Delphi Derivatives Limited v The Commissioners for HMRC [2023] UKFTT 722 (TC)

‘HMRC are directed to update the Tribunal, at intervals, of not less than three months, on the current status of such proceedings. As and when the risk of prejudice has passed, any decision of the Tribunal on this appeal is to be published in the usual way.’

‘I am instructed by Clavis Solutions Ltd/ Clavis Tax Solutions LLP (“Clavis”) in relation to the use of a Human Resources Consultancy Company (‘HRC’) and a special purpose trust to provide discretionary benefits to employees of UK companies in a similar way to an employee benefit trust.’

‘The intentions would be for the Directors of a trading company to outsource to HRC, a completely independent party, the function of evaluating the performance of key personnel and providing reward packages based on that evaluation with awards then made in a tax efficient manner.’ (2) The contractual arrangement between the trading company and the HRC: ‘The trading company would enter into an outsourcing contract with HRC, a completely independent body to the trading company. The contract would identify the requirements of the trading company, and the services to be provided by HRC. No fee would be payable at the point of the company entering into the outsourcing contract. A fee would be determined once a report had been submitted and would be payable prior to implementation. HRC would meet with the Directors of the trading company and the selected employees and by a process of thorough interviews assess what benefits of what approximate value would best meet the objective of the company and the aspirations of the employee.’ (3) The role of a HRC is set out by Thornhill in the following terms: ‘HRC would compile a report setting out recommendations, in the light of all relevant circumstances including tax and proposing an overall fee to cover the provision of all the services as defined in the agreement. VAT is likely to be chargeable under the “reverse charge” provision. HRC would identify a range of possible reward and incentive arrangements for employees. The report would be provided to the company which would settle the invoice. (4) The timing of payment of an ‘overall fee’ is described as follows: ‘Once the proposal is accepted and an overall fee agreed the report would be implemented, quite probably with minor variations in type of benefit and quantum of expenditure.’

‘The relevant legislation governing the corporation tax deductibility of payments for employee benefit contributions is Schedule 24 to the Finance Act 2003 as amended by draft legislation introduced in the budge on 21st March 2007. The broad aim of these measure is to restrict deduction for EBT contributions until such time as those contributions are applied to benefit employees in a form which gives rise to an employment income tax charge and an NIC charge.’

‘The Finance Act 2007 will introduce further measures to restrict the availability of corporation tax deductions for contributions to an EBT. However, the anti-avoidance measures as they currently stand do not apply “in respect of anything given as consideration for goods or services provided in the course of a trade or profession”. See FA 2003 Schedule 24, para 8(a). Clearly, the services envisaged must concern the provision of employee benefits. Otherwise the legislation would not apply. The services envisaged do of course, directly concern the provision of benefits.

‘In my opinion, therefore, properly implemented, the proposal outlined above should allow the employer company to claim a corporation tax deduction for the amount paid to the HRC. Subject to the points outlined below, I confirm that in my view the payments should fall into the exclusion from Schedule 24 FA 2003 set out at paragraph 8(a) of that Schedule – “the goods and services exemption”.’

‘For the proposal to work, it is vital that the HRC does not act as agent for the company. Payment must be made unconditionally to the HRC for the functions it is to perform and HRC must have complete freedom to then perform those services as it sees fit within the confines of the report. These decisions must be taken – and be seen to be taken – by HRC. In my view, documents confirm that this is indeed what will happen. The fee paid to HRC will encompass both work to be undertaken by HRC in assessing the rewards to be provided and the cost of making those rewards. Should the situation arise whereby HRC is paid significantly more than HRC ultimately pays out to employees, HRC must be free to retain the excess.’

‘I further confirm that it is my view that the anti-avoidance legislation set out at paragraph 33 of the 2007 Finance Bill further restricting deductions for employee benefit contributions would not affect the proposal set out above. A deduction would be claimed on the grounds that the payment was made wholly and exclusively for the purpose of the trade. If the payment is made after the year end, it is vital that a liability is established in terms of FRS 12 during the period of account. It does not seem that payment needs to be made within nine months of the year end (see FA 1989 s. 43(2)) though it might be sensible to make it within that time.’

