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Mark McLaughlin CTA (Fellow) ATT TEP outlines the scope and limitations for correcting errors or omissions in documents, or where the tax effects are not fully understood.

Mark McLaughlin

What can be done?

Documents such as contracts and deeds can clearly be important for tax purposes, as well as under general law. Sometimes a document may contain an error or omission, or the parties may be mistaken as to its effect. Can anything be done to put matters right?

Practitioners may be aware of the Hastings Bass principle in the context of trusts, as it was the subject of a Tax Bulletin article (Issue 83, June 2006), which subsequently became Revenue Interpretation 278. The Hastings Bass principle originated from a case of that name (Re Hastings-Bass (deceased) Hastings and others v IRC [1974] EWCA Civ 13). Broadly speaking, the courts may set aside acts of trustees which have unintended consequences in appropriate circumstances. In that case, Buckley LJ held:

‘…where by the terms of a trust…a trustee is given a discretion as to some matter under which he acts in good faith, the court should not interfere with his action notwithstanding that it does not have the full effect which he intended, unless:

(1) what he has achieved is unauthorised by the power conferred on him; or
(2) it is clear that he would not have acted as he did

(a) had he not taken into account considerations which he should not have taken into account; or
(b) had he not failed to take into account considerations which he ought to have taken into account.’

HMRC stated the view in Revenue Interpretation 278 that the following expression of the Hastings Bass principle in Mettoy Pension Trustees Ltd v Evans and others [1990] 1 WLR 1587 (by Warner J) was a ‘substantial leap’ from the original:
‘Where a trustee acts under a discretion given to him under the terms of the trust, the court will interfere with his action if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have taken into account’.

Limited scope

A number of cases followed Hastings Bass, in which the parties sought to rely on the above principle. A detailed consideration of them is outside the scope of this article. However, it should be noted that the principle has its limitations. For example, it does not extend to substituting an alternative action. In Breadner and others v Granville-Crossman and others [2000] 4 All ER 705, the trustees executed a deed the day after their power to do so had ended. The court rejected the trustees’ application for the deed to be treated as valid. Park J commented:

‘It cannot be right that, whenever trustees do something which they later regret and think that they ought not to have done, they can say that they never did it in the first place.’
 
Practitioners, trustees and clients in general who might view the Hastings-Bass principle as something of a safety net should bear in mind that rectification requires a court order. Applying to the court is potentially costly and time consuming, and this remedy should therefore be avoided if at all possible. it begs the question: ‘Would HMRC be willing to reverse the tax consequences of a particular transaction without a court order, to save the parties the trouble and expense of obtaining one?’ It appears not. In Revenue Interpretation 278, HMRC state:

‘We have generally maintained that we require an order of the court before we will review the tax consequences of a decision on the basis of the Hastings-Bass principle, and this remains the basic position.’ 

HMRC also indicate that even if they were willing to reverse the tax consequences without a court order, they would not be entitled to act in that way.

Changing ‘mistakes’ in tax planning

The possibility of rectification through the courts is open to claimants other than trustees. In Wolff and another v Wolff and others [2004] STC 1633, the claimants entered into a ‘reversionary lease’ scheme for inheritance tax (IHT) purposes. However, they only later became aware that they had no right to remain in their property after the lease in favour of their daughters came into operation in 20 years’ time, and that they would need to pay a market rent if permitted to stay, for the scheme to be effective for IHT purposes. The claimants successfully applied for the lease to be set aside. The court held that they had made a significant mistake as to the legal effect of the transaction, as they had not intended that the lease should deprive them of the right to occupy the property free of charge.

More recently, in Wills v Gibbs and others [2007] All ER (D) 509, a legatee wished to redirect his entitlement under the deceased’s will by way of a deed of variation within IHTA 1984, s 142(1), and for capital gains tax (CGT) within TCGA 1992, s 62(7). However, the deed accidentally omitted the required statements that the variation should apply for IHT and CGT purposes. The claimant successfully applied for rectification of the deed of variation to include those statements. The court held that it had clearly been the claimant’s intention that the deed of variation should give his disposition the relevant tax advantages. There were also other issues between the parties, so the rectification was not only to secure beneficial tax treatment.

However, as with Hastings Bass for trustees, there are limitations to the principle of rectification. In Allnutt & Anor v Wilding & Ors [2007] EWCA Civ 412, the settlor’s gift of £550,000 into a discretionary trust for his children was intended to be a PET, but was actually an immediately chargeable lifetime transfer. The Court of Appeal rejected the trustees’ application for rectification, as the settlement correctly recorded the settlor’s intentions at the time. The fact that the settlor’s fiscal purpose was not achieved was not considered to be material. The court had no jurisdiction to order rectification. Thus rectification cannot always be relied upon to unwind tax planning if it fails to work.

Be careful!

Based on their comments in Revenue Interpretation 278, HMRC are unlikely to have much sympathy with taxpayers who try to have the tax consequences of documents changed, particularly where tax advice is taken which turns out to be wrong, or where the advice is correct, but the steps are implemented incorrectly. It is also conceivable that HMRC may wish to actively participate in future cases if it suits their purposes to do so. Interestingly, and perhaps worryingly, HMRC intimate that the taxpayer may wish to ‘pursue whatever remedies it may have’ against the professional adviser in appropriate circumstances. Caveat practitioner!