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Two limited company directors have failed in their bid to quash immense financial penalties after they were unable to convince a tribunal that they needed to rely on Montpelier, and were not “negligent” in using a tax avoidance scheme.

Bernard Litman and Ann Newall, previously husband and wife, have been told to pay penalties of £11,814 each – which is around 10% of the £118,000 in Capital Gains Tax that they originally shunned, but have since paid.

Despite these hefty penalties, they are significantly lower than the original penalties handed out by HMRC, which were 25% of the tax due for Mr Litman and 20% for Mrs Litman (as she was then known).

The couple should be grateful that the tribunal decreased their penalties, but it dismissed their appeal that the sums should be reduced to 5% despite the couple’s insistence that they were not negligent because they sought professional advice.

Mr Litman argued that they had “no alternative but to rely on Montpelier” because they didn’t have any knowledge of the technicalitie” of the scheme, which was designed to avoid CGT on the sale of business and property assets.

But the tribunal agreed with HMRC that any advice which the taxpayers received was only “thin,” and that they had a ‘duty of care’ to ensure the entries in their tax returns were correct and reflected “what actually occurred.”

Again, the taxpayers argued that it was reasonable for them to simply rely on statements from Montpelier about how transactions would be implemented under the scheme which, as ordinary taxpayers, they claimed they couldn’t carry out due diligence on.

However pointing to the decision in the 2012 case Hanson Vs HMRC, the tribunal reminded that a taxpayer cannot simply leave everything to his or her agent, who in this case was Montpelier.

This means the taxpayer is actually obliged to ensure that the agent has not made any errors and, the tribunal referred, “that might involve the taxpayer seeking to understand the basis upon which an entry on his return has been made by the agent.”

Applying this case law to Litman/Newall, the tribunal explained: “We cannot accept that, even in the circumstances of a packaged transaction, it was reasonable for the taxpayers to have done no basic due diligence in respect of the payment flows, or to ascertain whether a loan had in fact been made and to have acted on so little in the way of advice from Montpelier.”

The pair’s failure to check that the scheme from Montpelier actually involved money changing hands vindicates HMRC – which accused Litman/Newall of negligence for not understanding “straightforward” and “ordinary” commercial documents, such as loan agreements.

KinsellaTax’s view:

As you can see, yet another tax avoidance scheme has been shut down by HMRC. Always remember, unless there is a full clearance from the HMRC then there will always be chance of this happening, and then you be personally liable as in this case.

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