‘This figure includes the sum of £[ ] which was paid to a human resources company. The payment was made in order that he human resources company could develop and implement a remuneration plan for the purposes of rewarding key employees of the company for their performance over a specified period.’ (4) On 3 March 2008, a further opinion was provided by Thornhill on the issue ‘beneficial loans’ with reference to section 720 ITA 2007. (5) On 10 March 2008, a 5-page opinion was given on ‘further income tax issues relating to the outsourcing strategy’

‘In accordance with your instructions’, and relates the two meetings Tucker had with Clavis Solutions Ltd (Frank Harris and David Cowen on 31 July and 4 August 2008) who explained the structure of the Arrangement in the first meeting, along with ‘a selection of Counsel Opinions’

‘I have not as yet taken up any external references on the scheme with other accountants.’ (4) Paragraph 4 summarises the Scheme in the following terms: ‘The planning has the merit of simplicity and uses an exemption within the anti-avoidance rules which were brought in to counter the use of Employment Benefit Trusts (EBT’s). Whilst the direct use of an EBT by paying money into such an entity will not succeed in obtaining a Corporation Tax deduction, the use of the payment by way of sub-contracted services appears to circumvent the rules. This is the opinion of Andrew Thornhill a well respected QC at Pump Court Tax Chambers.’ (5) Paragraph 5 goes on to refer to another opinion on DOTAS reporting: ‘An Opinion has also been obtained dealing with my concern that no report of the scheme had been made under the “DOTAS” rules which require most tax planning arrangements to be reported. This scheme has not needed to be reported as it existed at the time when the rules were introduced. Counsel has confirmed that this is still the case.’ (6) Paragraph 6 sets out the attending features of the Scheme using sub-trusts and the loan mechanism: ‘There are various refinements to the arrangements including the use of an offshore bank account as a means to pay interest on the loan from the EBT sub-trust and thus avoid any tax liabilities or with holding tax on the payment of interest to an offshore entity.’ (7) Paragraph 7 is a cost-benefit analysis, pitching the costs of entering the Scheme against the anticipated tax savings: ‘The projections of tax saving based upon a profit of say £1,000,000 as prepared by Clavis do give a substantial tax saving of approximately 35% in year one but it should be noted that ongoing costs of £1500 to £2000 will be incurred per annum in each subtrust and will continue as long as the structure is required. Broadly this will be at least until the cessation of employment with the principal company and may be for 10 to 20 years or longer. I can explain the impact of that if required.’ (8) Paragraph 8 summarises the economics of the cost-benefit analysis as setting a minimum entry level: ‘Although the minimum level set for bonuses is £100,000, the more effective level would be £250,000 should ongoing costs require to be funded for many years.’ (9) Paragraph 9 identifies ‘possible areas of risk’ as follows: ‘There are a number of possible areas of risk: – 1) The possible introduction of retrospective legislation. 2) A possible attack on the principal shareholder under the Inheritance Tax legislation – I have seen that line of attack used on EBT’s in a way which has caused the breakdown of such arrangements. 3) The use of this scheme might be blocked at the time of the Pre-Budget report which may be in October 2008 if not sooner. This would mean that any planning would have to be implemented before then. I understand that total planning through these arrangements may be approaching £100,000,000. 4) Should the Corporation tax planning fail but the “income tax” side of the planning prove successful, the result would not be completely fatal but would make the savings only marginal. 5) The VAT status of a company using these arrangements is most important. The company must be able to fully recover all VAT as the payment made to the Human Resources company will be within the reverse charge mechanism.’ (10) Paragraph 10 recommends obtaining a second opinion: ‘My normal and usual advice for any such scheme would be to ask that another Counsel Opinion from a barrister other than the original one is obtained if the Promoters of the arrangements are prepared to permit this.’ (11) Paragraph 11 contains the caveat that the Scheme is open to challenge from HMRC: ‘Whilst the scheme seems to be most effective any aggressive tax planning will always be open to attack from HMRC and their current policy is to litigate everything. Enquiries have been raised into the computations of companies which have utilised these arrangements but I understand that HMRC are just at the collection of information stage.’ (12) Paragraph 12 relates the promoters’ agreement to fund the first stage of litigation: ‘The promoters undertake to fund the scheme to the first stage of any appeal process which would be to the new style Tax Tribunal form October 2008. If the tax payer won at the first stage, the promoters have not agreed to fund the matter to higher courts and the cost of such a case at the High Court or Court of Appeal is very expensive. If HMRC took the matter to the higher courts, that is a possible cost which you might have to bear. In other schemes, promoters have created a fighting fund which would allow the costs to be covered if the case went all the way through the appeal system.’ (13) Paragraph 13 assesses the chance of success in litigation and reiterates recommendation for advice from independent tax counsel: ‘This scheme appears to have a stronger chance of success than many more convoluted schemes but considering the amount you may wish to place in these arrangements I would recommend that the matter be put before independent Tax Counsel.’ (14) Paragraph 14 is the final paragraph with conclusions and a disclaimer: I can not [original as two words] formally recommend such a scheme to you as there is certainly a risk in entering such arrangements. Should you wish to proceed having taken a commercial view, I would assist to try to ensure that the arrangements are properly implemented. Dickinsons will not be held responsible should you incur losses by entering into these arrangements.’

