When does tax avoidance become tax fraud?
This was recently considered by a case (Bayliss  UKFTT 0500 (TC)) before the First-tier tribunal (FTT). Mr Bayliss had entered into a “tax avoidance” scheme, marketed by Montpelier Tax Consultants (Montpelier), and it had been accepted by all parties that the scheme did not work. As a result Mr Bayliss’ tax returns were incorrect and further tax was payable.
However, HMRC had levied penalties against Mr Bayliss on the basis that he had fraudulently or negligently submitted an incorrect return. Mr Bayliss appealed against the penalty on the basis that he was neither fraudulent nor negligent; he had followed the advice of his accountant, a chartered accountant who he had relied on for many years.
The FTT found that HMRC had to be able to prove that Mr Bayliss did not have an honest belief in the correctness of his return. In the opinion of the FTT HMRC failed to do this. Accordingly, theft found in favour of Mr Bayliss on the basis that hehad relied upon his accountant of many years and upon what he believed to be Montpelier’s expertise. Given their assurances that the scheme was legal the FTT did not think that he had been fraudulent or negligent in the submission of his return.
It should be noted the FTT decision is not binding and could be appealed by HMRC. The case does however illustrate the wide gap that HMRC need to traverse if they wish to prove fraud.
Date: 2nd August, 2016
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