Philip Fisher examines the Halsall case, in which a firm of solicitors took legal action against the promoters of a failed tax avoidance scheme they had used.
There has been a lot of legal activity in the field of tax avoidance in recent years. This has largely centred on HMRC’s challenges to those that promoted and utilised schemes that took advantage of loopholes in a variety of ways.
The most recent case, Halsall & Ors v Champion Consulting Ltd & Ors (Rev 1) [2017] EWHC 1079 (QB), provides a new angle, since the partners in a firm of solicitors, who each utilised two different types of scheme took legal action against the promoters in an attempt to recover losses suffered when HMRC successfully challenged the arrangements.
Despite the fact that the defendants were eventually successful, this case is likely to prove both frightening and instructive for those that have encouraged clients to take advantage of purported tax reliefs that might ultimately have proved illusory – in this case the Revenue seeking additional tax.
This story started in 2003 from when Champion Consulting Ltd and its associates, as represented by a Mr Dallimore, promoted a series of tax-saving schemes that were referred in court to respectively as the “charity shell” schemes and “Scion” film schemes.
The nature of the former schemes sounds worryingly similar to others that literally landed a pair of individuals working for a relatively large firm of accountants in jail.
Briefly, shares in a newly created company that was to be listed on AIM were donated to a charity, which was unlikely to receive any material profit as a result of the arrangement. Instead, those behind the scheme would benefit from significant tax reliefs as share values were artificially manipulated.
According to Dallimore, there was a very strong probability that the scheme would be effective, although he denies the repeated assertions in court that he used the term “no-brainer” to convince the four individuals involved that the scheme would not be successfully challenged by HMRC. In passing, it is observed that, ignoring any ethical considerations, inadequate care had been taken with regard to the share valuations used.
The second scheme was also reputedly referred to as “robust” and involved the sale and exploitation of film rights that would then give rise to sideways loss relief. Given its name, this kind of arrangement should already be familiar to many readers. In any event, the intended outcome was that tax potentially worth millions of pounds might be avoided by legitimate means with a 75% to 80% prospect of success.
In both cases, HMRC carried out successful investigations, leaving the claimants out of pocket and angry.
Having received such glowing assurances from Dallimore, they believed that it was appropriate to take legal action to recover amounts that they were convinced should never have been lost.
The upshot was a long and complicated legal case that reached the High Court, where the official report stretches to 71 pages.
The judge HHJ Moulder eventually concluded that the claims are invalid. However, the grounds that he used for reaching this decision will provide no comfort to others who have promoted similar schemes and could find themselves facing similar cases in future.
The reason why each the claims foundered was a failure by the claimants to bring them within the three-year period permitted by the statute of limitations.
This means that the decision had nothing whatsoever to do with any failures or otherwise by Champion Consulting Limited or its associates.
For those that have the time and energy to read the case in detail, it is clear that Dallimore made far more positive claims on behalf of the schemes that he was promoting than seemed wise, certainly in retrospect when they so signally failed to persuade HMRC to allow the tax reliefs.
Looked at it from the perspective of recent attacks on tax evasion, but more worryingly what George Osborne christened “abusive” tax avoidance, the plans entered into appear reckless.
It is clear that the engagement letters used by the scheme promoters would have been of assistance in providing some defence against a claim brought within the appropriate time limits but, based on his comments in court, the judge did not seem inclined to give them sufficient credence.
Lessons
There are a number of lessons we should all learn from cases of this type.
The most obvious is that if the scheme looks too good to be true, then it probably is. Next, if you help a client to implement a scheme that fails, there has to be a risk that you could end up in the High Court trying to defend an indefensible position.
In particular, it would be wise to ensure that all engagement letters are rock solid and state in words of one syllable that the scheme could fail and if it does you will not be responsible for the consequences.
Going a step or two further, over-promising with regard to the outcome of an arrangement that might fail when challenged by HMRC could prove very expensive in the longer term.
Looked at from the opposite perspective, litigious clients may well come to you as an expert adviser asking whether it would be feasible to take legal action against the promoters of a scheme that has been unsuccessful.
Going to court is always likely to be expensive unless you are successful. Therefore, it is necessary to do sufficient homework before going into battle, especially when the simple basics may not have been explored in enough detail, as happened on this occasion.
Regrettably, it seems likely that this could be the first of many similar cases, particularly if the next one not only finds a similarly sympathetic judge, but is initiated within the statutory time limits.