Tax Disputes Briefing: Court Of Appeal Refuses To Reverse Artificial Tax Avoidance Scheme On Grounds Of Mistake.

• Published date: 18 August 2023
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Inheritance Tax, Tax Authorities
• Law Firm: Travers Smith LLP
• Author: Ms Emily Clark, Robert Fell, Kaleem Khan, Rachel Kitchman, Sophie Lloyd, Claire Prentice, Sarah Roman, Elena Rowlands, Mahesh Varia and Ian Zeider

In the recent case of Bhaur and others v Equity First Trustees (Nevis) Ltd and others [2023] EWCA Civ 534, the Court of Appeal (CoA) had to consider whether to allow taxpayers to undo, on the grounds of mistake, a voluntary disposition of their assets entered into as part of a tax avoidance scheme.

1 Background

Courts can set aside voluntary dispositions entered into by mistake. Caselaw distinguishes between mistakes (which can be set aside) and mispredictions (which cannot), with the former pertaining to the present or past circumstances at the time of entry into an arrangement and the latter to some possible future event. However, the distinction between the two can be fine.

Even if there has been a mistake, for the courts to intervene it must be sufficiently serious so as to render it unjust or unconscionable for a donee to retain the property given to them. Here courts have found it relevant whether the mistake related to artificial tax avoidance arrangements.

In Bhaur, Mr and Mrs Bhaur had, following tax planning advice, established an employee benefit trust (EBT) to which they had transferred their family business with the aim of mitigating inheritance tax on their death. The CoA found as a matter of fact that the business had no need for the EBT at the time it was established, with the relevant company's only three employees being members of the Bhaur Family who were not intended to benefit from the trust. The company later took on non-family employees following advice that this would be helpful for the purposes of the planning, but there was no intention that they should benefit from the EBT.

After HMRC started investigating the arrangements, the trustees sought to make payments to members of the Bhaur family, who strongly objected to...