‘PT [Tucker]: … would you personalise [the report] to pick up on the nature of what our client actually deals with? … It is purely the fact that one of the concerns was that these reports are too much of a standard with any tiny bits added …’ (4) Tucker’s view on his involvement (as regards reports) if Delphi took the Scheme: ‘PT: And if I am getting involved with it and our clients are going to … we want to make sure that we’ve not spoilt the ship.’ (5) When Cowen tried to impress Tucker on the importance of Sempra as supporting the Clavis Scheme ‘more than anything else’, Tucker arrested the flow by saying: ‘– sorry, my role in all of this is really to review the way you put the scheme together. Can I ask if we were going to go forward on this, would it be acceptable to you that I actually had sight of your tax report before it is finalised? … Because there were certain issues and thresholds. … [such as] the EMI levels were wrong.’

‘Fuller explained that she had spoken to Dave Jones at SI Liverpool regarding Walker’s letter as Jones was overseeing a review of the remuneration scheme provided by Clavis Solutions which had been used by several other companies including Delphi Derivatives. Fuller said that she would confirm the details in writing to Walker and provide a “bible” of documents regarding use of the remuneration arrangement.’ (2) On 21 October 2009, Dickinsons responded to HMRC’s letter of 15 September 2009 under the heading ‘Check of CTSA Tax Return for Delphi Derivatives Limited/ Period ended 30th June 2008’

‘We understand that you [i.e. Officer Walker] have agreed to liaise directly with Mr David Jones from Specialist Investigations in Liverpool who is coordinating all enquiries into this arrangement.’ (3) On 22 October 2009, Sally Fuller emailed Kerry Hall (and two others) at Clavis Solutions under the subject heading of ‘Delphi Derivates new sign up pack for SPT4’: ‘Can one of you please produce Delphi Derivates new sign up pack for SPT4? David [Cowen] going down to London next Tuesday for sign up, so he’ll need it ready before then. They’re doing £3m and will relate to their year ended 30 June 2009.’

‘Following our meeting with the above clients we are pleased to set out our findings for your consideration:- On the basis of the company and employee evaluations we have carried out, our preliminary view is that an overall benefit and incentive budget of approximately £5,000,000.00 to £5,500,000.00 should be able to provide a sufficient level of benefits and incentives to motivate, reward and retain the employees.’ (2) By email dated 20 November from Langran to Pauline Egan of Herald Trustees: ‘As discussed please could you send me the necessary paperwork for me to borrow £2,000,000 from the trust on an interest paying basis (which I think means we have to do slightly more so that I have enough money left in my […] Jersey account to pay the interest when it becomes due).’ (3) By email dated 23 November 2009 from Langran to Cowen: ‘I have paid £2.7mln to Herald today – then I need to arrange for the three of us to borrow it back so we can pay the balance of the invoice. Please could you ask whoever does the paperwork to organise the loan documents for us – we will need to do a loan of £900,000 each as cash flow a bit of an issue at the moment.’

‘I am pleased to say that our Counsel [i.e. Thornhill] who in fact appeared for the Sempra Company at the hearing has confirmed to us that their strategy was completely distinct from ours. There were six issues at stake and the one point that HMRC were successful on concerned deductibility within the company. I can confirm that there are no negative implications for the Clavis Strategy. In fact, it is exactly the opposite.’

‘I would reiterate that the decision was very good news for us and Counsel has confirmed this in conference – we await the outcome of the High Court Appeal which is being heard next month and our Counsel is again leading for Sempra.’

‘Further to our telephone conversation you asked that I provide details of payments into trusts/subtrusts to enable you to work out a possible settlement figure for the company.’

