Howzat! Cricketer Bowled out for a Duck by HMRC in English High Court Tax Case 16 June 2020
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1 TAX Howzat! Cricketer bowled out for a duck by HMRC in English High Court tax case 16 June 2020 INTRODUCTION and that the income paid to the personal intention must have been outwardly A recent English High Court decision (MV service company in respect of the 2011 expressed. Promotions Ltd and another v Telegraph contract should be recognised for Counsel for HMRC argued that even Media Group Ltd and another [2020] EWHC tax purposes as income attributable where the requirements for rectification 1357 (Ch)) has highlighted the importance to Vaughan himself. HMRC further are met under that test, as the relief of hiring experienced tax lawyers to submitted that that the 2018 deed remains discretionary the court may efficiently structure and document did not rectify the 2011 contract with refuse to grant relief in circumstances transactions, in this case due to the limits retrospective effect. The court agreed where there is no practical significance of rectification when a contractual mistake with HMRC’s interpretation of the contract to the outcome. In support of this they results in unexpected tax consequences. so the question for the court was whether rectification for a common mistake could referred to an earlier judgment of Hodge J Ashcroft v Barnsdale be granted as a remedy if all issues in [2010] EWHC 1948 (Ch), [2010] STC 2544: BACKGROUND between the parties to a contract had The case involved former international been resolved (as it had been in this case In my judgment, the effect of the authorities cricketer and cricket commentator, under the 2018 deed) where rectification is that the court cannot rectify a document Michael Vaughan, and his personal service was being sought only to achieve a tax merely because it fails to achieve the company. Vaughan and his company benefit. fiscal objectives of the parties to it. A mere took a claim against Telegraph Media misapprehension as to the tax consequences Group Limited (which consented to the of executing a particular document will not relief) and HMRC seeking rectification RECTIFICATION justify an order for its rectification… the court of arrangements relating to Vaughan’s In determining whether rectification was will not order rectification of a document if engagement to write for the Telegraph. an available remedy, Hodge J, relying on the parties’ rights will be unaffected, and if In 2008 Vaughan’s personal service the judgment in FSHC Group Holdings the only effect of the order will be to secure a company entered into a contract with Ltd v GLAS Trust Corporation Ltd [2019], fiscal benefit for one or more of them reiterated that the correct test to be the Telegraph in which it was agreed that Relying on this passage, counsel for applied in deciding whether the written Vaughan would write newspaper articles HMRC submitted that a distinction terms of a contract might be rectified for the Telegraph. In 2011 this contract should be drawn between cases where because of a common mistake is: was extended but the extended contract the rectification is sought in order to was entered into by Vaughan himself, i. that the document fails to give effect to a obtain a tax advantage in the abstract rather than his personal service company. prior concluded contract or (which tend against discretion being In a 2018 deed of rectification between granted) and cases where there is a the parties, it was agreed that Vaughan’s ii. that, when they executed the document, the parties had a common intention in specific common intention as to how personal service company was the correct the fiscal objectives of the agreement party to the 2011 contract. respect of a particular matter which, by mistake, the document did not accurately were to be achieved which has not been HMRC disagreed, stating that as a matter record. reflected in the documentation (which of interpretation the 2011 contract was would tend in favour of the court using For the second limb, the common between Vaughan and the Telegraph, its discretion). HMRC argued that in this arthurcox.com Howzat ! Cricketer bowled out for a duck by HMRC in English High Court tax case 2 case rectification was sought in order was not the case, rectification was not condition. This serves as a reminder that to achieve what is now perceived to be available . Hodge J set out the court’s evidence of pre-contractual negotiations a tax-efficient structure, but that there determination in the following terms: which illustrate the intention of the was no specific intention to adopt such transaction is a key asset in the event of a Had the entry into or the terms of the a structure at the time of entry into the future dispute with a tax authority. 2011 contract been motivated by tax contract. considerations, whether in whole or in part, It does more than remind taxpayers Ultimately Hodge J agreed with the then there would still have been something of the importance of good record claimants in that a rectifiable mistake left to be resolved even after the 2018 keeping however. The English High was made in identifying Vaughan as rectification deed; but since there was no Court has made clear that the remedy opposed to his personal service company such underlying tax motivation, there is of rectification will not provide a second as a counter-party to the 2011 contract. nothing left to rectify… The existence of a chance to taxpayers where the tax In deciding whether to apply the dispute between Mr Vaughan and HMRC advantages of a structure were not discretionary remedy however, the court does not justify the grant of the equitable contemplated and documented at the agreed with submissions made on behalf remedy of rectification because that dispute outset. It therefore illustrates that an of HMRC. Following its own determination does not affect the rights of the parties to the even more valuable asset to taxpayers in Ashcroft v Barnsdale, the court found 2011 contract as between themselves. is the advice of experienced tax lawyers that discretion was only to be exercised when structuring and documenting if there was an issue between the parties transactions. Vaughan’s agent, who was to be determined but here the 2018 deed PRACTICAL IMPLICATIONS responsible for negotiating and signing had fully resolved the rights of the parties This case raised the rather novel question the contracts on Vaughan’s behalf, as they had no specific tax advantage in as to whether a specific tax advantage is confirmed as part of his evidence that mind when they entered into the 2011 required as part of the bargain between he did not take any legal advice on the contract. The court went on to find that the parties as a necessary pre-condition 2011 contract prior to signing it. That had the 2011 contract been motivated to the grant of the remedy of rectification is a mistake which it seems cannot be by tax consequences, then there would where the parties have already corrected rectified. have been something left to be resolved the mistake in the underlying document. If you would like further information on this as HMRC did not accept the retrospective In this instance, the English High Court matter please contact a member of our tax effect of the rectification but, as that has held that this is a required pre- team. K E Y C O N TACT S Fintan Clancy Ailish Finnerty Caroline Devlin David Kilty Partner, Tax Partner, Tax Partner, Tax Partner, Tax +353 1 920 1190 +353 1 920 1207 +353 1 920 1224 +353 1 920 1036 [email protected] [email protected] [email protected] [email protected] Dublin Belfast London New York San Francisco +353 1 920 1000 +44 28 9023 0007 +44 207 832 0200 +1 212 782 3294 +1 415 829 4247 [email protected] [email protected] [email protected] [email protected] [email protected] arthurcox.com.