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Less Tax For Landlords: Mistake and the Unintended Tax Consequences

Posted on by Richard Gray

Since November 2023, Elysium Law have been taking enquiries from current/former Less Tax for Landlords clients.

We have previously canvassed the idea of bringing an action under CPR Part 8 for equitable mistake. However, given HMRC’s prevarication, this action has not previously been open to LT4L Clients.

HMRC have now announced that the Letter of Trust which transferred the beneficial interest to the corporate partner in the LLP had Stamp Duty Land Tax liability.  

As a result, landlords that have implemented Less Tax For Landlords’ planning (including those who implemented the planning via Chris Bailey directly) are facing significant and unintended tax consequences.

This will potentially give rise to a claim in professional negligence, but the priority must be to mitigate the losses. One option available is an application to the Court to set aside the arrangements on the grounds of mistake.

We have been approached by a large number of LT4L victims to advise, together with Tax Counsel as to the prospects of bringing this claim.

Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you

In Bhaur and others v Equity First Trustees (Nevis) Ltd and others [2023] EWCA Civ 53 (Bhaur) the Court of Appeal provided helpful guidance on when a court will set aside a transaction and  unwind adverse tax consequences. In summary, this was a tax avoidance scheme using the (abusive) EBT arrangements, to avoid IHT which the court refused to unwind. In this case the presentation of the trust to HMRC was dishonest and was tantamount to tax evasion.

Having lost in the High Court, the Appellants first ground of appeal was that the Judge should have allowed the transaction to be unwound in that the Appellants belief that they would incur no tax consequences was not a misprediction, but a mistake.

The first instance Judgment contains an extended analysis of the law on the setting aside of voluntary dispositions for mistake. The leading authority in the area is the decision of the Supreme Court in Pitt v Holt [2013] 2 AC 108.

In Pitt v Holt, at [103], Lord Walker adopted, the approach of Lloyd LJ in the Court of Appeal ([2011] EWCA Civ 197 at [210]-[211]), setting down three principles which would lay the groundwork for the exercise of the equitable jurisdiction to set aside a voluntary disposition, namely;

  1. A mistake, which is;
  2. Of the relevant type; and
  3. Is sufficiently serious so as to render it unjust or unconscionable on the part of the donee to retain the property given to him.

Misprediction or Mistake – the difference

Misprediction

In Pitt v Holt the Court said a misprediction relates to some possible future event, whereas a legally significant mistake normally relates to some past or present matter of fact or law.

In Dextra Bank & Trust v Bank of Jamaica[2001] UKPC 50, [2002] 1 All ER (Comm) 193 at [29], the court said “… to act on the basis of a prediction is to accept the risk of disappointment. If you then complain of having been mistaken you are merely asking to be relieved of a risk knowingly run …”

Mistake

This is a different consideration. The courts and lawyers generally deal with mistakes as to the consequences of a transaction.

For many years, a distinction was drawn between a mistake as to the effect of a transaction and its consequences. However, the modern approach is that providing the court is satisfied that there is a causative mistake of sufficient gravity; and as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.

The gravity of the causative mistake is relevant to an assessment of injustice or unconscionability. The court said that the injustice (or unconscionability) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an “intense focus” on the facts of the case including the circumstances of the mistake and its consequences for the person who made the disposition.

An evaluation – what are the merits of the case?

The court will look at the surrounding circumstances and the (in) justice done to the person making the disposition. The doctrine of mistake applies to unintended tax consequences. In Pitt, the court rejected any suggestion that mistake could not apply to tax issues. However, the court added the following when referring to previous cases and in particular Futter v Futter where the doctrine of mistake was not raised by the (Plaintiff). Lord Walker in Pitt said;

“Had mistake been raised in Futter v Futter there would have been an issue of some importance as to whether the court should assist in extricating claimants from a tax avoidance scheme which had gone wrong. The scheme adopted by Mr Futter was by no means at the extreme of artificiality (compare for instance, that in Abacus Trust Co (Isle of Man) v NSPCC [2001] STC 1344) but it was hardly an exercise in good citizenship. In some cases of artificial tax avoidance, the court might think it right to refuse relief…”

Why you need advice on the scheme

Lawyers and students alike will recognise the maxim ‘He who seeks Equity must do Equity’, but effectively any refusal now is based on public policy consideration. An example of this can be found in the case Dukeries Healthcare Limited v Bay Trust International Limited [2021] EWHC 2086 (Ch), with Deputy Master Marsh holding that, whilst the doctrine of mistake applied, it was refused nevertheless on the grounds that the whole transaction amounted to an artificial tax avoidance scheme.

Anyone affected needs independent advice, considering the degree of risk and any artificiality of the scheme, given that unintended tax consequences are an issue. This should be advised upon by an independent law firm such as Elysium Law and will involve review of the documentation, any advice provided to the Claimant at the time and what it was that was that the Claimant hoped would be achieved.

Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you.

Elysium Law have been approached by a large number of LT4L victims to advise, together with Tax Counsel as to the prospects of bringing this claim.

For further advice, or if you wish to join the group, please contact us at Elysium-law

Keeping your business running in the face of a winding up petition: Validation Orders in Compulsory Liquidation

Posted on by Ruby Keeler-Williams

Introduction

A validation order is a court order that approves transactions made by a company after a winding-up petition has been filed against it.

In this article, we discuss the purpose of these orders, why they are necessary, the application process, and the potential risks for businesses and directors if they fail to obtain validation orders where necessary.

