Contractual interpretation rectification not possible purely for a tax benefit

MV Promotions Ltd and another v Telegraph Media Group Ltd and another [2020] EWHC 1357 (Ch)

The question

Will rectification of a contract be permitted where the only effect of rectification would be to secure a tax benefit?

The key takeaway

The court exercised its discretion not to rectify a contract where all issues between the parties had been resolved, and rectification was only sought to secure a tax benefit that was not contemplated by the parties at the time of the contract. 

The background

In 2008, Michael Vaughan and Telegraph Media Group Ltd (TMG) entered into a contract for Mr Vaughan to write newspaper articles. This contract was later amended so that Mr Vaughan’s services company, MV Promotion Ltd (MVP), was the named counterparty, allowing billing and invoicing under the contract to take place between MVP and TMG. 

In 2011, the parties sought to extend their agreement but erroneously named Mr Vaughan as the counterparty, instead of MVP. As a result, HMRC increased the tax payable by Mr Vaughan in relation to the services provided.

In 2018, Mr Vaughan, MVP and TMG entered into a deed of rectification, whereby it was confirmed that the contract was supposed to be between MVP and TMG.

The decision

The Court found that a rectifiable mistake had been made as the parties had a common intention for the contract to exist between MVP and TMG, and the 2011 contract was not supposed to alter that aspect of the 2008 contract. However, the court did not exercise its discretion to rectify the contract. 

The parties had already signed a rectification deed, which resolved the issue and gave effect to the common intention of the parties.  

The rectification deed was not binding on HMRC and the parties request to rectify the 2011 contract to bind HMRC only served to achieve a tax benefit that had not originally been intended.  The Court drew a clear distinction between cases where the parties specifically intended to use a tax-efficient structure when entering into a contract, and cases where such intention did not exist at the inception of the contract.

Why is this important?

This case demonstrates that taxpayers should not rely on rectification to obtain tax benefits that were not originally contemplated by the parties. Although parties can agree to rectify a bilateral contract to correct a mutual mistake through a rectification deed, such amendment may not have retrospective effect for tax purposes.

Any practical tips?

When drafting a contract, parties should fully consider the tax implications of the arrangements and ensure that the terms give effect to the parties’ intentions.  When preparing amendments and variations, always carefully review the original agreement.  Evidence of the parties’ common intention in respect of their agreements should also be preserved in case needed.

Autumn 2020