Mark Northwood v The Commissioners for HMRC

HMRC made an application the day before the hearing to be permitted to take Mr Northwood’s expert accountancy witness, Mr Powrie, to FRS 18 (which requires accounting policies to be adopted to give a true and fair view) during cross-examination. The grounds for the application were that Mr Powrie’s relies in his report on all the rules and principles applying to the preparation of accounts but has not mentioned FRS 18 or explained how his evidence is consistent with FRS 18. Ms Belgrano submitted that although HMRC were not obliged to give advance notice of the lines of questioning which they intended to pursue (see Ingenious Games LLP and others v HMRC [2015] UKUT 105 (TCC) at [65]), Mr Powrie should have the opportunity to address this point in oral evidence and he will be assisted by having FRS 18 available.

Ms Brown strongly opposed the application, arguing that it amounted to adducing new evidence and an amendment to HMRC’s statement of case, as well as being against the interests of justice.

I do not agree with Ms Brown’s submissions. I consider the rules and principles applying to the preparation of accounts to be in evidence, whether referred to specifically or not, by virtue of Mr Powie’s report. Further, as FRS 18 appears to be relevant, I consider that it should be admitted in the absence of any compelling reason to the contrary (see Mobile Export 365 LTD v HMRC [2007] EWHC 1737 (Ch) at [20]). I also do not agree that allowing the application seeks to amend HMRC’s statement of case. Part of HMRC’s case is that the accounts were not prepared in accordance with GAAP and HMRC’s statement of case sets out their position on whether the RT transfers expense is in accordance with GAAP. Although their statement of case does not refer specifically to FRS 18, I do not consider its inclusion to fundamentally alter HMRC’s basic position, as contended by Ms Brown, such that an amendment to the statement of case is necessary.

On the question of whether it is in the interest of fairness and justice to allow the application, Ms Brown makes reference to HMRC previously making a number of applications at short notice that have disrupted preparation and argues that is a much more significant factor in the case of an individual appellant, with limited resources and support, than it is for HMRC. In respect of this application, I accept Ms Belgrano’s explanation that the late timing of the application was unavoidable due to the issue arising whilst preparing for cross-examination. On balance, I consider the potential prejudice to HMRC from refusing to allow relevant cross-examination to outweigh the potential prejudice to Mr Northwood’s case by the lateness of the application. I consider it to be in the interests of fairness and justice to allow the cross-examination and the application is therefore granted.

In their skeleton argument dated 11 January 2022, HMRC stated: “In the light of the Appellant’s evidence, as it emerged during cross-examination, HMRC advance a case on the basis of the sham doctrine, namely that the Appellant intended, by virtue of the scheme documentation, to make things appear other than they were”. The footnote to that submission states: “As set out by the UT in Ingenious Games v HMRC [2015] UKUT 0105 (“Ingenious Games”) at paras 62 to 65, HMRC are entitled to plead a case on sham if, in the light of the evidence that emerges in cross-examination, relevant oral evidence which indicates sham emerges (as it did in the present case).”

The findings of the Upper Tribunal (‘UT’) in Ingenious Games referred to by HMRC are as follows:

Ms Brown argues that HMRC misapplied the decision in Ingenious Games to the facts of this case and refers to HMRC’s amended statement of case dated 29 June 2020 which stated that: “HMRC notes that Mr Northwood has adopted conflicting positions. Unless these are satisfactorily resolved HMRC will contend that the Remuneration Trust arrangements, or elements of the arrangements, were a sham”. Ms Brown contends that is not, in fact, a pleading of sham but appears to be a warning that they may plead sham.

Ms Brown further contends that HMRC have not pleaded their case on sham properly because their skeleton argument is not a pleading, they did not refer to any of the documents referred to in their skeleton argument on sham in their statement of case, the argument was not trailed in their amended statement of case and HMRC’s case on sham is not in light of Mr Northwood's evidence because they were clearly considering a sham argument before hearing that evidence.

Ms Brown accepts that the overall burden of proof is on Mr Northwood but contends there is a necessity to plead the sham in this case because HMRC would not be losing “a potent weapon in helping to expose the truth” as HMRC had already indicated that they might plead sham. Ms Brown further argues that the UT decision must be read in a more general context and in the context of paragraphs 66 and 67, which says:

Ms Brown submits that those are the relevant questions and highlights that HMRC was still in a position to put their allegations to the witnesses in Ingenious Games, which is different from this case. Ms Brown further argues that no amendment has been made to their statement of case, these are serious allegations and because HMRC have decided to plead a positive case, they are now putting forward a different position to the one in their statement of case and should not be permitted to rely on that which is inconsistent with what they have argued before.