This article draws upon our recent experience attending upon a client at the Rolls Building to obtain a validation order to allow the payment of a debt to the creditor following company bank accounts being frozen.

What is Compulsory Liquidation?

Compulsory liquidation is a court-ordered process that results in the winding up of a company, meaning business must cease and the company assets are distributed to its creditors. This process is governed by the Insolvency Act 1986.

Various parties, including creditors, shareholders, and even the company itself, can petition the court for a compulsory winding-up order.

Once the winding-up petition is presented to the court, the company’s assets are frozen, and either the Official Receiver (an officer of the court) or an insolvency practitioner appointed by the court as liquidator takes control of the company’s affairs.

The company effectively loses the ability to conduct business, any transactions undertaken require scrutiny and, in most cases, court approval.

The Role of Validation Orders in Compulsory Liquidation

Section 127 of the Insolvency Act 1986 sets out that:

(1) In a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void

This section effectively creates a freeze on the company’s ability to freely dispose of its assets or enter into certain transactions.

A transaction will not be void under section 127(1) of the Insolvency Act 1986 if the court makes an order validating the transaction. Validation orders are therefore the process by which court approval is obtained for necessary transactions that a company enters into after a winding-up petition has been filed against it.

Without a validation order, transactions conducted after the filing of a winding-up are void unless the court orders otherwise, meaning they are unenforceable and the parties involved may need to reverse the transaction.

The main reason behind the requirement to obtain court approval is to protect the interests of all creditors by preventing the dissipation or unfair distribution of company assets once a winding-up petition is on the table.

A validation order may either validate a disposition as part of a specific transaction such as the sale of a particular asset or payment of a particular debt, or alternatively permit a particular type of disposition, such as all dispositions by the company in the ordinary course of its business.

When Are Validation Orders Required?

It is vital to understand that once a winding-up petition is filed, virtually all transactions the company wishes to undertake require validation by the court – even if the transaction was initiated or agreed upon before the petition was filed but completed afterward.

In theory, it is not necessary for a liquidator to apply to court for a declaration that a transaction has been made void by the operation of section 127 of the Insolvency Act 1986. A transaction within the scope of section 127 of the Insolvency Act 1986 will be automatically void unless the court orders otherwise – making obtaining a validation order a vital step.

Some examples of circumstances that typically necessitate a validation order are:

  • Selling major assets – including property, significant stock holdings, or any asset that represents a substantial portion of the company’s value.
  • Paying debts –  as keeping the company operational may require paying wages, utility bills, rent, or other essential expenses. Any payment to a creditor, even if it was due before the petition, needs court approval to ensure equitable treatment of all creditors.
  • Continuing essential business operations – a validation order may be required to authorise limited ongoing operations that are necessary for the winding-up process or beneficial to maximize the value of the company’s assets.

The Application Process

The procedure on an application for a validation order is set out in the Practice Direction on Insolvency Proceedings at Paragraph 9.11.

First, you must gather the necessary information and evidence to support the application. This should demonstrate the need for the transaction, information as to the company’s financial position in order to assess solvency, the benefit the transaction provides to the company (and potentially creditors) and its compliance with the overall objectives of the winding-up process.

Paragraph 9.11.2 of the Practice Direction sets out that:

Save in exceptional circumstances, notice of the making of the application should be given to: (a) the petitioning creditor; (b) any person entitled to receive a copy of the petition pursuant to rule 7.9; (c) any creditor who has given notice to the petitioner of their intention to appear on the hearing of the petition pursuant to rule 7.14; and (d) any creditor who has been substituted as petitioner pursuant to rule 7.17. Failure to do so is likely to lead to an adjournment of the application or dismissal.

The Court Hearing

The application for a validation order is typically heard at the Court dealing with the winding up petition. At the hearing, the applicant (via their legal representative) must present their case and justify the need for the validation order.

The court will consider the evidence presented and may:

  • Grant the order: approving the transaction and allowing it to proceed;
  • Refuse the order: denying the transaction; or
  • Modify the order: such as approving the transaction with specific conditions.

What factors the Court considers when granting a Validation Order

When deciding whether to grant a validation order, the court considers the following factors:

  • Benefit to creditors: The court must protect creditors’ interests. The court will assess whether the proposed transaction will benefit creditors or, at the very least, not cause them prejudice.
  • Company solvency: The court considers the company’s financial position, whether it is able to pay its debts as they fall due or alternatively whether the transaction will further deteriorate its solvency.
  • Nature of the transaction: The court will look at whether the transaction is part of the company’s ordinary business operations or a special deal that may benefit certain parties over others.
  • Prejudice to creditors: The court must ensure that the transaction does not unfairly prefer one creditor over another, upholding the principle of pari passu distribution of assets.
  • Case law: The court will consider existing case law on validation orders to ensure consistency and fairness in its decision-making process.

Risks if you do not obtain a Validation Order

When a company has gone into compulsory liquidation, the liquidator may seek to recover any property that was the subject of a void disposition under section 127(1) of the Insolvency Act 1986

Conducting transactions without obtaining a necessary validation order is therefore risky and can lead to the following:

  • Transactions voided: the transaction is automatically void, requiring the unwinding of the transaction. A third party may therefore insist on a validation order to prevent the receipt of property subsequently being void.
  • Challenges by creditors: Creditors can challenge unauthorised transactions, leading to further disputes and delays in the liquidation process.
  • Personal liability for directors: Directors who authorise or participate in transactions without securing a validation order may face personal liability for breaching their fiduciary duties to the company and its creditors.

