In an article first published in the 10 February edition of Taxation, partner James Le Gallais and associate Cécile Perrault discuss a decision which deals with recission: a remedy that has the effect of setting aside an otherwise legally binding action with the aim of returning the parties to the position in which they would have been had the action never been taken.
In JTC Employer Solutions Trustee Ltd and others v William Garnett and another [2024] EWHC 3128 (ch), the trustees of two employee benefit trusts (EBTs) applied to the High Court seeking the rescission of various deeds of appointment creating sub-trusts within the EBTs for the benefit of individual beneficiaries and their families.
Why is the case important?
The case is the latest in a line of authority in which the courts’ help has been sought in unwinding tax-driven structures that have not worked as intended. In this instance, the trustees and the beneficiaries (who did not oppose the order sought) succeeded despite opposition from HMRC.
The case highlights the importance of considering rescission as a remedy when tax planning goes wrong, as well as challenges to HMRC and seeking redress if tax advice has been substandard. If successful, rescission can eliminate the tax liability at source.
Notably, the court criticised how HMRC had participated in the proceedings. HMRC wrote to the court before the hearing setting out its position, rather than applying to be joined as a party and submitting evidence. The court recognised this was established practice but held that HMRC’s letter went beyond this in important respects, and it was criticised as ‘shadow boxing through correspondence’.
It is open for debate whether there would have been a different decision had HMRC applied to be joined to the proceedings and filed evidence.
Why was rescission sought?
The trustees sought to rescind certain sub-trusts within the EBTs to escape unintended IHT consequences brought about by the creation of those sub-trusts. An EBT falls outside the relevant property regime under the IHTA 1984 as long as it complies with s 86, which requires the class of beneficiaries to comprise ‘all or most of the persons employed by or holding office with’ the relevant body.
The EBTs, as originally drawn, complied with this provision, but HMRC took the view the sub-trusts did not because they were for the benefit of individual employees and their families. If HMRC’s position were upheld, additional tax of some £7m would be payable.
The trustees argued that they had not appreciated that there was any risk that the introduction of the sub-trusts would take the EBTs outside the protection of s 86. Accordingly, they sought rescission of the sub-trusts and to return the parties to the position they would have been in had they never been created.
When will rescission be available in this context?
The leading authority as to the availability of rescission in the context of a voluntary disposition to a trust is the Supreme Court decision in Pitt v Holt [2013] 2 WLR 1200. The test has also been summarised in Kennedy v Kennedy [2014] EWHC 4129 (Ch). In short:
The disposition must have been brought about by a distinct mistake (including as to the law) rather than mere ignorance or incorrectly predicting some future occurrence. Such a mistake can be brought about by carelessness, but not if the relevant person understood they were running the risk of being wrong.
The mistake can be an incorrect conscious belief or a tacit assumption. This includes, in principle, a mistaken belief or assumption as to the tax effects of a disposition. The Supreme Court in Pitt v Holt rejected the proposition that mistakes that related exclusively to tax cannot, in any circumstances, be relieved.
The causative mistake and its consequences must be sufficiently serious to make it unconscionable for the position to be left uncorrected.
What was the court’s decision?
The court found that the deeds of appointment were entered into on the basis of ‘an operative mistake as to the fiscal effect of those deeds’. The court described such mistake as ‘an incorrect conscious belief or an incorrect tacit assumption that the assets appointed under the deeds of appointment … would continue to benefit from the treatment in s 86 of the1984 Act once sub-trust appointments were made’.
A note of caution?
HMRC objected to rescission on policy grounds that the tax arrangements constituted ‘a complex tax planning scheme’, relying on obiter remarks of Lord Walker in Pitt v Holt (see the judgment at [135]).
The court described HMRC’s point as ‘somewhat obscure’ and did not consider it further, given (in the court’s view) the unsatisfactory manner in which it was raised. However, the court left the door open for HMRC by describing it as ‘a matter for another case in which it is properly before the court’.
How will HMRC approach rescission claims?
HMRC will likely want to revisit its current practice in approaching rescission claims. The standard letter approach may still be suitable for many cases, but if HMRC wants to make public policy arguments on the basis that artificial avoidance is involved, there are no shortcuts: they ought to join the proceedings so the issues can be dealt with by the court.
You can find further information regarding our expertise, experience and team on our Tax Litigation and Resolution page.
If you require assistance from our team, please contact us.
Subscribe – In order to receive our news straight to your inbox, subscribe here. Our newsletters are sent no more than once a month.
