Recent case offers helpful guidance on the operation of the tax disclosure regime

Who should read this article?

This briefing is relevant to anyone who promotes, participates in or finances tax planning arrangements, where the scheme may be within the ambit of the UK’s rules on disclosure of avoidance arrangements.

What has happened?

The Special Commissioner in HMRC v Mercury Tax Group [2009]  found that:

• importantly - if disclosure of the scheme in question had been required, no penalty could be imposed on the promoter for failing to disclose because the promoter had obtained a justifiable Counsel’s opinion on the facts of the case that disclosure was not required
• but in any event, on the particular facts of the case no disclosure was required (this bit of the decision is not that interesting, because the law relating to what must be disclosed has changed, and in any event the particular facts generally will not be directly relevant to other transactions)

Special Commissioners’ decisions do not constitute a binding precedent, but nevertheless this decision gives significant comfort where Counsel’s (or other suitable advisers’) views are sought and relied on as to whether a disclosure should be made.

The issue

HMRC are making increasing use of the UK rules on disclosure of tax avoidance arrangements to identify and subsequently counter what they perceive to be unacceptable tax avoidance schemes. This means that, where a transaction or arrangement is disclosed, legislation may be introduced relatively quickly to take away the tax advantage sought.

The obligation to disclose can fall on the promoter and, where a promoter does not make a disclosure, potentially on any other party to a relevant transaction or structure. 

However, not every transaction or structure needs to be disclosed, and it is not always clear whether a particular party to a transaction or structure is obliged to make a disclosure. In practice different parties may take different views.

Failure to disclose a transaction or structure which should be disclosed brings with it in a potential penalty “not exceeding” £5,000 (plus a daily penalty “not exceeding” £600 if the first penalty is not paid on time).

The case

Mercury Tax Group sought the advice of tax Counsel as to whether they were required to disclose the relevant arrangement, and Counsel advised that no disclosure was necessary. HMRC argued that Counsel was wrong, disclosure was required and that Mercury were liable to a penalty for failure to notify.

The Special Commissioner held that disclosure was not required.  However, and most interestingly, he went on to say that even had disclosure been required, given that the company obtained and relied on counsel’s opinion, he would fix the penalty at nil, saying:

“Counsel addresses his or her mind to the point and reaches a justifiable  conclusion…. Other than take advice there is nothing else that they [Mercury] could do; they could hardly ask HMRC whether they agreed without disclosing the scheme  in the process. In my view Mercury acted properly in relying on counsel’s opinion….”

Note that the adviser’s conclusion needs to be “justifiable”. Provided the adviser has been provided with a full understanding of the underlying facts, this hurdle should be easy to meet.

Comment and practical consequences of the decision

There are many transactions with a tax planning element where it is necessary to consider the tax disclosure rules at an early stage. 
Sometimes it is arguable whether disclosure is required and sometimes different parties (and different advisers) may disagree.

This case offers comfort to those in receipt of advice, and a practical solution if it is possible for each party to rely on that advice. It may also be helpful in resolving differing views between the parties, particularly where one party has obtained advice that a particular transaction or structure does not need to be disclosed.

However, where one party holds advice that no disclosure is necessary, other parties will need to be aware that they will either need to be an addressee of that advice or else to seek their own independent advice before they take comfort that they have “acted properly” and should not expect a penalty if the advice proves to be justifiable but incorrect.

Where a promoter is seeking advice on disclosure, it may therefore be useful to ensure that the disclosure obligations of other participants in any transaction or arrangements are considered, and that the adviser is prepared to address any opinion to those participants.

Contact

If you would like any more information, please contact Graeme Nuttall, Nick Noble, Derek Hill and Andrew Prowse.