I disagree with Ms Brown’s submissions on this point. It seems to me, from the UT’s remarks in Ingenious Games, that where the burden of proof lies on the appellant, as it does in this case, HMRC are not obliged to give advance notice of the lines of questioning or plead a positive case of dishonesty. I am not satisfied that there is any basis for the suggestion that that position is different where HMRC have now decided to plead a positive case. Further, the UT’s comment regarding the element of surprise is simply, in my view, a reference to what would be the case if the position were different and does not change HMRC’s obligations where the element of surprise is not an issue. It is my finding, in accordance with the UT decision in Ingenious Games, that HMRC have not breached their pleading obligations in respect of their arguments on sham.

The question of whether the allegations have been put fairly and squarely to Mr Northwood so that he has been given an opportunity to rebut them, is considered at [123] below.

The parties agree that Mr Northwood has the burden of proof in respect of his grounds of appeal, HMRC have the burden to prove their case on sham (but they do not have to do so for the appeal to be dismissed) and the standard of proof is the balance of probabilities. Accordingly, the appeal must fail unless Mr Northwood is able to persuade this Tribunal that the deductions claimed are valid. The appeal will also fail if HMRC prove their case on sham.

Ms Brown refers to the UT case of Qolaminejite v HMRC [2021] STC 1169 at [25]:

Ms Brown also refers to Lord Hoffmann’s remarks in Re B [2009] AC 11 at [2]:

Ms Brown submits that:

Ms Brown accepts that there is no legal authority that supports this contention and invites the Tribunal to reach this conclusion on a common sense basis. I am not persuaded by this argument. A finding of sham requires the Tribunal to be satisfied of an intention to deceive or, at least, to make things appear other than as they are (see The Brain Disorders Research Limited Partnership, Neil Hockin v HMRC [2017] S.T.C. 1170 (‘Hockin’) at [24]). I do not accept that a finding that HMRC have not proved their case on sham (and operating a binary system, that Mr Northwood did not intend to deceive or to make things appear other than as they are) can be considered to be a significant factor in favour of Mr Northwood proving his case that the contributions were deductible because they were wholly and exclusively for the purposes of his profession and in accordance with GAAP. I therefore do not accept Ms Brown’s submissions on this issue.

In addition to the bundles of documentary evidence before the Tribunal (referred to at [2] above), I heard evidence from Mr Northwood and expert accountancy evidence from Mr Powrie, instructed on behalf of Mr Northwood, and from Mrs Reeves, instructed by HMRC.

In assessing the evidence, I have taken into consideration Ms Brown’s submissions that:

Mr Northwood’s evidence is that he has no knowledge or expertise in tax, legal or financial matters. He has always worked as a self-employed trader and built a very successful business out of his dental practice. He had previously considered operating through a limited company but rejected this because of reduced operational flexibility and increased paperwork. Mr Northwood states that during the relevant period his leased business premises required commitment to a new lease in four years’ time or to find different premises, but concerns were raised during discussions with Foy that owning business premises provided a potential vulnerability in the event that clients, employees or others made a legal claim against him. Foy introduced him to the concept of a “remuneration trust structure” as a way of achieving his aim of owning his practice premises while overcoming some of the concerns. Foy introduced him to BW as a “specialist legal company”. He attended a meeting in August or September 2009 where Paul Baxendale-Walker talked about remuneration trust structures. He was told how such structures enable a mixture of all types of assets to be placed in a protected environment, had been used for many years unchallenged by HMRC who were fully aware of them, complied with all established tax law, were outside DOTAS (Disclosure of Tax Avoidance Schemes) procedures, could protect all classes of assets including cash, investment vehicles, commercial and domestic properties and could hold investments and property to be used as incentives to business contacts in a number of ways.

Mr Northwood states that, on the basis of the advice he had received, the meeting he attended and Paul Baxendale-Walker’s book on remuneration trusts, he came to believe that a remuneration trust structure was a normal way of dealing with assets that many people had done before, without problem. He concluded that it was an effective way to grow his business, which gave protection to that business from third party claims, without the need to incorporate. He was, of course, aware, that the RT had tax benefits, but obtaining these was not his purpose in entering into the Trust. He also understood that they were tax benefits that were accepted by HMRC. He did not understand all of the ins and outs of the RT, but felt that he understood the business rationale. He states: “I can’t recall 11 years down the line exactly my degree of understanding. I must have asked enough questions, I must have had enough information that I was happy that the answers there reflected the true situation. I rely on professional advisers. If my accountant or my independent financial adviser had looked at those answers and said, “These are not appropriate for your situation; they’re incorrect,” then I wouldn’t have signed them. It’s-- I-- this isn’t-- any of this documentation isn’t really something I have experience of on a day-to day basis, so I have to take professional advice on it.”

Mr Northwood’s evidence is that he believed the business had always been run in a way that placed commercial obligations on him towards his suppliers that were different to legal obligations. The commercial obligation was that, to obtain the most favourable trading terms and to maintain the best possible working relationships, he felt obliged to engage with them in the most professional manner. Bills are always paid early and in full and these obligations existed in his mind before, as well as after, the establishment of the RT.

