Tax avoidance schemes: what you need to know
August 2014 | EXPERT BRIEFING | TAX
There has recently been a lot of coverage in the media regarding celebrities and other wealthy individuals participating in tax planning schemes to minimise the amount of tax they are paying. These schemes can be an aggressive form of tax planning and can stray into the remit of tax avoidance.
Some of the most talked about schemes involve the British film industry. Highly publicised cases such as the one against ‘Eclipse 35’ have catapulted these types of schemes into the limelight.
Since 1982, various tax statutes have contained provisions that have enabled individuals or businesses to invest in film production in return for substantial tax concessions.
Film Partnership Schemes were introduced by the government to encourage British film production, and in turn generate significant revenue for the UK economy. Wealthy individuals were encouraged to invest in the film industry and received a tax benefit in return.
Most of these schemes involved establishing a Limited Liability Partnership (LLP) in which the investors became partners. The LLP then acquired the rights to a film before leasing those same rights back to the film production company. The company would then produce the film and the lease agreement would result in a stream of revenue for the LLP for an agreed period of time.
These schemes can only be considered valid by HMRC if they have a legitimate business purpose and are not entered into with the sole purpose of avoiding a liability to tax.
As recent reports in the media show, HMRC is now cracking down on individuals and businesses that have invested in particularly aggressive schemes which have the sole intention of minimising investors’ tax contributions.
As part of this, the 2014 Budget proposed a number of changes. The Finance Bill proposes tougher measures and greater power against those using and promoting tax avoidance schemes. This legislation will become law this month and is likely to lead to an increase in demands for tax repayments. The legislation has retrospective effect and therefore it does not take account of when the scheme was entered into.
In light of the changes, individuals and businesses may be required to pay a tax demand before HMRC has determined the scheme as being invalid. Accordingly, an investor may be required to pay the disputed tax sum in full, at the start of the investigation, rather than after a final determination has been made. Payment may be demanded up front if: (i) the tax scheme should have been disclosed under the Disclosure of Tax Avoidance Scheme rules; (ii) the investor is caught by the General Anti-Abuse Rule; or (iii) where the tax scheme concerned has already been the subject of a tax tribunal case, which the HMRC has won. In these circumstances, where there is no appeal outstanding, HMRC may invite other investors to settle. If they do not, in addition to paying the disputed sum upfront, they risk an additional penalty.
The consequence of a successful challenge by the HRMC is that the investors will not be able to offset the funds spent on the partnership loan against their tax liabilities. This means that the investors will be required to pay the tax they were previously trying to shelter.
In addition, the investors may also become liable for tax on the income that was paid to the partnership by the film production company under the lease agreement. However, the investor will not have received this money as it would have been used by the partnership to repay the loan required for the initial investment.
In summary, not only would the investor have to pay the tax they sought to shelter in the scheme, but also tax on income that they did not receive.
Due to the changes introduced in the Budget, and the subsequent requirement for investors to pay their disputed tax up front, a number of investors are finding themselves in positions where they do not have the funds available to meet the repayments.
In many of these instances, claims management companies are encouraging investors to bring legal claims against the people who had advised them to participate in the schemes. Traditionally, claims would only be brought against the scheme providers. However, accountants, brokers and other professionals (such as Independent Financial Advisers (IFAs)) may also be targeted if they have introduced or promoted one of these schemes to their clients.
That said, even if the investor has had to pay HMRC tax that was intended to be sheltered under a scheme that is being, or has been challenged, it does not necessarily mean that the IFA or other professional adviser has failed in their duty to the investor and has been negligent. If the professional can show that the correct advice, procedures and warnings have been given to the investor prior to, or at the time the scheme was entered into, then the professional can often defeat the claim.
If you find yourself or your company at the centre of a claim, it is important that you give careful consideration as to who, or which company, provided the relevant advice, and therefore whether the claim should be redirected to another entity or individual.
It is also very important to consider when the alleged negligence took place as there is a limit on the time available for an investor to bring a claim. Claims can only be made for up to six years after the alleged negligent advice was given or up to three years after the investor became aware that the advice was potentially negligent. It is the later of these two dates which determines the cut-off point. There is, however, also a longstop provision which prevents an investor bringing a claim in respect of alleged negligent advice which was given more than 15 years ago, irrespective of when the investor became aware of it.
If, as a professional, you or your company is faced with a claim (or you believe that there are circumstances which might give rise to claims being made), the first step you should take is to check whether the entity being pursued has professional indemnity insurance in place. If cover is in place a notification should be made to the insurer in accordance with the policy terms. As the value of the claim could be substantial you should be aware that even if there is an insurance policy in place, the level of indemnity could be insufficient to cover the full value of the claim or claims. In this instance, independent legal advice should be sought.
If there is no insurance in place, or if your insurer asserts that you are not covered under the terms of the policy, then you should seek legal advice at the earliest opportunity.
The subject of tax avoidance is complex, and each case has to be evaluated on its own merits. If you find yourself, or your company, facing a claim, then make sure you seek legal advice at the earliest opportunity.
Laura Heaton is a solicitor at Shulmans Corporate Solicitors. She can be contacted on +44 (0)113 245 2833 or by email: firstname.lastname@example.org.
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