Press Room

16 Jun 2023

What a Sham – Andrew Parkes


National Technical Director, Andrew Parkes, discusses what legally constitutes a ‘sham’ in terms of tax avoidance schemes and how the term applies to a range of cases and scenarios.

Lessons from Northwood

Since we reported last June on Mr Baxendale-Walker’s foray into the remuneration benefit trust business, another one of his “clients” (Mark Northwood) has found himself before the First Tier Tribunal and, unusually, the judge found that there had been a “sham”.

This is not something you see often in tax cases as, generally, although the man on the street (or the Clapham Omnibus as we’re talking tax) may consider something to be a sham (as may some tax officers), it is more of a legal term.

I was that deck of cards

When I was working at HMRC, I had an enquiry that was clearly a “sham” and wanted to run that as part of my case, but the experts in Counter Avoidance sat me down and explained, very patiently, that there were strict criteria for whether something was a sham in a legal sense and was pointed to Arden LJ’s judgement in Stone v Hitch and Others [2001] EWCA.

The points to bear in mind are:

  • the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties the appearance of creating different rights and obligations;
  • an inquiry as to whether an act or document is a sham requires careful analysis of the facts;
  • when examining a document, the court can also look at external evidence including circumstantial evidence;
  • it is the intention of the parties that matters – not the result;
  • a document can be uncommercial or artificial but not a sham;
  • that the parties deviate from the original contract may mean that they have agreed a new contract and not that they never intended the original to be effective; and
  • it is a common intention of the parties to the transaction.

So I didn’t get to run that argument, as the other party to the transaction didn’t know what my taxpayer was up to.

Fraud or sleight of hand

Sham was also considered in Hockin v HMRC [2017] UKUT 176 (TCC) and this case was referred to in Northwood, where an interesting point was found. Where a sham has been perpetrated, it does not mean that someone must have been dishonest. It can mean that there is a common intention to make things appear other than they are.

To make this distinction, consider two scenarios. In the first, Mr A enters into a contract to pay £10,000 to X Ltd, a company resident in Utopia, where it doesn’t pay tax. However, when entering into the contract, X Ltd agreed to return the payment to Mr A without telling anyone and does so. The contract is designed to give the impression to anyone that Mr A has made a payment and lost control of the money, whereas the intention of both parties is that Mr A retains the money.

Contrast this with a contract between Mr A, X Ltd and Y Ltd, where it is agreed that both X Ltd and Y Ltd will tender for a job and they do so, but it has already been agreed between the three of them that Y Ltd will provide a bid of double the market rate. Mr A then accepts the quote from X Ltd. It just happens that Mr A controls X Ltd, but that is public knowledge and the money stays with X Ltd.

Both examples show an intention that the contracts are not to reflect reality and, from a tax point of view, the first is highly likely to be considered to be evasion. However, the second could be said to be a case of where the intention is to make things appear other than they are (an open competition) and does not breach the dishonest threshold. Using Hockin, both are a sham.

Flood gates not exactly open

The need to show that both parties to a transaction intended to give a misleading impression to third parties means that it will still be difficult for HMRC to show a sham has been perpetrated. However, the idea that it can be done without also alleging that the person has been dishonest may make HMRC more likely to attempt to make the case in the future. This is especially so for avoidance cases, as if HMRC can show a sham, they are more likely to be able to show that the transaction was tax driven and falls within anti-avoidance legislation.


Andrew Parkes

Andrew is a highly experienced international tax specialist who worked at a senior level in HMRC’s international teams for over 10 years. He has a wealth of experience and technical knowledge.

Email: Andrew Parkes