With regard to his reasoning for setting up the RT, Mr Northwood says that discharging commercial obligations, as referred to in the BW Report, was not the sole reason that he started the RT. His use of funds within the RT led to enhanced payments to suppliers through increased business in a different way. The Report was a more standardised rather than a personalised report, and he had a variety of reasons for starting the RT. Suppliers have benefitted from his enhanced practice and good commercial relationship. Mr Northwood states that the RT was partly to do with building up a pot of money that would let him invest in business premises and the trust would be used as a way to give incentives to suppliers.

In his witness statement, Mr Northwood says that it “was also explained that the structure had the ability to introduce my children into the trust investment process in the future. I have three children and I, therefore, want to protect their financial futures, too”. In cross-examination he confirmed that “the talks had spoken about use of the trust structure for future planning regarding inheritance and children” but clarified that he was stating that the directive control of the trust would be potentially passed on to his children, not the contents of the trust fund.

When put to him in cross-examination, Mr Northwood disputed that the entire arrangements, basis for the resolutions and responses on the Questionnaire referring to substantial cash liabilities or substantial commercial liabilities to suppliers were just artificial and said that he was advised that this was a way that he could give long-term incentives to suppliers by making investments that would enhance his business. He refers to the amount spent with one supplier having gone up 30 per cent in the last three or four years, showing that they are benefitting from the business having nicer premises.

Mr Northwood states that the payments to the RT were not his funds anymore and were not drawings because they were an irrevocable contribution into a trust, where the funds were taken out of his control and unreservedly gifted. He makes the point that less than half of the funds paid into the Trust have been lent to him and investments made by MML have increased in value, benefitting the RT.

Mr Northwood’s evidence is that he would have potentially not made the payments to the RT if they were known not to be tax deductible but, although he was aware of the potential tax advantage of the RT, this was not his purpose.

I do not consider the evidence given by Mr Northwood to be credible in respect of certain key issues.

Having considered the evidence before me, I make the following findings of fact.

I accept Mr Northwood’s evidence that he was advised that he could enter into a set of arrangements which gave him the protection that he wanted for his business, in a way that offered him a tax advantage. I do not find Mr Northwood to have acted dishonestly in an attempt to evade tax or to conceal the overall arrangements.

However, with regard to his introduction to the arrangements, Mr Northwood refers to Foy as his “financial advisors”, whereas the firm’s email signature refers to “Trust Planning & Wealth Protection”, and he claims that BW LLP were introduced to him as a “specialist legal company”, but their letterhead refers to them as “The Wealth Strategy Firm”. The slide deck sent to NatWest Bank (‘NatWest’) in July 2014 in order to secure a mortgage refers to the arrangements amounting to “tax free wealth with personal control” and refers to “unique features and benefits” which include: tax deduction against profits, no tax on contributions, tax free roll up of trust fund, loans allowed, no tax on loans, funds stay in UK and client manages own funds. I do not consider Mr Northwood’s evidence regarding his introduction to the arrangements to be credible and it is my finding that Mr Northwood was made aware of the arrangements, at least partly, in the context of discussions about personal financial planning and not solely in the context of discussions about purchasing business premises, protecting business assets or incentivising suppliers. The NatWest slide deck also includes references to “Trust fund IHT free”, “IHT deduction for loans at death” and “Client’s will controls succession” as “unique features and benefits” of the arrangements. Mr Northwood’s evidence referred to the talks he had about use of the trust structure for future planning regarding inheritance and children, and that he wants to protect their financial futures. It is my finding that inheritance tax planning was one of the purposes of the RT payments.

With regard to Mr Northwood’s evidence on his intention to benefit the beneficiaries of the RT (suppliers) by improving his business and its turnover, which would in turn benefit the suppliers by making direct gifts either of cash, or in the form of other incentives, based on how successful the business was over time, he accepts that nothing about the way he ran his business at the relevant time generated in his suppliers the expectation that they would receive substantial cash gifts and he accepts that it was never his intention that £570,000 would be distributed amongst his suppliers in the next financial year, as he considered it to be a long-term incentive trust. He accepts that it was never his intention, even in the long term, that all of that money would end up being paid out to suppliers because he had plans to develop his business and the suppliers would benefit in the long term from the business having nice premises and a much increased turnover. Mr Northwood accepts that the size of cash gifts made to suppliers in the last ten years has been the odd case of wine and one cash gift of £250 and that the suppliers listed on the Providers List were not aware of the existence of the RT. I do not find Mr Northwood’s evidence of his intention to benefit suppliers to be credible. It is my finding that no commercial obligations to suppliers existed and I therefore find that incentivising or discharging commercial obligations to suppliers was not a purpose of the RT payments.

