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Counsel’s opinion is no guarantee, HMRC warns as barrister’s scheme fails

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A tribunal decision that a tax barrister’s ‘highly complex’ avoidance scheme was ineffective shows that it is a mistake to assume that schemes backed by counsel’s opinion will work, HMRC has warned.

‘Rex Bretten QC designed a highly complex scheme which involved setting up trusts and investing £500,000 in discounted securities,’ HMRC said last Friday. ‘He claimed his scheme created a loss of £475,000 which he could set against his income. The tribunal said that the securities had been issued solely to facilitate Mr Bretten’s tax avoidance scheme and that there was no genuine loss, so the tax is payable.’

HMRC’s warning came on the same day that Tax Journal published an interview with Stephen Herring, senior tax partner at BDO, in which Herring was asked whether there was a recent development in tax that concerned him. ‘The proliferation of “tax opinions” supportive of tax treatments which tax professionals ought to (and probably do) know the courts would be extremely unlikely to uphold,’ Herring replied.

HMRC said that while the structure implemented by Bretten in 2003 was unique, the principles considered by the tribunal ‘could be directly applied to a number of other cases involving further tax of around £2m’.

Bretten represented himself at the First-tier Tribunal in January. He practised from Tax Chambers at 15 Old Square until his retirement last year, the Law Society Gazette reported, adding that he ‘could not be contacted for comment on whether or not he will appeal the decision’.

A spokesman for Tax Chambers told Tax Journal today: ‘Tax Chambers would agree with HMRC that it is a mistake to think that any action taken on advice given by a senior lawyer is necessarily safe from HMRC challenge. It is, however, also a mistake to think that, were there to be a challenge by HMRC (even in a case where a tax avoidance motive is found to exist) an appeal would necessarily fail. This is not surprising given the complexity of the tax system. It is often the case, however, that a purpose of tax litigation is to determine whether or not such a motive existed.’

As Tax Journal reported last week, in George Rex Bretten QC v HMRC TC 02604 Judge Barbara Mosedale found that transactions in loan notes were undertaken ‘solely for tax avoidance reasons’.

Bretten had contended that he put assets into a trust ‘to avoid potential creditors’, but Mosedale said that if asset protection had been his only concern he would have transferred funds directly into a trust.

HMRC’s press release quoted exchequer secretary David Gauke as saying: ‘The vast majority of individuals and businesses pay the tax they owe. There are, however, a small minority who will seek to exploit the rules and try to avoid their responsibilities by engaging in artificially contrived schemes.’

Jim Harra, HMRC’s director general for business tax, said: ‘This is another important success for HMRC at tribunal which may well have repercussions for other similar tax avoidance schemes. Some people make the mistake of thinking that a complex avoidance scheme backed by a senior lawyer is safe from HMRC’s challenge. That would be a big mistake, as this outcome proves. People should always ask themselves whether a proposed scheme is too good to be true.’

Bretten was one of four QCs criticised for their role in advising on the efficacy of marketed schemes last December. Margaret Hodge, chairman of the Commons public accounts committee, was addressing witnesses at an evidence session at which none of the four was present.

Hodge has been criticised for adopting too broad a definition of tax avoidance in the context of aggressive tax planning by multinationals. But her comments were made in the context of aggressive schemes targeted by the new general anti-abuse rule (GAAR).

HMRC has published its guidance on the GAAR today. Barristers practising at Tax Chambers will address a tax planning conference in June. Promotion material for the conference claims that ‘[HMRC’s] published guidance shows they expect to use it against the most innocuous of transactions’.