‘I confirmed that I had studied the schedule provided and was able to reconcile the amounts, which would enable me to produce indicative calculations of the liability arising. However, I still did not have details of any loans taken by the directors subsequent to 31/3/2009, and I would need this information for the purposes of asking colleagues to calculate any IHT liabilities. Agent will try to get this information, however, in the interim, he will accept computations which exclude any IHT. … Agent also confirmed that none of these loans have been shown on P11Ds and, therefore, there would be no credit available for tax paid for class 1A NIC.’

‘By entering into the agreement your clients are not accepting any culpability whatsoever, quite simply the agreement allows the issue of whether any penalties will be charged in this case to be concluded separately.’

‘There is now agreement between the parties that the Scheme did not “work” in producing the expected tax saving and the settlement agreement reached reflects the agreed position that PAYE and NICs are due upon the [tranches of] payments made [to Herald].’

‘My normal and usual advice for any such scheme would be to ask that another Counsel Opinion from a barrister other than the original one is obtained if the Promoters of the arrangements are prepared to permit this’, the advice to seek a second opinion was given with a caveat as underlined.’

‘At that point, I had not asked Clavis whether they would release the documents for review by another barrister, and in any event before they would allow me to see them I had to sign a confidentiality agreement which restricted the release of these documents to anyone else.’ (3) When asked by the Tribunal the wording used in relation to ‘my normal and usual advice’, Tucker confirmed: ‘That would be the firm’s sort of policy, and that would have been something which I would be asked to include in such a letter’

‘In terms of asking for another barrister to look at the case, it struck me that with the amounts involved it would give additional defence against any attack that the clients had been negligent in entering into such arrangements.’ (4) When asked by the Tribunal further in relation to his advice to seek a second opinion, Tucker replied: ‘A: … Although in hindsight and the like, I think it is highly unlikely that any barristers would have come out with an opinion at the time that those arrangements would fail. But my view was that the technical side of the arrangements was fairly robust.’

‘A: … in [Tucker’s] opinion there was no way, having had to sign all the non-disclosure agreements, any other person would be allowed access to the information…. What I am saying is he told us that he did not think Clavis would release the opinion to any other barristers, tax counsel to examine their scheme because of NDA.’

‘Mark Langran had phoned me and the discussion related to what the profits of the period were, and the objective of these arrangements, as I understood it, were to enable profits to be extracted and the latest management accounts had profits in excess of that period, and that was the way the discussion went. It was not a recommendation of the amount; it was setting out the level of the profits for the period, which could be sheltered should the directors wish to make a payment in that order of magnitude.’

‘Q: … is it not right that the only reason the figure in Clavis’s report changes from the one you see in the draft is Mr Langran’s email where he communicates a higher profit figure? A: I would say no, because accounts were also communicated. Q: Right. So the accounts are sent in on 30th October, and then one day later, we are told, … “Can we do 5.4 million instead?”’

‘We would have had a conversation and it would have been based on the fact that the accounts profit was in excess of that amount, and Mr Langran would have asked whether such an amount could go through the arrangements. That would have been the nature of the discussion. I was not setting it, and the accounts of the Company would have disclosed profits certainly of that order of magnitude and considerably more.’

‘1.18 HMRC’s position at the time was also not supported in the courts. In 2002’s Dextra Accessories v HMRC, the Special Commissioners found that the employee benefit rust (EBT) scheme under consideration achieved the “outcome promised when they were being marketed”. While HMRC was eventually successful in appealing narrower arguments around corporation tax in the House of Lords the question around whether the loans were income was not considered further. It took until 2017 – subsequent to the announcement of the Loan Charge – for Dextra to be overruled by the Supreme Court, which concluded that it had been wrongly decided. 1.19 While loan scheme use was growing in early 2000s, HMRC had not yet received judicial support that loan schemes did not work, and that loans should be taxed as income. Taxpayers did not, therefore, have to accept HMRC’s view. Evidence received by the Review consistently supported the view that such schemes were not seen as being aggressive tax avoidance at the time.’

‘Form 2009 onwards, HMRC also published its view in specialist Spotlight articles, which reach a limited number of agents and tax professionals. Evidence about the readership of relevant Spotlights from the time is not available, but in 2015 (when data is available) the four articles published to that point received an average of just 520 views each. The Review therefore concludes that both individual scheme users, and those using schemes through their employers, would likely have continued to be largely unaware of HMRC’s position at this time.’