Ms McCarthy challenged Mr Northwood’s evidence that he concluded the RT was an effective way to grow his business, which gave protection to that business from third party claims without the need to incorporate. When asked how the RT protected his privately owned assets from a legal claim, Mr Northwood said that the practice is owned by MML and that offers security. When it was put to him that the tax benefits of operating the business through a straightforward limited company were dwarfed by declaring tax of £10,000 or less for the years since using the trust, he simply said that he chose not to practice as a limited company in the years prior to being introduced to a remuneration trust as a possibility. I do not consider it to be credible that Mr Northwood previously rejected the option of operating through a limited company because of reduced operational flexibility and increased paperwork but concluded, despite any reduced operational flexibility and increased paperwork involved with the RT, that the RT was an effective way to grow his business, which gave protection to that business from third party claims without the need to incorporate. I find that operating and growing the business in an effective and protected way, without incorporation, was a factor considered by Mr Northwood when entering the arrangements but was not a purpose of the RT arrangements.

I do not accept Mr Northwood’s evidence that he no longer had control of the RT funds. In an email to Foy in February 2010 Mr Northwood stated: “I’d be grateful if you could let me know how I proceed for payments in/out from now on. I’ve arranged for the practice drawings for January to be paid into the Marhel Management account direct.” I do not accept as credible Mr Northwood’s explanation that he meant “cash” instead of “drawings”. In his correspondence with NatWest Bank in July 2014, Mr Northwood refers to his income as including “Other monies available from RT” and states: “For the last 3 year, I have paid the greatest part of the business profits into a remuneration trust whose funds myself and my wife have control of through a fiduciary, Marhel Management Ltd. These payments are visible in the business and personal accounts.” It is my finding, on the basis of the evidence before me, that Mr Northwood retained personal control of the funds paid to the RT, after the payment of fees.

With regard to the loans made to Mr Northwood, I find that the terms were not commercial or made at arm’s length, every loan requested was granted, Mr Northwood authorised MML to make the loans and Mr Northwood signed the loan documentation both in his capacity as borrower and on behalf of MML as lender. I do not find that the loans made to Mr Northwood from the RT to have been genuine loans.

Mr Northwood’s evidence is that the potential tax advantage of the RT was not his purpose and that he sought the view of an independent third party to confirm that the arrangements did not amount to tax avoidance. Ms Brown submits that Mr Northwood understood that the payments he intended to make to purchase the business premises would have the same effect whether made by him directly or through the RT, and asks the Tribunal to draw an inference of fact that, far from being a purpose, the potential tax effects of the arrangements were a cause for concern for Mr Northwood, and an effect that caused him to consider not executing his purpose (to expand and improve his business through the purchase of new premises) through the arrangements at all. NatWest’s view of the arrangements, as set out in an email on 16 July 2014, was “Basically this tax avoidance is structured so that the individual is probably taking all of the profit (you will be able to see from the accounts) from his dentist business tax free rather than paying income tax at 40%-50%... we must not fund tax avoidance such as this which seeks to artificially reduce income tax liabilities to nil or virtually nil”. Ms Brown submits that NatWest ultimately gave the loan to MML and not Mr Northwood. In his evidence, Mr Northwood said “It doesn’t appear that I was as truthful…” with regard to his NatWest interactions. Having considered the totality of evidence in this case, I am not persuaded by Ms Brown’s submissions on this point and I do not consider Mr Northwood’s evidence, that the potential tax advantage was not his purpose, to be credible. It is my finding that the payments to the RT were made with the purpose of obtaining tax advantages.

On the basis of my findings regarding the purpose of the payments, I do not consider the documentation regarding the RT to accurately reflect the arrangements.

Resolution A states that it “is resolved that the Business make contributions to a scheme established under irrevocable trust (“the Scheme”) for the purpose of funding the provision of discretionary benefits to providers of service, services, products and custom to the Business and their respective wives, widows and dependants”. Mr Northwood accepts that discharging commercial obligations to suppliers was not the sole reason for the arrangements and, having found that the payments to the RT were made with the purpose of obtaining tax advantages, I do not consider this to be an accurate reflection of the purpose of the contributions.

The Questionnaire states that the trade has “been conducted in such a way as to place a commercial obligation on the business to provide benefits for consultants and other suppliers” and that the “discretionary trust allows each potential beneficiary to make a case to the trustees for the receipt of a benefit and for the Trustees to determine what benefits should be paid out”. Having found that discharging commercial obligations to suppliers was not a purpose of the contributions and the suppliers were unaware of the Trust, I do not consider this to be an accurate reflection of the position regarding commercial obligations or the basis upon which a potential beneficiary could make a case to the trustees for the receipt of a benefit.

Resolution B “resolved that the proposed amount of contribution to the Scheme for the fiscal year ending on 31st March 2010 reflects part of the economic cost to the Business of earning its profits for that period and constitutes the discharge of its constructive obligation”. Again, I do not consider this to be an accurate reflection of the position regarding commercial obligations.

I also do not consider the Trust Deed and Deed of Amendment (supplemental to the Trust Deed) to accurately reflect the position regarding the stated beneficiaries. I also find that the Delegated Manager and Custodian Agreement and the Fiduciary Services Agreement do not accurately reflect that the RT funds remained in Mr Northwood’s control.

