In the recent case of Bhaur and others v Equity First Trustees (Nevis) Ltd and others [2023] EWCA Civ 534, the Court of Appeal (CoA) had to consider whether to allow taxpayers to undo, on the grounds of mistake, a voluntary disposition of their assets entered into as part of a tax avoidance scheme.
1 Background
Courts can set aside voluntary dispositions entered into by mistake. Caselaw distinguishes between mistakes (which can be set aside) and mispredictions (which cannot), with the former pertaining to the present or past circumstances at the time of entry into an arrangement and the latter to some possible future event. However, the distinction between the two can be fine.
Even if there has been a mistake, for the courts to intervene it must be sufficiently serious so as to render it unjust or unconscionable for a donee to retain the property given to them. Here courts have found it relevant whether the mistake related to artificial tax avoidance arrangements.
In Bhaur, Mr and Mrs Bhaur had, following tax planning advice, established an employee benefit trust (EBT) to which they had transferred their family business with the aim of mitigating inheritance tax on their death. The CoA found as a matter of fact that the business had no need for the EBT at the time it was established, with the relevant company's only three employees being members of the Bhaur Family who were not intended to benefit from the trust. The company later took on non-family employees following advice that this would be helpful for the purposes of the planning, but there was no intention that they should benefit from the EBT.
After HMRC started investigating the arrangements, the trustees sought to make payments to members of the Bhaur family, who strongly objected to receiving them. The trustees therefore resolved to wind up the trust and transfer its assets to the NSPCC, leading the Bhaurs to seek to unwind the original disposition of assets to the EBT. As we discussed last year, the High Court rejected the Bhaurs' application, essentially, on the basis that they had miscalculated the consequences of the scheme going wrong rather than made a relevant mistake.
2 Decision
The CoA unanimously declined the appeal but took a different approach to the High Court. The CoA thought that the case was a good example of when the distinction between mistake and misprediction is blurred, but held that, if there had been a mistake, it would not be unjust or unconscionable for the EBT to retain the property. In this regard, the court thought it relevant that, in implementing the scheme, the Bhaurs knew there was a risk and decided to take it anyway. It also gave "considerable weight" to the fact that the case involved "an entirely artificial tax avoidance scheme", something it observed to be a "social evil".
3 Comment
This case is an interesting reminder of the principles of the equitable doctrine of mistake and emphasizes the difficulties taxpayers face in using it to unwind tax avoidance arrangements that have not turned out as planned.
Originally published 3 July 2023
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