23 July 2021

Dukeries v Bay Trust International; (ChD)

This case comprised unsuccessful applications by settlors to rescind, on the ground of equitable mistake, dispositive trust deeds which had been used in a 2010 tax avoidance scheme.  The scheme had been devised by Baxendale Walker LLP, intending to allow employing companies to facilitate the making of soft loans to their directors by indirect means (including offshore trusts) and to deduct contributions to the trusts from taxable profits without incurring income tax for the directors.  One of the companies has a pending appeal in the First-tier Tribunal against the relevant assessments to tax, but that appeal has been stayed pending the outcome of the present application to the High Court.  An argument in the present case concerned the way in which the remedy for equitable mistake may be denied in the context of artificial tax avoidance following the judgment of the Supreme Court in Pitt v Holt [2013] UKSC 26.

In the event the claimants’ evidence was held not to have shown an operative mistake at all, seeing that in his oral evidence the principal director was shown not to have read the relevant documents.  The judgment contains a strong criticism of the claimants and their legal team for relying on witness statements which had misleadingly suggested the contrary.  It concludes by accepting also that the scheme was properly characterised as artificial tax avoidance, and that it was reasonable to conclude that the claimants must be taken to have accepted the risk of its failure.

Mark Herbert QC and Edward Waldegrave represented HMRC, who were the only defendants to take an active part in the case.

You can read the judgment here.