It is my finding that the documentation relating to the RT was intended to make things appear other than they were, for the purpose of obtaining tax advantages.

Ms Brown invites the Tribunal to find that Mrs Reeves, while honest, was unconsciously unable to maintain her independence due to the fact that she is employed for the last 14 years by HMRC and as such all her training, professional development and experience has been gained in the context of HMRC’s control (and considering her professional opinion has accorded with HMRC’s view of the accounting treatment). I am not persuaded by Ms Brown’s submission. I do not consider Mrs Reeves’ HMRC employment alone to be a sufficient basis to challenge her professional integrity and independence. I consider Mrs Reeves to have given credible evidence of her mindful independence, saying that: “I consider whether I am able to give an honest and free from bias opinion, and I believe that I am. I’m under no pressure to give any particular opinion.” It is my finding that Mrs Reeves understood her duty to the Tribunal and gave her opinion uninfluenced by partisan considerations (see Anglian Water Services Ltd v HMRC [2017] UKFTT 386 (TC) at [83]).

Further, I do not accept Ms Brown’s submission that Mrs Reeves’ report should carry little or no weight since Mrs Reeves was unable to explain several errors such as her confusion over the entity in question (i.e. whether a “partnership” known as The Brace Place existed or not) and her failure to include relevant accounting standards FRS 18 and UITF Abstract 13. I do not consider the report demonstrates a confusion over the entity in question. Mrs Reeves’ evidence is that she is describing what she sees in the accounts, namely that the net profit has been divided between the two individuals. I also accept Mrs Reeves’ evidence that she “did look at UITF 13 and didn’t consider that it added anything to what is already set out in UITF 32” and that a footnote to her report, which refers to the objective to show a true and fair view of the business (where accounts are being prepared in accordance with GAAP), accords with FRS 18.

I also do not accept Ms Brown’s submission that Mrs Reeves did not understand UITF Abstract 32, in particular “de facto control” and how to apply the test of the rebuttable presumption in relation to control and payments being made in accordance with a sponsoring entity’s wishes. I accept Ms Belgrano’s submission that both experts agreed that Mr Northwood had control in an accounting sense of the RT assets and I do not consider Mrs Reeves’ report to be fundamentally flawed in respect of her understanding of de facto control.

HMRC submits that the Tribunal should give Mr Powrie’s report and evidence no weight because Mr Powrie did not give objective, unbiased opinions and his assumption of the role of an advocate permeated his written and oral evidence.

Although it is not in dispute that Mr Powrie qualified in 1982 as a fellow of the Institute of Chartered Accountants, on the basis of his evidence, I accept HMRC’s submission that Mr Powrie’s practice is as a tax specialist, not as an accountant, and Mr Powrie’s report states that at the time when the matters on which he is reporting on took place, his practice involved him on advising on matters relating to planning with Employee Benefit Trusts.

HMRC contends that Mr Powrie failed to utilise any standards or reference material to support his central conclusions. On this point, Mr Powrie’s report stated that:

I accept HMRC’s submission that there were no specific references to standards or materials in the report’s conclusion.

HMRC argues that a significant proportion of Mr Powrie’s analysis is geared towards making legal arguments and the core of his analysis is focused on arguing against HMRC contentions, rather than setting out his own, free-standing analysis. Mr Powrie’s evidence regarding his approach to HMRC’s statement of case was that: “if I hadn't argued with it, then presumably it would have to be accepted by the Tribunal. It was crucial that the mistakes, the misunderstandings that in my opinion were in the statement of case were corrected.”

HMRC also refers to examples of incomplete commentary designed to advance Mr Northwood’s position, for example by offering only supportive commentary on “soft loans” and interest rates (outside the scope of his expertise) without making mention to other features of the lending, such as no security, no credit checks, 10-year term, rolling up interest and principal repayable only at the end of the term.

I agree with HMRC that an expert should provide a balanced analysis and not simply present matters which provide support for their conclusion. Mr Powrie did not refer to the lack of security or credit checks in his analysis of the loans, although he did mention that he understands “that it may be that the trustees will then roll these loans over or, in other ways, provide compensation if Mr Northwood has to repay the loans” before he concluded that “it does not seem to me to be right to say that monies which have, through a variety of processes, ended up as loans to the proprietor of a business on interest bearing terms and subject to repayment can be drawings”.

In general terms, as HMRC submits, Mr Powrie’s analysis focused on arguing against HMRC contentions. Mr Powrie states in his report that he understands that he should not assume the role of an advocate. However, he refers to “various statements of accounting practice which may be relevant to our structure” and then states that the “question then arises as to how the purported contributions should be treated for accounting purposes within that framework. It appears to me that there are four separate contentions made by HMRC as to how they should be treated and each of them raise different issues”, before setting out his opinion, rejecting HMRC’s contentions. Such an approach does give support to HMRC’s argument that Mr Powrie assumed the role of an advocate. However, I have also considered that, whilst Mr Powrie’s conclusions rely upon the acceptance of Mr Northwood’s evidence, he also makes references to alternative findings of fact or law being matters for determination by the Tribunal that would lead him to different conclusions. I therefore do not consider Mr Powrie’s actions go as far as amounting to neglect of his duties as an independent expert. I do, however, consider the approach taken by Mr Powrie to affect the weight I give to his evidence and I have no hesitation in preferring Mrs Reeves’ balanced analysis and report, supported by detailed references to accountancy standards and materials.

