A recent ruling by the Upper Tribunal in Dunsby v HMRC [2021] has confirmed that efforts to avoid paying income tax by deploying an elaborate tax avoidance scheme can be thwarted by taking ‘a realistic view of the facts’ or, in other words, applying some common sense.
Mr Dunsby had originally appealed to the First Tier Tribunal against an amendment by HMRC to his 2012/13 tax return, following an investigation and pursuant to the issuing of a closure notice. HMRC determined that Mr Dunsby was liable to pay income tax on a £195,400 dividend payment that he had received via a convoluted route, designed as a tax avoidance scheme by De Sales Promotions. Although the FTT agreed with two of HMRC’s three arguments against Mr. Dunsby, it gave the latter leave to appeal to the Upper Tribunal, a decision challenged by HMRC.
The facts of the case
Mr Dunsby, acting on the advice of De Sales Promotions, had entered into a tax avoidance scheme (the ‘Scheme’) involving the transfer of an S share in his UK-based private company, of which he was the sole director and shareholder, into a Jersey-based discretionary trust via a non-UK resident investor, Fiona Gower, for the sum of £100. Ms Gower transferred the share into a trust of which Mr Dunsby and his family were the sole beneficiaries. When Mr Dunsby declared a dividend of £200,000 on the S share, it was declared as income arising under a settlement (i.e. the trust) in which the settlor (in this case, Ms Gower who created the settlement) retained an interest. Under the terms of the trust, Ms Gower received 1.5% of the dividend, a charity 0.5%, leaving the beneficiary i.e. Mr Dunsby in receipt of the remaining £195,400.
The Scheme had been devised so that the dividend payment would be governed by the settlements legislation in Chapter 5 of Part 5 Income Tax (Trading and Other Income) Act 2005 (ITTOIA) with the result that the payment would be treated as if it was Ms Gower’s income (as the creator of the settlement) rather than Mr Dunsby’s. HMRC disagreed on three grounds. First, it contended that the settlement had been created specifically to benefit Mr Dunsby, and not Mrs Gower – she was simply an agent – and that he, rather than Ms Gower, was the settlor and therefore retained an interest in the income arising under the trust in respect of the S share. Secondly, Mr Dunsby facilitated the transfer of assets abroad (the selling of the S Share to Ms Gower) and so any income generated by those assets belonged to him. Finally, HMRC argued that ‘on a realistic view of the facts’ the £200,000 dividend was a taxable distribution from a UK company to UK resident.
Argument and counter-argument
The FTT agreed with Mr Dunsby that the payment he received from the trust was not a dividend or distribution within the meaning of ITTOIA. However, they found that he was the settlor of the settlement under the settlements legislation, and that he was taxable under the transfer of assets abroad regime, with the result that he was liable for tax on the £195,400 he received from the trust. Mr Dunsby contended that Ms Gower was the settlor so that any income arising from the settlement was hers. He was thus given leave to appeal the FTT findings on both the settlor and the transfer of assets issues.
The Upper Tribunal disagreed with the FTT on the distribution point, noting that ‘viewed realistically there is no doubt whatsoever that Mr Dunsby was the “person to whom the distribution truly belongs”: the entire purpose and effect of the Scheme was to put the distribution in the hands of Mr Dunsby.’ Having determined this point, the UT acknowledged that it did not need to examine further the FTT’s reasoning behind the settlement issue, or the transfer of assets abroad issue, but decided to do so for the sake of completeness. Reviewed in the round, it was clear to the UT that the whole scheme was ‘a series of commercially interlinked transactions’ with the sole – and obvious - purpose of putting income generated by Mr Dunsby’s company beyond the reach of the UK tax authorities. The net result for Mr Dunsby, was that the UT ruled that he was to pay income tax on the total £200,000 dividend payment.
If it sounds too good to be true, it probably is
This is a useful ruling for anyone contemplating using a tax avoidance scheme. The courts will take a pragmatic view on the basis that if each element of the scheme has been deliberately set up in such a way to help a particular individual, or group of individuals, to avoid paying income tax, then it is likely to fail. In other words, if a scheme seems to be too good to be true, it almost certainly is - even if it has been disclosed to HMRC.
Nonetheless, if you think that you have been unfairly targeted by HMRC because you entered into one of these schemes in good faith believing that, having taken professional advice, it had HMRC’s approval, you may have a claim against your professional adviser if they failed to outline the inherent risks of a tax avoidance scheme they are promoting.
We have successfully pursued claims for compensation on behalf of a number of clients against their accountant, financial adviser, tax adviser or even their solicitor. These professional advisers owed a duty of care to provide honest and appropriate advice on the risks associated with tax avoidance. If you feel you were not adequately or appropriately advised, you may have a claim for professional negligence.
