Tax consequences of setting aside a voidable transaction on the ground of mistake.
18 Jun 2020
There has until now been a widespread understanding, largely arising from statements by
Mostyn J. in AC v DC  EWHC 2032 (Fam), that in general, if a voidable transaction is avoided by an order of the court, the order operates retrospectively for all purposes, including fiscal purposes. The underlying principle has been said to be that tax is due on effective transactions, not on those which are not. Whether there is such a principle of particular importance where a transaction is set aside for mistake or under the so-called rule in Hastings Bass.
The Court of Appeal decision in Clark v HMRC  EWCA Civ 204 prompts a fresh consideration of whether, and to what extent, there is a principle that, when a transaction is avoided by the court, all consequent tax liabilities are nullified. It suggests that there are some tax liabilities at least which will be unaffected by such an order and that such liabilities should not depend on subsequent events.
If there is a general principle it is difficult to see how it can operate without qualification where the court imposes terms on the rescission of a transaction, such as a requirement that one or more of the parties enters into a fresh transaction, or where there have been intervening transactions between the voidable transaction and the order rescinding it.