It is accepted by the parties that the profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for income tax purposes (under section 25(1) ITTOIA 2005). It is also accepted that Mr Northwood’s accounts should therefore have been prepared in accordance with UK GAAP.

I consider the relevant accounting principles to be those set out by Mrs Reeves in her report, as follows:

It is common ground between the parties that Mr Northwood would not be entitled to claim an income tax deduction for drawings.

Ms Brown contends that Mr Northwood’s accounts have been prepared in accordance with UK GAAP because:

The expert accountancy report prepared by Mr Powrie of behalf of Mr Northwood is based on certain legal and factual assumptions. The conclusion in his report states:

Mr Powrie’s opinion is that a constructive obligation to pay suppliers did not exist in this case but that is not relevant because Mr Northwood actually paid the contributions during the year. His statement that it is not necessary to consider whether there is a liability where a payment is made during the accounting period does not address the accruals basis principle of accounting or the point made by UITF 32.5, that “Generally speaking, most expenses are incurred not when they are paid for but when a liability arises…”. I agree with HMRC’s submission that it is necessary to consider whether the business had a liability in order to determine whether (and if so, when) it was appropriate to recognise an expense because if there is no liability, then there would be no expense to recognise.

On the basis of my legal and factual findings, I do not accept Ms Brown’s submission that Mr Northwood’s accounts have been prepared in accordance with GAAP. I do not agree that the profits of his profession have been calculated in such a way that they represent the substance of the transactions entered into. I have found that the contributions did not remove the money from Mr Northwood’s personal control and upon transfer to the trust, he did retain future economic benefit from the assets transferred.

I therefore agree with HMRC that the accounts were not prepared in accordance with GAAP and I accept the evidence given by Mrs Reeves that the correct accounting treatment under GAAP is as follows:

Accordingly, I find that the payments made to the RT do not give rise to an expense under GAAP and therefore do not give rise to an income tax deduction, in accordance with section 25(1) ITTOIA 2005.

The Tribunal was asked to consider, if the payments to the RT were found to be an expense under GAAP, whether the expense had been “incurred” for the purposes of section 34 ITTOIA 2005.

HMRC submits that where only £150,000 was contributed by Mr Norwood to the RT and he claimed an income tax deduction in relation to a supposed contribution of £450,000, by using a leverage mechanism whereby £150,000 went round in a circle three times between Mr Northwood and BW, Mr Northwood did not bear the economic burden of the alleged contribution because, quite simply, he did not have the cash to make the contribution.

HMRC refers to the decision in Ingenious Games LLP; Inside Track Productions LLP; Ingenious Film Partners 2 LLP [2019] STC 1851, where the UT expressed the view (obiter) that an expense will only be “incurred” where the taxpayer bears the “economic burden” of an expense. HMRC invites the Tribunal to apply the same approach in the context of this case.

Having considered the judgment of the Supreme Court in Revenue and Customs Commissioners v NCL Investments Ltd [2022] UKSC 9, with regard to section 54 of the Corporation Tax Act 2009 (which is analogous to section 34 ITTOIA 2005 and provides, for corporation tax purposes, that no deduction is allowed for expenses not incurred wholly and exclusively for the purposes of the trade), I reject the approach suggested by HMRC. The point is addressed by the Supreme Court, as follows:

In Mr Northwood’s case, the basic rules also require profits of the trade to be calculated in accordance with generally accepted accounting practice (under section 25(1) ITTOIA 2005). I do not consider there to be a further requirement for Mr Northwood’s contribution to be shown to be “incurred” and I do not accept, as HMRC suggest, that I should adopt a different approach because the Supreme Court decision was in the context of a case that did not concern tax avoidance.

Ms McCarthy refers to the FTT decision in Strategic Branding Limited v HMRC [2021] UKFTT 0474 (TC) (‘Strategic’) where it was held that a corporation tax deduction was not available in circumstances concerning similar arrangements, and to the Court of Appeal decision in Vodafone Cellular Ltd and ors v Shaw [1997] STC 734, where Millett LJ said at page 742:

Ms McCarthy submits that similar arrangements have been recently considered by the General Anti-Abuse Rule (‘GAAR’) Advisory Panel. The GAAR Advisory Panel is an independent advisory panel which approves HMRC’s GAAR guidance, and provides opinions on cases where HMRC considers the GAAR may apply. On 7 April 2020, the Panel released two Opinions on very similar arrangements, observing that they considered “the arrangements as a whole to be contrived and abnormal and appear… to serve no useful purpose other than to avoid tax”. Ms McCarthy contends that the same approach should be taken in this case since nothing in Mr Northwood’s evidence is capable of supporting a different conclusion.

