HM Revenue & Customs (HMRC) has lost an appeal over an insurance-based tax avoidance scheme promoted by accountancy and advisory firm Tenon.
HMRC appealed a ruling by the First Tier Tribunal to protect the scheme members from so-called discovery assessments, which allow the Revenue to ask for more information from a taxpayer relating to tax liabilities.
The Tribunal said that since users of the scheme had declared the essential features of the scheme under disclosure of tax avoidance scheme (Dotas) rules, and that HMRC officials had not decided to take action in the relevant window, the members were protected from the taxman’s demands.
The scheme members, Michael Charlton and Barbara Corfield used a second hand insurance policy scheme using AXA Isle of Man assurance policies.
Losses on selling the policies were then used to offset any capital gains they had made.
In her tax returns Corfield declared net chargeable gains of only £1,626, under the annual capital gains tax (CGT) exemption.
The net gains derived from there being gross gains in respect of disposals of quoted shares of around £197,825, and losses of £195,322.
Charlton and Corfield submitted tax returns for 2006/07 detailing the nature of the scheme in line with Dotas rules.
When they submitted their returns Charlton and Corfield knew that HMRC had challenged the scheme and the Special Commissioners had ruled a similar scheme promoted by a different company did not work, but this did not set a precedent.
Despite the enquiry window on the 2006/7 tax returns closing on 31 January 2009, HMRC waited until the Court of Appeal confirmed the scheme failed in June 2009 before it raised discovery assessments.
The Upper Tribunal judge said: ‘It is not necessary that the hypothetical [HMRC] officer should understand precisely how a scheme works…All that is needed is that from the information made available…he can reasonably be expected to be aware of the insufficiency of tax such as to justify an assessment.
‘In our judgment, as well as an officer being aware of the matters, amended in respect of the small amounts of income that were declared, he would also have been sufficiently aware of the law relating to second-hand insurance policies to be able to appreciate the unusual nature of the entries in the return.’