Why seek representation?

Given the complexity and potential risk associated with validation orders, seeking professional legal advice is strongly recommended.

Elysium Law can assist you with the following:

  • Preparing evidence that supports the need for the validation order and demonstrates that the transaction is in the best interests of the company and its creditors.
  • Advising on procedure and ensuring compliance with all relevant rules and regulations.
  • Representing the company in court hearings and addressing any challenges from creditors or other stakeholders.
  • Liaising with liquidators and negotiating on behalf of the company.

Conclusion

Validation orders play a critical role in the administration of companies facing compulsory liquidation as they provide a mechanism for companies to conduct necessary transactions while protecting the interests of creditors and ensuring the orderly winding up of the company’s affairs.

It is vital that companies and their directors understand the significance of validation orders and seek professional legal advice when facing a winding-up petition.

Failure to obtain necessary validation orders can lead to severe legal and financial consequences, including rendering transactions void and potential personal liability for directors.

If your business is facing a winding-up petition or you require guidance on validation orders, CONTACT our team today for a free consultation to discuss your specific circumstances and see how we may assist.

Contractors – Received a Demand from West 28th Street Limited? Here’s Why You Shouldn’t Pay Yet

Posted on by Richard Gray

Elysium Law has been approached by an insolvency practitioner who has received enquiries regarding demands made by West 28th Street for repayment of loans from various Employee Benefits Trusts (EBTs).

Elysium Law has engaged with West 28 Street on behalf of over 650 clients. The alleged debts (the Loans) were assigned from Felicitas, a specially formed company in the Isle of Man, one of whose directors was Adrian Sacco. Mr Sacco has been disqualified from being a director in England and Wales and also in the Isle of Man. We’ve linked the Insolvency Service publication which demonstrates specifically his behaviour which gave rise to the disqualification. Felicitas attempted to serve demand letters and, in some cases, Statutory Demands for Bankruptcy. Elysium Law, acting in Our Clients’ interests, resisted those demands, which were all subsequently withdrawn.

Following a Mediation and our Letter of Response, Felicitas Solutions Limited (the Isle of Man Company) was dissolved after the debts were purportedly assigned to West 28th Street Limited.

Upon being further contacted, Elysium law sent the Letter of Response to West 28th Street for them to consider – Elysium Law has received no substantial response and nor have our clients.

Our Position in relation to the Demands of West 28th Street

There is a claim in breach of trust for equitable and other relief. The Defendant purports to have purchased and/or been assigned the Trust Assets and has sought to enforce a loan as between the beneficiary who is a contractor (“Beneficiary”) and the original Trust Company (“the Loans”), this was a marketed tax avoidance scheme.

The significance of the purported assignment to Felicitas, and the current purported assignment to West 28th Street, is that they were made for an improper purpose against the interests of the Beneficiaries and with a view to enabling fees to be recovered for the transfers in favour of the Trustees and secondly, recoveries under the Loans in favour of the purported assignees. Accordingly, the assignments were detrimental to the best interests of the Beneficiaries.

They were also contrary to the terms of certain oral collateral undertakings provided by or on behalf of the employers, to the effect that the Loans would not have to be repaid and were the means by which the tax avoidance scheme could operate.

On behalf of its clients, who are Beneficiaries under the various Trusts, Elysium Law contend that any assignments or transfers were for an improper purpose and are void in equity. Any beneficial interest has remained as the property of the Beneficiaries and has not been transferred or assigned. Any purported transfer or assignment is void or otherwise liable to be set aside.

The repeated assignments were in breach of an implied term of the trust relating to the proper exercise of its powers and were unlawful because they were carried out for an improper purpose (also known as a fraud on the power).

The Constructive Trust

The position as set out in FS Capital is that no interest, or right to the Trust Assets have been transferred by the various assignments because they are void. To the extent required, the Beneficiaries will contend that any trust assets alleged to have been assigned by the various assignments are held by the Defendants by means of a Constructive Trust for the benefit of the Beneficiaries. The imposition of the constructive trust arises by operation of law and imposes upon any purported assignee or transferee, the fiduciary principles of a Trustee with regard to the preservation of Trust Assets and the protection of the interests of the Beneficiaries.

The Position

In short, we think the position is as follows:

  1. The assignments were void;
  2. The loans are not enforceable;
  3. Those beneficiaries who have already come to an arrangement must be paid their money back; and
  4. West 28th Street hold all of the assets on trust for Our Clients and all Beneficiaries under the Trust.

Elysium Law are currently acting for a group of 650 Clients who are contesting this claim.

If you wish to join the claim, or are an insolvency practitioner who have been approached by West 28th Street or a firm called Fiscus Management in relation to Your Clients, then please Contact Us.

Mistake and the Unintended Tax Consequences

Posted on by Richard Gray

Elysium Law have received enquiries from taxpayers who have received large CGT assessments from HMRC which have been raised as a result of the Trust document used by Property 118 and Cotswold Barristers.

HMRC’s position is that incorporation relief provided by Section 162 of the Taxation of Chargeable Gains Act 1992 is not available as a result of a clause used in the purported Deed of Trust which creates a power of revocation, allowing the Trustees to vest the property in themselves absolutely and bring the trust to an end. HMRC’s position is that this future right to receive the property creates a separate contingent beneficial interest, which is not transferred to the company. As a consequence, the whole of the assets of the business are not transferred to the company and the relief is not available.

