In Anthony Bayliss v HMRC [2016] UKFTT TC05251 a taxpayer who used a tax avoidance scheme was found not to be acting fraudulently or negligently after relying on professional advice.

  • Mr Bayliss entered into a scheme sold by Montpelier Tax Consultants, which involved using a loan to invest in a contract for difference.
  • Mr Bayliss invested £51,000 of his own funds, receiving £11,000 back when the contract was partially surrendered.
  • The partial surrender of the contract gave rise to a capital loss of £539,000 which Mr Bayliss claimed on his 2006/07 tax return and used to offset gains in 2006/07 and 2007/08.
  • There is no dispute that the scheme itself did not work and that additional tax is payable.
  • HMRC contend that Mr Bayliss acted fraudulently or negligently when submitting his tax returns and are seeking penalties of 35% of the underpaid tax.
  • Mr Bayliss appealed these penalties on the basis that he did not act fraudulently or negligently.

The First Tier Tribunal (FTT) found that HMRC had not discharged its burden of proof to demonstrate that Mr Bayliss acted fraudulently or negligently in filing an incorrect Return.

  • He relied fully on his accountant of many years, Mr Mall.
  • He relied on what he believed, based on Mr Mall’s recommendation, to be Montpelier’s expertise.
  • The fact that the terms of the loan and the contract transaction were uncommercial does not demonstrate negligence.
  • Mr Bayliss did have concerns about the implementation of the scheme but received subsequent clear reassurances from Mr Mall and Montpelier that the scheme was legal.
  • This case could be contrasted with Litman v HMRC [2013] UKFTT TC03229 as in that case the scheme itself was a sham and there was no evidence that the loans involved were ever made.    HMRC clearly confirmed that in Mr Bayliss’s case it was not relying on any argument that the transaction was a sham.

In terms of the amount of the penalty, the FTT were critical of HMRC’s approach in this case noting that

  • HMRC only allowed a 15% reduction for disclosure and 35% reduction for co-operation based on Mr Mall’s responses.  Once Mr Mall was out of the way, HMRC accepted that Mr Bayliss gave full co-operation and disclosure and so reductions of 20% and 40% would have been appropriate.
  • The deduction of 15% rather than 40% for seriousness was made on a basis which did not make any distinction between fraud and negligence.  The FTT described this as “highly questionable” adding that seriousness should not just be based on the sums involved and that the penalty should vary depending on whether fraud or negligence is established.