‘The legal position at the time also remained unclear, with the courts not accepting HMRC’s view of the tax consequences of loan schemes. The 2008 decision in Sempra Metals v HMRC rejected the government’s arguments that loans made by an employer’s EBT were subject to income tax. The case was not appealed to the higher courts, which may have given scheme users at the time a degree of comfort that the legal position was settled. As had been the case with Dextra, it would take until 2017 for the Supreme Court to conclude that Sempra had been wrongly decided.’

‘Spotlight 5: Using trusts and similar entities to reward employees – PAYE (Pay As You Earn) and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax We’re aware that companies have been seeking to reward employees without operating PAYE/NICs by making payments through trusts and other intermediaries that favour the employees or their families. The arrangements usually seek to secure a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated, and also defer PAYE/NICs or avoid them altogether. Our view is that at the time the funds are allocated to the employee or his/her beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer. In addition our view is that an Inheritance Tax charge may arise on the participators of a close company. Unless the participators are excluded beneficiaries and have not had funds applied for their benefit, such as the receipt of a loan, a charge to Inheritance Tax arises on participators of close companies at the time the funds are paid to the trustee by the close company. Relief is only available to the extent that a deduction is allowable to the company for the year in which the contribution is made. Later payments of earnings out of the trust that may trigger a deduction to the company would not qualify for relief. Participators affected by this may need to self-assess a liability to Inheritance Tax. There is further technical advice on Inheritance Tax on Contributions to Employee Benefit Trusts on the HMRC internet site. We are actively challenging examples of such arrangements and considering legislative options to end further usage of these schemes.’ (Emphasis in bold in original replaced by italics here.)

‘where P satisfies HMRCthat P took reasonable care to avoid inaccuracy’

‘P is liable under paragraph 1(1)(a) where a document which contains a careless inaccuracy (within the meaning of paragraph 3) is given to HMRC on P’s behalf.’

‘… P is not liable to a penalty under paragraph 1 … in respect of anything done or omitted by P’s agent where P satisfies HMRC that P took reasonable care to avoid inaccuracy (in relation to paragraph 1) …’ (Emphasis added)

‘due to’ and ‘failure to take reasonable care’

‘The first condition is that the situation mentioned in subsection (1) above [is attributable to fraudulent or negligent conduct on the part of]the taxpayer or a person acting on his behalf’. (b) From 1 April 2010: ‘The first condition is that the situation mentioned in subsection (1) above [was brought about carelessly or deliberately by]the taxpayer or a person acting on his behalf’. (2) The repealed sub- 95(1) stated as follows: ‘(1) Where a person fraudulently or negligently – (a) delivers any incorrect return of a kind mentioned in … this Act …’

‘[22] … The test to be applied, … is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.’ (2) In Hanson (2012) Hanson v HMRC [2012] UKFTT 314 (TC). Judge Cannan considered ‘carelessness’ for Sch 24 purposes with reference to ‘negligent conduct’ and adopted the objective test of the ‘reasonable taxpayer’ in Anderson (deceased), and stated that: ‘[19] … In my view carelessness can be equated with “negligent conduct” in the context of discovery assessments under section 29 Taxes Management Act 1970. In that context, negligent conduct is to be judged by reference to the reasonable taxpayer.’ (3) Noting that Anderson (deceased) was concerned with s 29(4) TMA, Judge Cannan in Hanson went on to conclude that there is a subjective element in the test of ‘reasonable care’ apposite to Sch 24 provisions: ‘[21] … What is reasonable care in any particular case will depend on all the circumstances. In my view this will include the nature of the matters being dealt with in the return, the identity and experience of the agent, the experience of the taxpayer and the nature of the professional relationship between the taxpayer and the agent.’ (4) In Catherine Grainne Martin Catherine Grainne Martin v HMRC [2014] UKFTT 1021 (TC). (2014),Judge Redston compared the error penalty regime under Sch 24 with the predecessor provisions under s 95 of TMA, and similarly concluded that the concept of taking reasonable care in the context of Sch 24 penalty regime incorporates a subjective element, and stated that it is ‘similar to the approach taken on “reasonable excuse”’, and so ‘differs from the strictly objective meaning of negligence’ (at [127]). Judge Redston remarked on the absence of ‘reasonable excuse’ provisions in Sch 24, and hence the subjective element should be accorded in the test of ‘reasonable care’ to counter the absence of ‘reasonable excuse’ provisions in Sch 24. ‘[130] If failure to take reasonable care were to be an objective test, Sch 24 would be much harsher than the TMA penalty provisions, because the objective test of negligence at TMA s 95 can be mitigated by the reasonable excuse provisions…’ (5) Collis (2011)concerned an appeal against a ‘careless’ penalty under Sch 24, Judge Berner aptly summarised the test as being objective and referable to the ‘reasonable taxpayer’ but taking into account the subjective attributes of the taxpayer in question: ‘[29] … That penalty applies if the inaccuracy in the relevant document is due to a failure on the part of the taxpayer (or other person giving the document) to take reasonable care. We consider that the standard by which this falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question.’

