HMRC fail to demonstrate negligence in tax planning case

03 July 2014

In the case of R, A and M Gardiner v HMRC[1], the First-tier Tribunal (Tax Chamber) ('FTT') overturned penalties imposed by HMRC on the appellant taxpayers for negligently filing their returns.


The three appellants were husband, wife and son. In 2005, the appellants participated in a tax planning arrangement with the intention of sheltering chargeable gains realised on the disposals of shares in a company, Hall & Letts Limited.

The scheme operated through generating capital losses on the acquisition and disposal of capital redemption policies.

The scheme was disclosed by the appellants in their tax   returns for the year ended 5 April 2006, which were delivered to HMRC in January 2007. HMRC gave notice that they were enquiring into the returns in or about June 2007.

In June 2009, the Court of Appeal found the scheme to be ineffective in the case of Jason Drummond v HMRC[2]. Following that decision, the appellants accepted that the tax intended to be saved through the planning was payable. The appellants therefore paid this additional tax which was due for the year ended 5 April 2006.

Not content with this, however, HMRC alleged that the appellants had negligently delivered incorrect returns. HMRC relied on alleged incorrect implementation of the scheme, and argued that loans to the appellants totalling £1,788,000, as part of the planning, were never made, or only made after the event.

HMRC provided the FTT with two bundles of documents, which contained in respect of each appellant:

  • their tax return;
  • correspondence between the appellants, their advisers and HMRC regarding the enquiries; and
  • scheme documentation.

On 21 August 2012, HMRC issued penalties against the   three appellants pursuant to section 95, Taxes Management Act 1970 ('TMA'). Section 95 provides that a person shall be liable to a penalty where, amongst other things, he negligently delivers an incorrect return.

On 27 December 2012, the appellants each lodged notices of appeal with the FTT. One of the appellants' grounds of appeal was that HMRC had not demonstrated negligence.

On 26 April 2013, the FTT issued directions which required the parties to indicate whether witnesses would be called. On 10 June 2013, HMRC indicated that they   did not intend to call any witnesses.

In March 2014, HMRC again confirmed to the appellants' representative that they were not intending to call any witnesses. On 27 March 2014 the appellants'   representatives wrote to the FTT requesting that the matter should be dealt with summarily and the appeals allowed, as there was no evidence in support of HMRC's case. They wrote again to the FTT on 4 April 2014 to similar effect and noted that the lack of evidence issue would be argued at the hearing.


HMRC's Statement of Case, served on 26 March 2013, made a number of assertions, including the contention that "no reasonable person, having examined the documents, could have held that the transactions were carried out as described."

The FTT was critical of HMRC's Statement of Case commenting that it was "clearly deficient in a number of respects". The alleged negligence was not properly   particularised, and HMRC suggested that the appellants should be put to proof regarding the making of the loans of £1,788,000. HMRC accepted these criticisms, going so  far as to accept that "the appellants were somewhat in the dark about the case against them".

The FTT noted that part of the purpose of an enquiry into a tax return was for HMRC to investigate and gather evidence relevant to the issue of whether a penalty should be imposed, which must then be adduced before the FTT to at least raise a prima facie case.

The parties agreed to deal with the matter as a preliminary issue.

The appellants argued that there was no formal evidence   of what was before the appellants at the time the return was lodged in January 2007. Due to the absence of witness evidence, the FTT could not be satisfied as to what was available to the appellants, and could not therefore determine how the appellants should have behaved.

HMRC submitted that the FTT could consider the documentary evidence before them, which showed that the appellants had signed documents which were "not authentic, misrepresented the reality or related to transactions which simply didn't happen". These documents should have caused the appellants, so HMRC argued, to query the effectiveness of the arrangements.

Amongst the documents which HMRC sought to rely on were documents signed by each appellant, but also documents which were signed only by the promoter of the scheme, referred to as "unilateral   documents". There was no evidence that these were available to the appellants when making their returns.

HMRC had sought to rely on the documents as evidence of the truth of their contents. The FTT noted that under Civil Procedure Rules Part 32.19, a disclosed document is treated as authentic unless specific objection is taken to it. However, to rely on a document as evidence   of a statement in that document, section 8(1)(a) Civil Evidence Act 1995 requires production of the document. This is not simply through the document being handed up, but, the FTT held, "by awitness qualified to say what it is".[3]

In the present case, there were no witnesses to produce the documents relied upon by HMRC, nor did HMRC attempt to rely on Rule 15(2) of the First-tier Tribunal Rules, which permits the FTT to admit evidence irrespective of whether it would be admissible in a civil trial. Without argument on the point, the FTT   considered that the appellants were entitled to put HMRC to strict proof, and commented that (without the benefit of argument) its initial view would have been that it would be inappropriate to admit the documents without a witness adducing them.

HMRC had chosen not to adduce any witness evidence and the FTT concluded that there was no prima facie case of negligence made out against the appellants and allowed their appeals.


This case is yet another example of HMRC failing to adduce sufficient evidence before the FTT in support of their case (for other examples see the author's recent blogs: HMRC's computer says no! and Tribunal criticises HMRC for producing 'untruthful' records).

Given that the appellants had already paid the tax which had become due once the planning had been demonstrated to be ineffective, it is perhaps surprising that HMRC pursued penalties in this case, particularly given the relatively modest sums involved (less than £25,000 in respect of all three taxpayers).

HMRC had had ample warning that the appellants considered that the burden of proof was upon them, and that the appellants intended to argue that no evidence had been filed by HMRC, but nevertheless failed to produce any witness evidence. Whilst   it can be frustrating when HMRC adopt an entrenched position prior to the litigation of a dispute, it is reassuring that the FTT is not prepared to allow HMRC to make allegations of negligence against taxpayers without such allegation being properly supported by appropriate evidence.

To read the decision click here

The blog was written by Nigel Brook.

[1] [2014] UKFTT 421 (TC).

[2] [2009] EWCA Civ 608.

[3] Following Ventouris v Mountain (No 2), The Italia Express [1992] 3All ER 414.

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