As a result, landlords that have implemented Property 118 or and Cotswold Barrister are facing significant and unintended tax consequences.

This will potentially give rise to a claim in professional negligence, but the losses must be mitigated. One option available is an application to the Court to set aside the arrangements on the grounds of mistake.

Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you

In Bhaur and others v Equity First Trustees (Nevis) Ltd and others [2023] EWCA Civ 53 (Bhaur) the Court of Appeal provided helpful guidance on when a court will set aside a transaction and  unwind adverse tax consequences. In summary, this was a tax avoidance scheme using the (abusive) EBT arrangements, to avoid IHT which the court refused to unwind. In this case the presentation of the trust to HMRC was dishonest and was tantamount to tax evasion.

Having lost in the High Court, the Appellants first ground of appeal was that the Judge should have allowed the transaction to be unwound in that the Appellants belief that they would incur no tax consequences was not a misprediction, but a mistake.

The first instance Judgment contains an extended analysis of the law on the setting aside of voluntary dispositions for mistake. The leading authority in the area is the decision of the Supreme Court in Pitt v Holt [2013] 2 AC 108.

In Pitt v Holt, at [103], Lord Walker adopted, the approach of Lloyd LJ in the Court of Appeal ([2011] EWCA Civ 197 at [210]-[211]), setting down three principles which would lay the groundwork for the exercise of the equitable jurisdiction to set aside a voluntary disposition , namely;

  1. A mistake, which is;
  2. Of the relevant type; and
  3. Is sufficiently serious so as to render it unjust or unconscionable on the part of the donee to retain the property given to him.

Misprediction or Mistake – the difference

Misprediction

In Pitt v Holt the Court said a misprediction relates to some possible future event, whereas a legally significant mistake normally relates to some past or present matter of fact or law.

In Dextra Bank & Trust v Bank of Jamaica [2001] UKPC 50, [2002] 1 All ER (Comm) 193 at [29], the court said “… to act on the basis of a prediction is to accept the risk of disappointment. If you then complain of having been mistaken you are merely asking to be relieved of a risk knowingly run …”

Mistake

This is a different consideration. The courts and lawyers generally deal with mistakes as to the consequences of a transaction.

For many years, a distinction was drawn between a mistake as to the effect of a transaction and its consequences. However, the modern approach is that providing the court is satisfied that there is a causative mistake of sufficient gravity; and as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.

The gravity of the causative mistake is relevant to an assessment of injustice or unconscionability. The court said that the injustice (or unconscionability) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an “intense focus” on the facts of the case including the circumstances of the mistake and its consequences for the person who made the disposition.

An evaluation – what are the merits of the case?

The court will look at the surrounding circumstances and the (in) justice done to the person making the disposition. The doctrine of mistake applies to unintended tax consequences. In Pitt, the court rejected any suggestion that mistake could not apply to tax issues. However, the court added the following when referring to previous cases and in particular Futter v Futter where the doctrine of mistake was not raised by the (Plaintiff). Lord Walker in Pitt said;

“Had mistake been raised in Futter v Futter there would have been an issue of some importance as to whether the court should assist in extricating claimants from a tax avoidance scheme which had gone wrong. The scheme adopted by Mr Futter was by no means at the extreme of artificiality (compare for instance, that in Abacus Trust Co (Isle of Man) v NSPCC [2001] STC 1344) but it was hardly an exercise in good citizenship. In some cases of artificial tax avoidance, the court might think it right to refuse relief…”

Why you need advice on the scheme

Lawyers and students alike will recognise the maxim ‘He who seeks Equity must do Equity’, but effectively any refusal now is based on public policy consideration. An example of this can be found in the case Dukeries Healthcare Limited v Bay Trust International Limited [2021] EWHC 2086 (Ch), with Deputy Master Marsh holding that, whilst the doctrine of mistake applied, it was refused nevertheless on the grounds that the whole transaction amounted to an artificial tax avoidance scheme.

Anyone affected needs independent advice, considering the degree of risk and any artificiality of the scheme, given that unintended tax consequences are an issue. This should be advised upon by an independent law firm such as Elysium Law and will involve review of the documentation, any advice provided to the Claimant at the time and what it was that was that the Claimant hoped would be achieved.

Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you.

Elysium Law has been approached to consider bringing such a claim.

For further advice please contact us at Elysium-law

CGT Rebasing – Why Less Tax For Landlord’s Planning Doesn’t Work

Posted on by David Brogelli

Elysium Law has posted several articles on this issue in recent weeks. Since HMRC’s Spotlight 63, we have been continuously approached by landlords who have entered into the planning with LT4L, Chris Bailey or the Bailey Group and they are concerned as to what the best course of action to take is.

At this point, it is probably wise to step back and look at the planning itself and why HMRC says it doesn’t work.

We will break down the key aspects of the planning and the claimed advantages of using it as well as providing HMRC’s view and our opinion of that.

The Structure

By now, especially as you may have used the planning, you will likely be familiar with the structure of the planning. Simply put:

  1. The Landlord (and/or family members) set up a Limited Company and an LLP with the Limited Company as a Corporate member of the LLP.
  2. The Landlord transfers their properties into the LLP and then the Landlord as an individual member of the LLP allocates profits to themselves remaining basic rate taxpayers, excess profits are then allocated to the Limited Company.
  3. The Corporate Member then claims a deduction for finance costs.

