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Offshore Tax Fines

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The directors of two limited companies have failed in their attempt to avoid substantial fines after trying to convince a tribunal that they were unaware of the fact that they were using a tax avoidance scheme. Their case rested on their claims that they relied on Montpelier for tax advice and therefore were not being negligent when it came to using one of the firm’s schemes.

Ann Newall and Bernard Litman were married when they were first involved in the scheme which was administrated by the firm Montpelier, who are based on the Isle of Man. The pair have been instructed to pay a sum of £11,814 each, which represents around 10% of the Capital Gains Tax bill which they avoided at the time. They originally owed £118,000 in CGT, which they have subsequently repaid, and this fine is in addition to the repayment of their original debt.

The couple have been successful in reducing the amount that they were fined by HM Revenue and Customs which amounted to a penalty of 25% of the original amount for Mr Litman and 20% for Ann Newall, who was known as Mrs Litman at the time.

Whilst the tribunal may have reduced the penalties imposed on the former couple, they had little time for their claims that their reliance on professional advice absolved them of responsibility for any negligence in the way that their investments were handled.

Newall and Litman were originally hoping to have their fines reduced to 5% of the original sum owed, believing that their reliance on Montpelier to understand the technicalities of the investment scheme meant that they were not responsible for the avoidance itself.

HMRC originally ruled that the couple had only received a negligible level of advice from Montpelier, stating that the Litman’s duty of care for their own taxation affairs wasn’t negated by their use of the firm. HMRC also made it clear that it was the ultimate responsibility of the Litmans themselves to ensure that their tax return was an accurate reflection of their financial situation.

Bernard Litman and Ann Newall argued that they couldn’t be expected to perform due diligence on statements and other transaction information which they received from Montpelier. They claimed that their lack of understanding as to how the scheme was managed was normal and understandable.

Unfortunately for them, the 2012 case of Hanson vs. HMRC resulted in a decision which showed that no taxpayer can relinquish all responsibility to an agent, a ruling which was cited in his case. Newall and Litman had an obligation to ensure that Montpelier were providing accurate information, the tribunal found, stating that this included making an effort to understand any information Montpelier had included on their tax return.

Citing the Hanson case, the tribunal judge Rachel Short explained that it was every tax payer’s responsibility to ensure that they have some idea of the way in which their money was being used. Accepting such scant information from Montpelier without question meant that they were failing to meet their responsibilities.

Judge Short also stated that to accept their defence meant that it would be possible for taxpayers to absolve themselves of responsibility for tax avoidance just by paying their adviser’s fee and signing whatever paperwork they are provided with.

The full judgement included the ruling that Bernard Litman and Ann Newall’s failure to do any meaningful research into the commercial details of the deal that they entered into was negligence. She said that it was reasonable to expect a taxpayer would make some effort to understand the transaction taking place, particularly if there was a loan included in the package, and to ensure that everything was carried out correctly.

The pair were also criticised for including the capital losses on their tax returns when they had no understanding of the type of transaction that had taken place, or indeed that money had been moved.

This ruling supports the original one from HMRC which accused Litman and Newall of negligence on the grounds that the agreements involved were ‘ordinary’ and ‘straightforward’ such as loan agreements.

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