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Legal Basics


go to Leander.


This partnership was


run completely outside of the UK and all activities to do with the partnership, including its day to day running, also took place outside of the UK – and, thus, Mr. Frost’s American earnings were kept entirely outside of the UK tax net.


Mr. Frost’s endeavours to break


the American market proved to be incredibly successful and consequently the partnership did very well. The profits of the partnership were divided in accordance with the terms of the partnership agreement. Mr. Frost did not remit any of the earnings he made from the partnership to the UK (i.e. he spent or invested them all outside the UK) and so did not pay tax on them.


Court Case


The Inspector of Taxes asserted that this was tax evasion by Mr. Frost, as Leander was not a substantial company – it was set up purely for these purposes, and so the Frost/ Leander partnership was not a genuine


one. The profits from the partnership were therefore included in Mr. Frost’s income tax assessment for the years 1969-1970 to 1971-1972.


Mr. Frost contested this decision


in court, and it was ruled that the partnership was genuine as Leander provided administrative services for Mr. Frost’s American activities. If this was the end of the matter then it would seem that Mr. Frost was completely right, on this occasion, to ignore any initial doubts he may have had as to the risks of the scheme. Unfortunately for him, the matter was appealed by the Inspector of Taxes, which inevitably caused an increased amount of stress and cost as the proceedings became even more protracted.


The Inspector appealed on a variety of different grounds, including that the partnership was designed purely to avoid tax rather than to make a profit. The appeal was eventually dismissed as it was held that, even though the partnership may have achieved a degree of tax avoidance, this did not meant that it was not formed with the


Gary Barlow (left) and Jimmy Carr have both been accused of tax avoidance schemes Conclusion


Mr. Frost was clearly well advised, both when structuring his tax avoidance and then throughout the court proceedings. The partnership was determined by the court to be entirely legal – but the structure did not pass the eyebrow test and, as a result, Mr. Frost incurred the cost, stress and negative publicity which go along with a multi-year investigation into one’s


tax affairs.


Had he known about this in advance, or properly considered the risk of it occurring, might he have felt that it was not worth the savings he made through the scheme?


Perhaps most plans that fail the


eyebrow test will not end up in such protracted proceedings, but even so there are risks attached. Entrepreneurs may not have public profiles at the level of Jimmy Carr and Gary Barlow, but being involved with plans that fail the eyebrow test may nevertheless put off the likes of potential employees, investors, acquirers and commercial partners.


Most entrepreneurs will not have the benefit of being as well advised as Mr. Frost in similar situations, and in that case the eyebrow test has to detect illegality as well as something that may put off other parties from dealing with the business.


This is


why it is always better to take time before entering into any commitment to really assess whether a proposal fails the eyebrow test. If it does, then ensure that


the potential


gains are significant enough to outweigh the risks - and if unsure, always take advice.


42 entrepreneurcountry


view to realise a profit. Mr. Frost was therefore, in the end, successfully able to use the partnership to protect a sizable amount of his earnings from the UK tax authorities.


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