the participants in the scheme had not authorised the changes made, which had not been drawn explicitly to their attention by Mercury.

Broadly, HMRC investigates potential shortfalls in the execution of contractual documentation. However, in the above case, was the granting of warrants unlawful? 

2. Fraud - HMRC’s Wabi Sabi moment?

The above case highlights HMRC’s fault line. The 'beauty' (as I mentioned above) of things imperfect, impermanent, and incomplete perhaps also highlights the fact that HMRC should use discretion when using its fairly draconian powers. 

During the course of the Mercury investigation, HMRC had sought warrants using [the then] s.20C TMA 1970 information powers to obtain documents and particulars.

On critical analysis, the Judge stated that “deployment of the nuclear weapon of an application under s. 2