The Claimed CGT Advantages

LT4L and Chris Bailey claim that the planning results in a Base Cost Uplift to for Capital Gains Purposes to the date of transfer to the LLP

This means that when you come to sell the property, the Capital Gain is calculated on the value when the property was transferred into the LLP, which ordinarily will be higher than when you originally purchased it. The claim is therefore that this will result in a lower gain and consequently lower CGT being paid.

Our view is that LT4L’s planning is based on a total misconception that Incorporation Relief applies in this instance.

Our Analysis

If on the transfer into the LLP an element of Capital is transferred to the Company, then this element would be rebased for the Company, but that would also trigger an immediate CGT charge to the Client. Any disposal of a property from the LLP is treated as transparent and therefore the Client’s base cost is used to calculate CGT. HMRC explains this in example 2 here, which is taken from their Capital Gains Manual.

It is claimed by the scheme promotors that the Incorporation Relief rules apply here. To clarify HMRC states regarding Incorporation Relief:

“you may be able to delay paying Capital Gains Tax if you transfer your business to a company in return for shares”

HMRC

The fundamental flaw here is that you are not transferring your business to a COMPANY in exchange for SHARES, you are transferring it to an LLP – under a Trust arrangement, an entity which does not have shares.

The following questions regarding CGT rebasing were put to Chris Bailey by a trusted colleague of ours.

Trusted Advisor: “You advised that on the transfer into the LLP the properties would be rebased for CGT purposes. I questioned this and although I appreciate that they would be recorded in the LLP accounts at fair market value, on a disposal of a property the LLP would be treated as transparent and as such CLIENT’s base cost would be used for the purposes of the CGT calculation. You advised that this wouldn’t be the case and that he would only be subject to CGT on any growth from the date of contribution into the LLP. I can see that on the transfer into the LLP if an element of capital is transferred to the Company then this would rebase that element for the benefit of the company, but it would also trigger CGT on CLIENT’s disposal to the company. So, on the basis that no CGT is triggered on the transfer into the LLP, I assume that all capital is retained by CLIENT. This is demonstrated in HMRC example 2 on the attached: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg27940 where it demonstrates that the base cost for the disposal is the original base cost (not the uplifted market value).” (Trusted Advisor)

Chris Bailey: “An LLP is an incorporated partnership and as such the incorporation relief rules can be applied”.

Trusted Advisor: “How can incorporation relief apply to an LLP? Incorporation relief requires a person to transfer a business to a company in exchange for shares. The LLP is a corporate body, but it is not a company and cannot issue shares so I can’t see how this could apply or the impact it would have on CLIENT’ CGT base cost. Please can you clarify?”

Chris Bailey: “The LLP’s capital account is increased by the level of the equity. The same rules apply as in a company environment, in that if the LLP is closed down then the CGT would become payable – just as in a company environment.”

As you can see, the question remains unanswered.

Elysium Law has spoken to multiple individuals who used this planning and subsequently received a revised and unexpected CGT calculation from HMRC on the basis of the original value of the properties, not their rebased value as claimed by Chris Bailey.

This of course has resulted in a very large tax charge and had the individuals been aware, it would certainly have affected their decision to sell the properties.

Conclusion

Despite LT4L and Chris Bailey’s claims that there is a CGT Base Cost Uplift, Elysium Law has now been approached by numerous clients who have now had to pay CGT from the date of purchase of the assets, not the uplifted value.

We have seen no advice from Chris Bailey or LT4L as to what they should do, and our view is that they have a claim in professional negligence. Elysium Law has an outstanding track record of bringing, defending, and settling high-value and complex cases.

Contact us today for more information if you have been affected.

OCG Accountants: Their Advice To Do Nothing, Requests For Disclaimers and the Unanswered Questions

Posted on by Richard Gray

Elysium Law has received a number of requests for legal advice as to what to do in the face of the latest letter sent by Chris Bailey (of Less Tax for Landlords and the Bailey Group) on behalf of OCG Accountants.

The letter sent to their clients – which we are still considering in more detail – raises two points of concern.

Reliance

Given our experience in professional negligence claims, my colleague Ruby Keeler-Williams previously advised that advice from between Leading Counsel was NOT one that could be relied upon by the clients of Chris Bailey, LT4L or any other who sought advice. WE WERE CORRECT.

At the time of writing the article we had not seen any disclaimer. In their letter to their clients, OCG accountants set out extensively the excellent background and qualifications of Leading Counsel. However, we can now confirm that this caveat was provided further in the letter:

“We are writing this letter to you after taking (Leading Counsels) advice. However, (Leading Counsel) has asked us to make it clear to you that he is advising only OCG Accountants Ltd and not any of its Clients and that he cannot, for a number of reasons, himself accept any duty of care to any of you or to any other third party”.

Our previous warning has been proven correct. There is no duty of care between the Clients and Leading Counsel and they cannot rely upon his advice.

Who is advising Clients?

The letter then goes on to say:

“The advice to you in this letter thus comes from OCG Accountants Ltd. If you choose not to follow that advice, then we will need to discuss this with you and potentially ask you to sign a disclaimer that you are choosing not to follow our advice. This has been requested by the insurance broker who deals with our Professional Indemnity Insurance.”

This raises the question – what ‘advice’ are OCG giving their clients and are they insured to give such advice?

Our belief is that nothing contained within the letter amounts to advice, save for one small sentence, which advises Clients to do nothing.

We now ask Chris Bailey, Less Tax for Landlords, OCG Accountants or anyone else connected: What ‘advice’ have you been giving your Clients?

Given neither Chris Bailey or OCG accountants are qualified, regulated legal professionals, any advice given is not subject to legal professional privilege and as such can be disclosed.