‘Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do.’

‘… even if it is permissible to look to such materials for guidance as to the intent of Parliament in interpreting legislation, the statements in the materials are not sufficient to conclude that the two terms are simply interchangeable. Although there are indications that the change in terminology was not intended to give materially different results (at any rate as regards penalties), Parliament has chosen to use different words and it is those words which must be interpreted. The starting point must be that the term “careless” as further defined as a “failure to take reasonable care” has to be interpreted according to the usual principles of statutory interpretation.’

‘took reasonable care to avoid inaccuracy’

‘[50] … if HMRC fail to provide any evidence at all to the effect that a s8 notice was served, they will have failed to demonstrate a crucial fact on which their entitlement to a penalty hinges and the FTT will necessarily set aside the penalties charged for alleged failure to comply with that notice. [51] Where HMRC have given some evidence that a s8 notice was served, it will then be a matter for the FTT to determine whether that evidence is sufficiently strong to discharge HMRC’s burden of proof. The FTT’s assessment of the evidence should take into account the extent to which the taxpayer is disputing receiving a s8 notice. …’ (Emphasis original)

‘… it seems to me that a practice may be so described only if it is relatively long-established, readily ascertainable by interested parties, and accepted by HMRC and taxpayers’ advisers alike: compare the decision of the Special Commissioners (Dr A N Brice and Mr John Walters QC) in Rafferty v HMRC [2005] STC(SD) 484 at paragraph 114’. [i.e. “a practice generally prevailing had to be a practice, or agreement, or acceptance over a long period whereby the Revenue agreed or accepted a certain treatment of sums in particular circumstances” per Rafferty.]’

‘[169] … HMRC highlight that Sempra was settled before HMRC could appeal (as recorded in Judge Poon’s dissenting judgment in the FTT’s decision in Rangers at [210]). In any case HMRC say no authority is advanced for the proposition that, because a case goes against a party and the party does not appeal, the party is content with the outcome such that it forms part of the generally prevailing practice. HMRC litigated Sempra after Dextra. The position HMRC adopted in Rangers showed that at no point had HMRC accepted Sempra and Dextra.’ (5) The appellant’s reliance on Sempra and Dextra as the authorities underpinning the purported ‘prevailing practice’ that PAYE/NICs were not payable on EBT contributions is misguided, as concluded by the UT in Hoey at [170]: both Sempra and Dextra were first instance decisions which did not create a precedent, and while the decisions would have been of ‘persuasive value’, ‘there could not be said to be a settled view of the law’. (6) Further, Sempra and Dextra (wrongly) held that no CT deduction was available (and no PAYE/NICs payable) on contributions to EBTs. Even taking Sempra and Dextra at their face value, the appellant has failed to establish that these two authorities could be construed as giving rise to a prevailing practice that EBT contributions could avoid PAYE/NICs and at the same timeobtain a CT deduction as claimed by the Scheme: see Cockerill J’s judgment in R(oao Cartref) Cockerill J’s judgment in R(oao Cartref Care Home Ltd & Ors) v HMRC gives a full summary under the heading ‘The background noise: Spotlights, mailings and Rangers’ at [75] to [86] of HMRC’s view being consistent throughout that schemes used to reward employees without accounting for PAYE and NICs were ineffective, which eventually led to the introduction of the Loan Charge legislation in 2017. which highlighted that HMRC had been consistent in their view that EBTs were ineffective in avoiding PAYE/NICs. (7) The Morse Report, even if admitted as evidence, does not assist the appellant. The paragraphs relied upon by the appellant, as recorded earlier in the decision, are to be read in the context of the whole report. To the extent that the Morse Report sheds any light on the state of the law on the tax treatment of EBTs, it highlights that there was no settled view of the law. For present purposes, we find the UT’s observation in Hoey at [167] apt: ‘In our view, all this [excerpts from the Morse Report] confirms is that there is a dispute, … around the position that was being maintained by HMRC. It does not tell us what the position was at the relevant time. For the appellant’s purposes, it does not provide the necessary evidence for them to meet their burden. Insofar as the support is relevant, it lends support to the idea that HMRC had a view which was different to that set out by the court decisions [i.e. Sempra and Dextra]referred to.’

