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The recent Court of Appeal decision in Bhaur and others v Equity First Trustees (Nevis) Ltd, and others provides important guidance on when a court will set aside a transaction on the grounds of a mistake, thereby unwinding any adverse tax consequences. While the claim failed on the particular facts of this case involving an artificial tax avoidance scheme, the judgment affirms that the English courts remain open to mistake claims in appropriate circumstances. This article summarizes the key principles from Bhaur and other relevant cases on the equitable doctrine of mistake.
Background to the Claim
The case involved a married couple, Mr and Mrs Bhaur, who had built up a substantial UK property business. In 2006, their advisor Mr O’Toole of Aston Court, introduced them to a tax avoidance scheme. This involved incorporating their business into a company called SIUK, which then transferred shares in a subsidiary holding the business assets to an offshore trust designed to qualify as an “employee benefit trust” (EBT) under favourable inheritance tax rules.
The aim was for the EBT exemption to become available after Mr and Mrs Bhaur died, enabling their sons to benefit free of inheritance tax. The Court of Appeal later ruled in Barker v Baxendale Walker that this planning did not work, as EBTs could not be used for dynastic tax planning in this way.
HMRC challenged the arrangements in 2010. The Bhaurs brought a claim in the High Court in 2018 to unwind the initial transfer into the EBT, thereby eliminating the inheritance tax exposure based on a mistake.
Legal Principles on Mistake
Pitt v Holt in the Supreme Court is the leading modern case on a mistake. The Court summarized four conditions for a claim:
- There must be a distinct mistake, not just ignorance.
- Carelessness is not a bar unless the taxpayer deliberately took a risk.
- The mistake must be sufficiently serious – typically as to the nature/effect of the transaction or a basic matter of law/fact.
- Based on an objective intense focus on the facts, leaving the mistake uncorrected must be unjust or unconscionable.
The Court confirmed mistakes could cover errors as to tax consequences. But relief may be refused for artificial tax avoidance where the taxpayer accepted the risk or as a matter of public policy.
Distinguishing Mistakes and Mispredictions
The law distinguishes mistakes from mispredictions as to future events. In Re Griffiths, a mistaken belief that the taxpayer would survive seven years was held to be a misprediction not covered by mistake.
Decision in Bhaur
The High Court and Court of Appeal dismissed the claim. The Bhaurs were found to have taken a deliberate risk on the scheme, which was considered artificial tax avoidance. Their mistaken belief in their advisor’s honesty was irrelevant. Refusing relief for such an artificial scheme was not unjust. Tax avoidance counts heavily against granting relief.
Other examples
Despite this, other cases show that mistake remains worthwhile exploring for unexpected tax issues:
- Hartogs v Sequent: non-domicile status advice was wrong, leading to £3m inheritance tax exposure.
- Payne v Tyler: incorrect deed of appointment advice caused additional inheritance tax under section 144.
- Mackay v Wesley: mistake as to becoming an offshore trustee caused £1.6m in capital gains tax.
In these cases, the mistake successfully unwound the transaction and related tax.
Practical Points
For unexpected tax issues, the mistake is worth considering to eliminate tax liabilities, especially for trusts and gifts. But artificial tax avoidance is unlikely to warrant relief after Bhaur. A High Court claim is typically advisable, given the clear jurisdiction.
The Court of Appeal in Bhaur affirms that mistake remains available to unwind appropriate transactions and eliminate the related tax. But artificial tax schemes are unlikely to warrant relief.
For Tax Investigations, tax resolution or appeals, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.