The letter sets out Leading Counsel’s view, and Leading Counsel’s view as regurgitated in this letter is NOT advice to their Clients, as the retainer makes clear and CANNOT be relied upon by the Clients at all.

Therefore, every reference to what Leading Counsel has advised is of no consequence to the Clients. Further, OCG are not underwriting the advice via their retainer – the whole thing is arguably a smoke and mirror exercise.

The difference between Advice and Information

In claims of professional negligence, English law distinguishes between advice and information given to a client upon which the client may act if they chose. This is a complex area of law and is beyond the scope of this post.

Here, with one caveat as discussed later in this article, there is no advice given.

OCG are simply rehearsing Counsel’s view to their clients

Whilst Leading Counsel’s qualifications and experience are very impressive, rhetorically why is OCG setting this out to clients who cannot rely upon it.

You can read our previous post for more information on reliance upon Counsel’s advice.

The Caveat – OCG’s advice is to do nothing

Lest it be thought that OCG have not offered any advice to their clients. OCG have offered one piece of advice and that is to do nothing.

That one small piece of advice in the letter that may have significant consequences. It is predicated upon the basis that the client has received a nudge letter re Spotlight 63 (some clients of course having not):

“…we advise you on what should be your general response to such a letter…  do nothing in response to HMRCs letter.”  (our emphasis)

That advice does not tell you either:

  • What to do if you have not received a letter;  

and more importantly:

  • What the potential consequences are should you not respond either to the letter or to HMRC’s Spotlight 63 registration.

No doubt experienced tax advisers, with whom Elysium Law are currently working, will have far more questions and we are happy to receive them and expand the post.

The Request for a disclaimer – the iniquity of the uniformed choice

In our view, what seems to be iniquitous here is that Clients who are facing unknown consequences have so far received no advice from Chris Bailey, Less Tax for Landlords or OCG Accountants as to the way forward. The Clients are now given a stark choice with uninformed consequences – to sign or not to sign the disclaimer.

Elysium Law assumes (albeit OCG do not specify this) that this is an attempt to bar clients from bringing a claim under OCG Accountant’s Professional Indemnity Insurance should the clients chose not to follow the only piece of advice in the letter; namely to do nothing with regards to Spotlight 63, and should they go to independent and more experienced tax advisers who will give proper, informed, regulated advice.

We ask OCG and LT4L – why only now has this iniquity raised its head and upon what basis is the disclaimer sought?

LT4L and OCG Accountants have been aware of HMRC’s Spotlight 63 since at least 4th October 2023.

They ought to have informed their professional indemnity insurers at that stage of the potential of a claim or claims to be made.

Can they confirm to their clients that they have done so? If it is not the case, then why?

We therefore ask Chris Bailey and OCG Accountant the following questions:

(we invite every client of theirs to copy them and send them to Chris Bailey and the other Directors and demand answers)

  • Does the Schedule of Work in the Client Care Letter, which we assume is different to that sent by LT4L, cover work by OCG as regards any investigations/enquiries by HMRC?
  • Given that HMRC are aware of the LLPs registered at the office of OCG Accountants, what is the harm (or adverse consequences) to clients in simply registering under the Spotlight?
  • Do you accept that registration is not an automatic admission of any tax that HMRC claim to be owed?
  • In the event that a Client does not register, will this expose them to issues such as, but not limited to, greater penalties or possibly the unavailability of any settlement facility?
  • If more penalties and interest may (or do) occur as a result of OCG’s advice, will OCG’s insurance cover ALL penalties and interest that accrue to each and every affected client as a result?
  • Was it a term of any original contract and did you point out that any insurance might be invalid, as we believe you intimate, if the clients did not stay with you in the event of HMRC issues? If not, why not?
  • If this is an attempt at variation of the contract or at exclusion for liability in some form of new contract, have you considered the legislation that protects consumers against unfair exclusion clauses and contractual terms?  If not, why not?
  • Rather the discussing matters with individuals, which may go unrecorded in the event of a dispute, will you set out in clear and unequivocal terms so that your clients can take independent legal advice as to the basis of the disclaimer, its validity and consequences if signed?
  • Will you tell your clients that they should take independent advice before signing the disclaimer? If not, why not?
  • Acting in the interest of your clients and not your own interests or the interests of a third party such as the insurance broker or the underwriter, have you considered whether there could be a conflict of interest in asking the Clients to sign this Disclaimer? Clearly it would suit OCG and their insurers if the clients had signed such a disclaimer, but is that in the best interests of the clients? As set out at paragraph 12 of the ICAEW’s Guidance on identifying and managing conflicts, in relation to self-interest conflicts, the test is whether: “…the member (OCG) can give, and be seen by a reasonable and informed third party to give, objective advice or service.’
  • If you assert that you have considered this and are compliant with it, will you let your clients see your written correspondence with the Broker as to why the disclaimer is sought now and prima facie at least, is not in the interests of the plethora of clients you currently represent?
  • Does the Broker have any interest in protecting themselves in making the request?
  • Has the Broker told you why this request is being made, or upon whose authority, and pointed out to you under the original PII policy that your clients will be covered only in the event that you continue to act even in the face of a significant and serious conflict of interest?
  • Finally, please tell us all now the consequences of not signing the disclaimer as regards your Professional Indemnity Insurance and what you will say to those who want to seek advice elsewhere.

Once again, Elysium Law invite each and every client of OCG/LT4L to reproduce these questions and send them to OCG demanding an immediate response.