Ms Brown argues that payments were for business purposes because the context of the ultimate decision to enter in to the arrangements was to enable Mr Northwood to grow and develop his business with new, better business premises, which meant that he would be able to increase his business, and thus give more business to his suppliers. There was no dual purpose. Mr Northwood was under the impression that there was no immediate tax advantage in his circumstances (as he would have been able to deduct the payments for premises) and was concerned as to whether or not these were arrangements that would constitute tax avoidance. Consequently, it can be seen that his purpose was one wholly and exclusively for the purposes of earning the profits of his trade, and that the tax consequences of the way in which he chose to do this were an effect, but was neither a purpose nor an effect so inextricably linked to the method of entering into the transaction that it should be treated as an unconscious purpose.

I have considered Judge Zaman’s comments in Strategic as follows:

Judge Zaman sets out the principles established by the authorities and reasoning for the FTT’s finding on this issue, as follows:

I agree with the approach taken by Judge Zaman in Strategic. Having regard for the principles established by the authorities, I must also consider whether the contributions were for the purpose of the trade, the subjective intentions of Mr Northwood at the time of making the payments, whether the expense was also incurred for some other (non-trade) purpose, the object of the payments (which must be distinguished from its effect) and the object of the means of incurring the expense.

On the basis of my factual findings in this case, I am not satisfied that the reasons for making contributions were for the purpose of the trade, namely to enter into a set of arrangements which gave Mr Northwood the protection that he wanted for business premises he was proposing to purchase and to benefit suppliers from his enhanced practice and good commercial relationship. My finding is that Mr Northwood’s subjective intentions at the time of making the payments was to benefit himself and his family by obtaining tax advantages, including inheritance tax planning. I therefore consider the expense was incurred for a non-trade purpose and that securing of the private benefit was the object and not merely a consequential and incidental effect of the contributions. I accept that the mere fact that Mr Northwood’s choice was influenced by the tax consequences does not necessarily mean that the choice involves a duality of purpose as regards the expense but, on this facts of this case, it is my finding that the expense was incurred for the non-trade purpose of securing a tax advantage.

Viewing these findings in the light of the authorities, I have concluded that the payments were for Mr Northwood’s personal benefit and are not wholly and exclusively for the purposes of his trade. I do not consider the decision to use the RT arrangement could be said to be a permitted choice as to the means of incurring the expenditure and I have found there was a purpose of benefitting himself and his family, not just an effect.

With regard to the issue of whether Mr Northwood can claim a deduction for the fees of BW, Foy or any other facilitator of the arrangements, on the basis of my findings with regard to the purpose of the arrangements, I agree with HMRC that the fees were not incurred wholly and exclusively for the purpose of Mr Northwood’s trade. Consequently, it is my finding that such fees are not allowable pursuant to section 34 ITTOIA 2005.

Ms McCarthy submits that Mr Northwood intended, by virtue of the scheme documentation, to make things appear other than they were and that those documents were therefore a sham. Ms McCarthy does not accept that Mr Northwood was honest but contends that HMRC do not need to prove dishonesty to establish sham.

HMRC argues that the supposed purpose of benefitting suppliers was exposed as a work of fiction during cross-examination and the documents that Mr Northwood relied on to obtain a mortgage from NatWest exposed the true story, that the money remained within his control throughout and the only purpose of the scheme was tax avoidance. HMRC comment that it is noteworthy that those documents were obtained from NatWest by HMRC using its information powers and were not handed over by Mr Northwood during HMRC’s enquiries. HMRC argue that Mr Northwood failed to identify a single person who was both a beneficiary of the arrangements, so far as Mr Northwood understood them to operate, and a person who fell within the class of beneficiaries under either the RT Deed and/or the Deed of Amendment, and that the only person who, in reality, was intended to benefit – and in fact did benefit – from the arrangements was Mr Northwood himself.

HMRC further contends that Mr Northwood’s evidence, elicited in cross-examination, establishes that the Questionnaire was a sham because, although the document was designed to make it appear that Mr Northwood had considered the questions in it and completed it by reference to his business, the answers were in fact pro forma answers supplied by the promoter of the scheme and the alleged “obligations” owed to Mr Northwood’s suppliers were never identified by Mr Northwood himself. Rather, the concept of “obligations” referred to in the Questionnaire simply formed part of the tax avoidance scheme package sold to Mr Northwood.