‘This does not imply approval of artificial tax schemes, or of tax avoidance. If the Loan Charge controversy shows anything, it shows what a bad idea participating in such schemes was in the past and will be in the future.’

‘In fact, psychological research has demonstrated that memories are fluid and malleable, being constantly rewritten whenever they are retrieved.’

‘[21] … Such questions are misguided in at least two ways. First, they erroneously presuppose that there is a clear distinction between recollection and reconstruction, when all remembering of distant events involves reconstructive processes. Second, such questions disregard the fact that such processes are largely unconscious and that the strength, vividness and apparent authenticity of memories is not a reliable measure of their truth.’

‘[19] The process of civil litigation itself subjects the memories of witnesses to powerful biases. The nature of litigation is such that witnesses often have a stake in a particular version of events. This is obvious where the witness is a party or has a tie of loyalty (such as an employment relationship) to a party to the proceedings. Other, more subtle influences include allegiances created by the process of preparing a witness statement and of coming to court to give evidence for one side in the dispute. A desire to assist, or at least not to prejudice, the party who has called the witness or that party’s lawyers, as well as a natural desire to give a good impression in a public forum, can be significant motivating forces. [20] Considerable interference with memory is also introduced in civil litigation by the procedure of preparing for trial. A witness is asked to make a statement, often (as in the present case) when a long time has already elapsed since the relevant events. The statement is usually drafted for the witness by a lawyer who is inevitably conscious of the significance for the issues in the case of what the witness does nor does not say. The statement is made after the witness's memory has been “refreshed” by reading documents. The documents considered often include statements of case and other argumentative material as well as documents which the witness did not see at the time or which came into existence after the events which he or she is being asked to recall. The statement may go through several iterations before it is finalised. Then, usually months later, the witness will be asked to re-read his or her statement and review documents again before giving evidence in court. The effect of this process is to establish in the mind of the witness the matters recorded in his or her own statement and other written material, whether they be true or false, and to cause the witness's memory of events to be based increasingly on this material and later interpretations of it rather than on the original experience of the events.’

‘[22] In the light of these considerations, the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.’

‘a certain artificiality’; ‘the very narrow gaps when something was forced through … on the bridle’; ‘these reports are too much of a standard’

‘the purpose of the scheme was to try and avoid both taxes’; and agreed that there would be no point in doing it otherwise. We find that it is in view of the avoidance of both taxes that Tucker considered the Scheme as a form of ‘aggressive tax planning’

‘the opinion of Andrew Thornhill a well respected QC at Pump Court Tax Chambers’, we find that Tucker was very clear and unequivocal that Thornhill’s opinions should not be taken as the last word as regards the exposure to tax risks on proceeding with the Scheme. (9) While the advice contained in paragraph 10 is bracketed by ‘My normal and usual advice for any such scheme’ and ‘if the Promoters of the arrangements are prepared to permit this’, that does not detract from the fact that the recommendation that the appellant should seek independent counsel’s opinion is unequivocal due to the prospect of litigation. We find that Tucker assessed that the prospect of litigation was close to certain and is contained in the sentence in paragraph 11: ‘any aggressive tax planningwill always be open to attack from HMRC and their current policy is to litigate everything’

‘I would recommend that the matter be put before independentcounsel’. (11) We find that the written advice to seek independent counsel’s opinion was given with the close-to-certain prospect of litigation in mind, and this finding is consistent with Tucker’s oral evidence: ‘In terms of asking for another barrister to look at the case, it struck me that with the amounts involved it would give additional defence against any attack that the clients had been negligent in entering into any such arrangements.’ (12) The concluding paragraph where Tucker seemed to be equivocal in his position is to be read in the light of the foregoing paragraphs 10 to 13. On that basis, we find: (a) Given the close-to-certain prospect of litigation, Tucker was unable to recommend the Scheme (in the sense of giving his professional endorsement); (b) However, if the directors of Delphi decided to go ahead ‘having taken a commercial view’ (i.e. as a commercial decision based on weighing up the costs for entering into the Scheme against the double tax savings in terms of both PAYE/NICs and corporation tax, factoring in the risks associated with the close-to-certain litigation); (c) Then Tucker would assist Delphi to implement the Scheme properly as made clear to Cowen in the phone call on the same day: ‘if I am getting involved with it … we want to make sure that we’ve not spoilt the ship’, and Dickinsons could derive the benefit from earning additional fees if Delphi chose to proceed.