Conclusion

The January 31st deadline for registration is upon the users of the planning and we have numerous affected who, rather like a rabbit in the headlines, are caught without knowing the proper way forward.

OCG’s advice, namely to do nothing, cannot seriously be considered as responsible advice such as would be expected from a competent, independent advisor unless they have considered and set out the consequences of following their advice.

We urge their clients to write to them, setting out and adopting our questions. In the meantime, seek independent advice on registration and its potential consequences.

Elysium Law has an outstanding track record of bringing, defending, and settling high-value and complex cases. With a significant number of taxpayers likely to be affected following Spotlight 63, we are looking to advance a group claim. Contact us today for more information and a free consultation.

Less Tax for Landlords – Are they acting in the best interests of their Clients?

Posted on by Ruby Keeler-Williams

Elysium Law understands that Less Tax for Landlords and OCG Accountants have instructed Leading Counsel (KC) about the tax issues relating to income tax distribution, questions about which have been raised by various tax professionals concerning the hybrid LLP planning.

HMRC’s view (and that of every other tax expert) is that the planning does not work. HMRC’s views are set out in Spotlight 63. They can be seen here.

We have several observations:

Potential Conflict of Interest

We fail to understand why LT4L, Chris Bailey and OCG Accountants are continuing to advise clients who may have suffered loss as a result of the planning.

Our view is that clients who may have been affected require independent advice in evaluating their options, specifically tax advice and the possibility of bringing legal action against LT4L, Chris Bailey and/or OCG Accountants. Accordingly, ongoing representation represents a conflict of interest, and it cannot confidently be said that LT4L, OCG Accountants or Chris Bailey are in a position to advise their clients independently and objectively.

If you are a client of LT4L, Chris Bailey or OCG Accountants, our advice is that you seek urgent advice from a competent and respected tax professional, register following Spotlight 63, ascertain all or any tax liabilities and seek advice from legal professionals.

Is it only income tax that affects the clients in the planning?

The simple answer is no.

At this stage, we anticipate the potential liabilities are as follows:

  • Income tax payments, including interest and penalties;
  • Capital Gains Tax liabilities (potentially by clients who have sold property) – The transfer into an LLP does not give you a base cost uplift as advised by LT4L and Chris Bailey;
  • Inheritance Tax – It is generally accepted that Business Property Relief cannot be claimed upon the death of the partners under this planning.
  • SDLT – as changes in LLP profit sharing automatically trigger SDLT charges under FA 2003, Sch 15, para 14

Elysium Law has been approached by one client who informs us that he sold properties under the mistaken belief of a CGT uplift which is not available, and he had a revised CGT bill of £800,000. There MUST be others in this position.

Clients should be asking LT4L how their instructions to Counsel deal with this, as on the current information their clients have, they don’t appear to.

Can clients rely on Counsels’ advice – who are the clients for the purposes of the retainer?

Traditionally, it was a ‘selling point’ widely used by the tax avoidance scheme providers that ‘Leading Counsel’ had advised. Mostly these were eminent Counsel, with the providers themselves using these ‘names’ to give a form of comfort blanket to the participants who felt very secure knowing that Leading Counsel had advised.

The problem with this is that no matter who Counsel is or was, Counsel’s instructions and advice are governed by the retainer. Leading Counsel will very likely not be retained to advise you. Counsel will likely be retained to advise LT4L or any other of the named entities. In that case, there is no relationship between you as the end client and Counsel and as such his/her advice cannot be relied upon by you. Counsel, we believe, is instructed to advise LT4L and OCG Accountants and only has a duty of care towards them

An example of this is the recent case of McLean v Thornhill [2023] EWCA Civ 466, where it was held that a tax barrister advising the promoter of a tax avoidance scheme owed no duty of care to the tax avoiders who invested in it, even though they had been allowed to see his advice.

In those circumstances, if a client relies on the advice given by LT4L’s KC, and either in the event the advice is not correct, or HMRC does not agree with Counsel’s views, there is no recourse by their clients.

What if HMRC disagrees with Counsel’s views as put forward by LT4L?

If HMRC disagrees with Counsel’s views, the only answer is for you to litigate the matter with HMRC, and this will take considerable time (years) and very significant expense. It is not clear who will pay that expense and it is not at all clear that LT4L insurance will fund this litigation and pay any tax and penalties due to HMRC (as LT4L has informed clients).

The insurance provider will be acting via their solicitors (not via LT4L or any of their representatives) and will not simply ‘payout’ claims. The only way a recovery can be made is by bringing a claim against LT4L and their insurance provider in negligence and breach of contract.

In our further articles, we will demonstrate the effect that relying upon this advice will have on your ability to bring a claim against LT4L or any others who advised that this planning was reliable.

Have the criticisms of the overall planning been answered by LT4L?

The short answer is NO. The informed views namely that the planning does not work, have NEVER been contradicted by Chris Bailey or LT4L since the ineffectiveness of the planning was exposed, principally by Dan Neidle of Tax Policy Associates.

Limitation

There are time limits to bringing civil claims, including claims made against Insurance Companies. These are known as limitation periods. Once those limits have expired, you have no options open to you and your claims will be time-barred, no matter how well-founded.

You must obtain independent and objective legal advice within the limitation period. LT4L will have a complete defence to any claims brought against them once the limitation period has expired.

Conclusion

The deadline to register for Spotlight 63 is rapidly approaching. If you have been affected, you must obtain independent, objective tax advice now.

