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Gardiner: negligence and tax avoidance

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Sometimes tax schemes are found by the courts to fail. The question then arises whether a participant who in the meantime filed a return on the basis that it worked is guilty of negligence. Certainly the possibility cannot be ruled out, as Mr and (the then) Mrs Litman found out in [2014] UKFTT 089 (TC). The question is generally not whether a participant knew or ought to have known the fine technical details of the scheme, but whether he or she asked appropriate questions before signing a return. You don’t need to be a tax expert to know whether the meetings you say you attended actually happened; whether a loan on which the scheme depends was actually made; whether the asset you claim to have bought and sold actually existed; or at least to evince some sort of curiosity into such matters. Blindly signing all the papers put in front of you does not reach the standard of care the law expects of you. So much is fairly uncontroversial.

But where negligence is alleged, it is for HMRC to prove its case: in technical terms the ‘burden of proof’ lies with HMRC. It is not for a taxpayer to show he is not negligent, but for HMRC to show that he is. Unfortunately, HMRC seemed to forget this basic point in the recent case of Gardiner [2014] UKFTT 421 (TC). HMRC called no witnesses and in its absence was unable to produce in evidence any of the documents on which it apparently sought to rely. There was therefore not even a prima facie case of negligence for the taxpayers to answer, so the case was dismissed.

Result: if the taxpayers had in fact been guilty of negligence (a matter which, we emphasise, remains unproven), HMRC’s handling of the case will have allowed them to ‘get away with it’. Possibly worse, if they were not guilty of negligence, their time and money has been wasted in coming to court to resist an allegation entirely unsupported by evidence. Either way, there should be some very red faces at HMRC.