JTC Employer Solutions Ltd v Garnett: could this case signal a shift in HMRC’s approach to mistake applications? 

In JTC Employer Solutions Ltd v Garnett, a decision from late last year, Janus Henderson, the investment business, and JTC (Jersey Trust Corporation), the trustee of two of its employee benefit trusts (EBTs), asked the High Court to set aside a series of appointments to multiple sub-trusts which, it was said, inadvertently and mistakenly triggered IHT of around £7M.  The application was successful and follows in a long line of similar decisions.  But what makes this case interesting is not the application itself but rather the approach HMRC took and the judge’s observations on that approach.  In this article, we look behind this, asking whether there is more to HMRC’s procedural position in this case than meets the eye and what this might mean going forwards?

HMRC’s approach

If successful, the tax effect of such applications is a reduction, potentially to nil, of the tax payable, and it is long established that HMRC must be notified before issue so it can decide what stance to take on it.  For a period HMRC would be joined as a defendant and made submissions on why relief should not be granted.  That approach gave way to HMRC writing to the parties and the court, asking the court to take account of various established authorities when considering the application.         

Here, HMRC wrote to the parties and the court but its letter took an altogether different approach.  Instead of simply referring to the usual authorities, it set out a positive case for why the application should fail.  Further, the letter was provided shortly before the hearing of the application, after the parties had exchanged skeleton arguments and well after evidence had been served.

The court was less than impressed with this approach.  The judge considered and dismissed each of HMRC’s arguments but in doing so made clear that, if HMRC wishes to mount a serious challenge to such applications, this was not the right way to go about it saying: “HMRC cannot expect these points to be determined if their only involvement is by a form of shadow boxing through correspondence.”  As judicial criticism goes, this was relatively mild, but it is clear from other passages of his judgment that the judge was deeply unimpressed with HMRC’s approach. 

Looking beyond the judge’s observations, the real issue is why HMRC broke from its usual practice in this particular case. This case suggests HMRC could be looking to adopt a more aggressive approach in future mistake applications, potentially testing cases to challenge established positions. If that’s right, this case may provide useful guidance on the circumstances in which HMRC is likely to oppose such applications.  

Useful indicators?

First, this was not the first time the claimants and the EBTs had brushed up against HMRC.  In 2015 Janus Henderson had entered into a settlement agreement with HMRC in relation to income tax and national insurance consequences of the EBTs.  The judgment is not clear as to the basis for the settlement but suggests the trusts breached rules on disguised remuneration.  Second, HMRC categorised the EBTs as “complex tax planning” saying that there were similarities with the Rangers case.  Third, HMRC clearly thought it was puzzling how professionally operated trusts, with expert advisers could have made the mistake in question.  Of course, mistakes are made all the time and it is now well established that relief is available even if there is an alternative route the taxpayer can take of a claim in negligence against its adviser(s).  What HMRC might have been suggesting, but which was not supported by the evidence, was that there was an element of risk taking which went wrong.  Quite rightly the courts should not come to the aid of the taxpayer in those cases.    

A new approach?

HMRC has a well published objective to raise more tax from the wealthy by tackling non-compliance which has recently been the subject of a National Audit Office report (HMRC secures more of the tax due from wealthy people, with further gains possible – NAO press release).  On the whole, mistake applications tend to involve material amounts of tax, and are made by some of society’s most wealthy individuals.  Whilst the court disapproved of HMRC’s procedural approach, we suspect that the approach it took in this case is an early sign of its change in policy to such applications.  Whilst there have been some wins for HMRC, the majority of decisions in the High Court are in favour of the taxpayer.  It has long been thought that if HMRC wants to make a real difference it must select one or more mistake decisions in the Hight Court to appeal to the Court of Appeal in order to change the law.  This might be a very early sign that it is now pursuing that strategy.

If you have any questions in relation to the issues raised above, please contact the author Justin Briggs. This update was written with the assistance of Simon Lellouche.