Furthermore, Elysium Law is still receiving enquiries from clients affected. You can contact us via telephone or email for a free initial consultation.

Elysium Law has an outstanding track record of bringing, defending, and settling high-value and complex cases. With a significant number of taxpayers who are likely to be affected following Spotlight 63, we are looking to advance a group claim. Contact us today for more information

Exiting Tax Avoidance Schemes following HMRC’s Spotlight 63

Posted on by Richard Gray

In this article, Richard Gray and Ruby Keeler-Williams of Elysium Law provide practical guidance for individuals navigating the exit process from tax planning schemes, notably those promoted by Less Tax For Landlords.

Let us start by thanking the CIOT for publishing the letter which is being sent by HMRC following Spotlight 63. This communication sheds light on the potential fallout from the tax planning schemes orchestrated by Less Tax For Landlords (LT4L) and other promoters.

To see this, you can access the article containing the posted letter on the CIOT website: HMRC One to Many letters concerning ‘Spotlight 63’ LLP property tax planning

Elysium Law have been approached by numerous victims of this particular mess and are looking at bringing claims in professional negligence, amongst other causes of action, against the perpetrators. Note, there are in fact a few providers presently in our sights.

One issue that we raised with the professional advisors with whom we work is the policy HMRC are adopting in relation to the recovery of the many specific tax liabilities this scheme will cause.

Following these discussions, we’ve put together this short practical guide for those affected.

Exit

Exiting a tax planning scheme such as those implemented by LT4L demands careful consideration and strategic planning, especially in the aftermath of HMRC’s Spotlight 63.

Reassessing the Declaration of Trust

The first crucial step in the exit strategy involves evaluating the effectiveness of the declaration of trust over the beneficial ownership of properties within the LLP. If deemed necessary, a change may be required to shift the beneficial interest back to the individual(s). However, it is essential to note that there are significant considerations in this regard, which we will address shortly.

Income Declaration and Section 24 Implications

Once the beneficial ownership is realigned, landlords must declare the income and expenses on the properties as they did before. This reinstatement to individual ownership brings Section 24 of the Finance Act 2015 into focus, particularly impacting the calculation of taxable profits for those with mortgages.

Liquidation of the LLP and Limited Company

In certain scenarios, the LLP and Limited Company member may need to be liquidated, but exercising caution is paramount. This step should only be taken post-settlement to avoid potential complications.

Potential Pitfalls of the ‘Transfer Back’

One of the critical issues in the ‘transfer back’ process involves the change in the corporate member’s entitlement to profits. The looming question is whether HMRC would perceive this transfer as triggering SDLT or CGT charges. While we remain hopeful that it wouldn’t, seeking professional advice before taking any action is essential. Waiting for HMRC’s confirmation or agreement on any arguments presented is equally crucial.

Filing Returns: Exercise Caution and Transparency

For those compelled to file returns before HMRC confirms their stance, it is advised to base your position on professional advice. Full transparency in filing, accompanied by a clear rationale for the chosen position, is vital. Acknowledge the possibility of amendments and be prepared to provide evidence if HMRC disagrees, as filing without proper advice poses the risk of penalties and additional taxes.

Settlement

Mixed Membership and Reallocation

In addressing the mixed membership issue, it is anticipated that HMRC may seek to reallocate profits back to individual members. Moreover, there’s a possibility that HMRC might go a step further and consider ignoring the LLP structure entirely, leading to the computation of tax on the individual(s) based on a ‘normal’ basis.

Corporate Income Tax Offset in Settlement

For corporates that have previously paid income tax on profits, there is a potential avenue to offset or include this in an overpayment claim. This can effectively reduce the ‘cash’ cost of settlement, subject to time limits. Similarly, income tax paid by individuals on dividends from the corporate may be repayable, further alleviating the financial impact of settlement.

Inheritance Tax Implications

While we hope that no participants in these arrangements have passed away, considerations must be made. If Business Property Relief has been claimed for Inheritance Tax (IHT), and it is deemed ineffective, HMRC would expect necessary amendments.

CGT and SDLT Liabilities

The transaction and reallocation of profits may have triggered liabilities in terms of Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). HMRC’s perception of the effectiveness of these events will determine the course of settlement. There’s a possibility (albeit a significant one) that HMRC may choose to ignore these issues. If not, computation and payment of SDLT and CGT become necessary, requiring careful consideration of available reliefs.

HMRC Registration and Policy Pause

While HMRC advises victims of this scheme to register, responsible professionals should encourage compliance. However, we recommend pausing a moment. As of now, HMRC has not disclosed its policy on these matters, making it crucial to stay informed and navigate the registration process with a clear understanding of potential implications.

Next Steps

In the initial phase, Elysium Law strongly advises seeking assistance from a professional adviser. Rushing into decisions without expert guidance may inadvertently lead to the creation of further tax liabilities. A professional adviser can provide invaluable insights, helping you make informed choices tailored to your unique circumstances.

It is highly likely that discussions with HMRC will be necessary to navigate the complexities of settlement and exit. Achieving a clear understanding of the precise terms for both settlement and exit is crucial. This ensures that you can leverage the benefit of any tax already paid, contributing to a smoother resolution of the situation.

Should you find yourself impacted by the aftermath of LT4L and the tax planning issues discussed in this article, Elysium Law is here to offer guidance and assistance. We recognise the complexity of the situation and the potential legal challenges involved, and our team stands ready to advise. Contact us today for advice on your personal circumstances.