‘By taking the role of a tax adviser to Mr Hicks in this respect, Mr Bevis has to be judged by the standard of a reasonably competent tax adviser giving advice to a taxpayer on this matter. The advice which Mr Bevis gave was not advice that could have been given by a tax adviser of reasonable competence.’

‘Enquiries have been raised into … companies which have utilised these arrangements.’

‘Applying the test laid by the case of Bayliss, the real question is whether the Company carelessly filed an incorrect return. The focus is therefore on the alleged error in the return and whether the Company was careless in making that error. In this case, as the Company fully relied on the expertise of Clavis (and their Queen’s Counsel Opinions) as promoter of the Arrangements, on its accountants and its auditors, there can be no suggestion that it failed to take care when implementing and carrying out the first three tranches of Arrangements. In light of assurances that the Arrangements were above board as well as delivering remuneration in a CT tax efficient manner, the fact that the Supreme Court decided nine years later that there was a PAYE/NICs liability attached does not demonstrate carelessness in submitting a P35 on the reasonable assumption that income tax was not deductible. … In any event, if the Company had sought a second Opinion, they may have been advised that a Corporation Tax deduction was not available (although this is highly unlikely in light of the prevailing practice and thinking about EBTs at the time) but this would not have informed the Company on how to fill and submit its P35 return. Had the Company sought a second Opinion at the time, the FTT is invited to hold that, in the light of the authorities [i.e. Sempra and Dextra] (which were the extant authorities at the time), such an Opinion was highly unlikely to have differed as to the PAYE position (there would have been no authority to base a contrary view on).’

‘The FTT should have gone on to consider whether even in the absence of specific advice, BFL obtained implicit reassurance that the loan would qualify which was enough to amount to the taking of reasonable care’

‘In the absence of subsequent reassurances, completion of a tax return on the assumption that the scheme worked might well have amounted to a negligent behaviour. However, in order for s 95 [TMA] to be engaged HMRC would also have needed to show that there was a causal link between the negligence and the errors in the return.’

‘[86] … depending on the precise circumstances, an inaccuracy may also be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew that he should do so….’

‘[63] In our view, a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. This is a subjective test. The question is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time.’

‘They’re doing £3m and will relate to their year ended 30 June 2009’. (6) The reasonable inference, from Sally Fuller’s instruction email of 22 October 2009, that the figure of £3m was already determined before Cowen’s visit of 27 October 2009 purportedly to carry out an independent review. (7) Furthermore, the figure per Sally Fuller’s email of 22 October 2009 would appear to be referable to Delphi’s cash position at the time of tranche 4, being £3m (or £2.7m), according to Langran’s evidence. (8) When Sally Fuller told her colleague ‘They’re doing £3m’ (before Cowen’s visit), the most probable inference of the identity of ‘they’ would be ‘the directors of Delphi’. (9) Tucker’s evidence was that the tranche 4 payment was made post-year-end, and included in the final set of accounts by way of an accrual. (10) The reasonable inference is that the management accounts provided to Cowen by email on 30 October 2009 would not have included the £5.4m. (11) Between the management accounts on 30 October 2009 and the set of accounts filed on 9 June 2010, an accrual of £5.4m augmented the figure for Directors’ emoluments to £11m, (inclusive of the £5.4m invoice paid to Herald), which represents 86% of the ‘Administrative expense’ total of £12.78m for period ended 30 June 2009. (12) Tucker’s evidence originally stated that the management accounts would not have changed Herald’s recommendation, then changed to state that Herald would not have changed the figure without supporting documents, such as the management accounts. (13) Langran’s evidence concurred with Tucker’s amended evidence, in that the change of recommendation in Herald’s report from £3m to £5.4m was due to the set of accounts sent on 30 October 2009. (14) Langran’s statement in cross-examination was that the email of 31 October 2009 was ‘to instruct’