HMRC also argue that, contrary to the appearance given by the RT Deed, the Deed of Amendment, the Fiduciary Services Agreement and the Delegated Manager and Custodian Agreement, Mr Northwood remained at all times in control of any funds that he contributed to the RT. Mr Northwood’s control over the funds was an integral part of the arrangements and is clearly set out in the slides provided by Mr Northwood to NatWest. Accordingly, HMRC argue, all that happened, in reality, was that Mr Northwood typically moved money from his first account to a second of his accounts (sometimes via BW’s account), namely the MML account, without ever losing control of the funds and, as is now clear on the basis of Mr Northwood’s own evidence, those funds were never intended to be, and were in fact not, subject to any trust for the benefit of Mr Northwood’s suppliers and were never intended to be, and were in fact not, held by Trustees of any trust in a fiduciary capacity. HMRC contend that, notwithstanding the RT documents, in particular the RT Deed and Deed of Amendment, the funds remained Mr Northwood’s funds and that in these circumstances the Tribunal should conclude that the RT documents were a sham.

Ms Brown submits that, while dishonesty is not a necessary element of sham, HMRC’s case is that Mr Northwood was dishonest in the ordinary sense and, as the alleged shams are based on that alleged dishonesty, procedural safeguards should have been observed. Ms Brown further submits that, in order to prove the sham that HMRC allege, it is necessary to prove dishonesty and HMRC have both failed to do this given the standard of evidence required to do so and they have failed to put each of those documents to Mr Northwood.

To support her submissions, Ms Brown provided the Tribunal with a table setting out searches done on the transcripts of Mr Northwood’s evidence. The search terms used were the name of each of the documents, variations of the names, and the words “mislead”, “pretend”, “pretence”, “honest” and “dishonest”. Ms Brown accepts that the search did not include all potentially relevant words, such as “truthful”. Ms Brown’s submission is that what Ms McCarthy put to Mr Northwood was that the documents were artificial, which is not the same as putting that it is a sham or dishonest, referring to Hitch v Stone (Inspector of Taxes) [2001] EWCA Civ 63 at [67] where Arden LJ said:

Both parties referred to the decision in Hockin. With regard to the issue of sham in that case, the UT stated:

Ms Brown expressed great difficulty with the distinction between an intention to deceive and an intention to make things appear other than as they are. Ms Brown’s submission is that what was alleged and found in Hockin was that the document was drafted with an intention to make things appear other than as they were, namely that one of two things might happen when it was really only possible that one thing might happen, which is far from what is being alleged in this case. Ms Brown submits that Hockin found there to be two sorts of sham, an intention to deceive, which must require dishonesty, or an intention to make things appear other than they are and that can be described as not requiring dishonesty in the ordinary sense. Ms Brown contends that HMRC's case is clearly one of dishonesty. It is not a case of half concealment, which was the case in Hockin. Ms Brown submits that HMRC make a number of statements as to what the alleged real purpose of Mr Northwood's arrangements were, such as that the whole thing was a work of fiction, the only purpose of the arrangements was tax avoidance, the only person who was intended to benefit was Mr Northwood, contrary to the appearances of various documents such as the trust deed, Mr Northwood retained control of the funds at all relevant times and that the funds were never subject to the trust, were never held or intended to be held by anyone in a fiduciary capacity and remained Mr Northwood's property and in his control. This therefore is not an allegation that Mr Northwood said “well, we might do this or we might do that” when Mr Northwood clearly only intended to do one thing. The allegation, Ms Brown submits, is that Mr Northwood created documents to give one appearance and then did something completely different. Ms Brown contends that is an allegation of dishonesty and it is not open to the Tribunal to make a finding of dishonesty, because those allegations of dishonesty have neither been properly pleaded nor properly put to Mr Northwood in cross-examination.

I have considered Ms Brown’s arguments regarding pleading sham at [42] to [49] above. I do not accept Ms Brown’s submission that the way in which HMRC have put their case requires proof of dishonesty. It is clear that HMRC do not consider Mr Northwood to have been honest. However, in my view, this case falls within the category described in Hockin as a pretence that does not cross the threshold into dishonesty. My finding is that the RT documentation was dressed up to achieve a tax benefit but this was “not evasion, and there was no attempt, as there would be in the case of evasion, to conceal what actually happened, however the parties chose to dress it up”.

I also do not agree that HMRC did not put the sham allegation to Mr Northwood in cross-examination. The questions put to Mr Northwood did not simply suggest the situation where parties made an agreement which was unfavourable to one of them, or artificial. The questions were put in the context of a situation where the parties intended some other arrangement. I therefore find that the allegations were put fairly and squarely to Mr Northwood and that he was given an opportunity to rebut them.

With regard to the scheme documentation, I am satisfied, on the basis on my factual findings above, that there was a common intention to make things appear other than as they are. I therefore find the documentation relating to the RT, referred to at [75] to [78] above, to be a sham.

I find that the contributions made to the RT, together with any associated fees, are not deductible in calculating Mr Northwood’s taxable profits because the contributions should not have been recognised as an expense in the accounts under UK GAAP and the contributions and associated fees were not wholly and exclusively for the purposes of the trade. I also find that there was an intention, by virtue of the RT documentation, to make things appear other than they were and the documentation was therefore a sham.

Accordingly, and for the reasons set out above, the appeal is dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.