A multimillionaire lost an appeal over use of a historic tax avoidance scheme, and his claim that the high income child benefit charge (“HICBC”) interfered with the 'enjoyment of his money' was rejected.
At the First Tier Tribunal (FTT) appellant Brian Lynch disputed three HMRC closure notices related to his involvement in the Caledonian tax avoidance scheme over a four-year period between 2010-11 and 2013-14.
In total, HMRC issued a dry tax demand for £9,937,913, including two years HICBC.
Lynch appealed on three grounds, the first being against the 'dry tax' income tax charges which were issued as a result of him using the Caledonian scheme and the second a challenge against the discovery assessment. The third issue at stake was an appeal against high income child benefit charge, which he claimed breached his human rights and interfered with the 'enjoyment of his money', despite owing almost £10m in tax.
'Caledonian involved a limited partnership called Ridgeback Investments No. 1 Limited Partnership (Ridgeback)', said HMRC.
'Caledonian sought to generate for the partners in Ridgeback, a deduction for interest relief on a loan to invest in that partnership pursuant to s383 and s398 Income Tax Act 2007 (the Interest Relief Claim and ITA 2007 respectively).
'Part of Caledonian involved Ridgeback entering a series of transactions involving promissory notes which were qualifying corporate bonds (QCBs).'
Lynch was represented by well-known tax barrister Keith Gordon, who argued that his client had never acquired or disposed of any QCBs 'at any amount less than face value', to which Harry Winter, HMRC's barrister disagreed.
Tribunal Judge Rosa Pettifer said: 'Having carefully reviewed the relevant documents, we find that they support Mr Winter's position.
Pettifer added: 'We find as fact that: a number of transactions involved the sale of the QCBs at face value; a number of transactions involved the sale of the QCBs at a price more than their face value; and a number of transactions involved the sale of 4 the QCBs at a price less than their face value.'
For the first issue of appeal Gordon relied on the Ramsay principle to argue that no dry tax charge was due.
Gordon argued: 'Aside from the tax savings, the series of transactions making up Caledonian had no commercial or other discernible purpose.
'As such, under a holistic approach all intervening steps are ignored. Thus, when construing s381 ITTOIA 2005 purposively and applying it to the transaction, viewed realistically, it is not possible to say that there is any taxable discount arising within the meaning of that section.'
Both parties agreed that if the appellant succeeded with the Ramsay argument, then ground two and three 'would fall away'. However, the tribunal dismissed this ground of the appeal.
The second issue was whether the discovery assessment for the 2011-12 tax year was valid, with Gordon arguing that HMRC had failed to satisfy the TMA s29(5) condition as it had to be determined 'whether an officer of HMRC could not have been reasonably expected, on the basis of information made available to him on or before 30 April 2014'.
The tribunal agreed with HMRC on this matter, however the two parties agreed a reduction in the tax owed in the discovery assessment to £3,652,638.
High income child benefit charge argument
The final issue revolved around an argument about the human rights of Lynch, and whether the HICBC impeded these.
Lynch's wife had claimed child benefits for their two children, but neither Lynch nor his wife were entitled to this as he earned over the £50,000 threshold.
Gordon argued: 'HICBC, when applied to non-recipients such as the appellant, is simply an appropriation of additional money without any compensation.'
He added that there was 'simply no objective or reasonable justification for subjecting him to the HICBC', and that the 'imposition of the HICBC interferes with an appellant's enjoyment of his money'.
HMRC stated that the 'objective of the HICBC is recouping child benefit from family units containing a higher income person and thus obtaining tax to fund the state'.
Gordon went on with the argument, saying Lynch should be compared to a 'childless single person' as he had not personally benefited from the money his wife had received, 'and so subjecting him to the HICBC was comparable to recovering that money from a person outside the ambit of the HICBC'.
But this shaky position failed to convince the tribunal.
Judge Pettifer said: 'On the appellant's case there is no difference in treatment that breaches Article 14, and we do not go on to consider this issue further.'
All three grounds of appeal were dismissed by the FTT.
FTT ruling, Brian Lynch v HMRC
Peter Nichols – BFN Accounts & Tax