Pay your taxes, the ethical argument is over

HMRC clampdown makes avoidance a high-priced risk

Laura Miller
clock • 5 min read

Wherever you and your clients stand on the ethics of tax avoidance - and on offers of 70% commission - moral considerations are now being superseded by more practical concerns of the personal damage attempting to avoid tax can cause, writes Laura Miller...

There are many reasons to avoid tax avoidance schemes. A desire and need for the fruits of taxes - roads that resemble roads, not the far side of the moon, schools that (mostly) produce literate children, an NHS manned by doctors not breeze blocks - are fine ones.

But there are others, ones likely to resonant more as they are more personally felt by advisers who recommend the schemes and the clients who buy into them.

Like a 25 times geared tax bill, a ban from the Financial Conduct Authority (FCA) that will send you searching for a new career, and prison.

 

Scrutiny

Take film schemes.

HM Revenue and Customs (HMRC) has been taking a hard look at these. One expects that means no-one is going anywhere near them now, but they offer a worthy cautionary tale for those considering using the raft of alternatives that will replace them.

Film partnership schemes were introduced by the government to encourage British film production - a revenue boon for the UK economy - by giving investment into film substantial tax concessions.

But schemes stand accused of being cynically abused by users and their advisers - ludicrously costing more to the government (and by ‘government' read roads, schools, the NHS) in tax reliefs than is produced in film industry related revenues.

The debate's poster child is the Eclipse 35 partnership.

HMRC argued the scheme was structured simply to create a tax relief for the investors, rather than to further the promotion of film - essentially defrauding the general population of UK taxpayers. The Upper Tax Tribunal agreed. Eclipse investors were accordingly denied their tax relief.

Eclipse was set up and promoted by Future Capital Partners (FCP) Limited, which has been fighting HMRC on the issue. It lost its Court of Appeal case in February and is now taking it to the Supreme Court, the highest arbiter in the UK.

In an email seen by Professional Adviser, FCP has put pressure on investors, both directly and via their financial adviser, to contribute towards the likely hefty costs of the court action.

FCP has form in the murky area of making costly demands of investors already backed into a corner.

Other emails seen by Professional Adviser show the firm is point blank refusing to give members of another of its film schemes, Micro Fusion Film Partnership, vital information about their tax position, unless they enter into ‘further services agreements', at an annual fee of £1,000 a year per scheme, above and beyond what investors have already paid this outfit.

We await the Supreme Court's decision. But on the face of it, the Appeal Court's ruling quashes any hope investors have that they will receive the tax relief they had expected.

 

Geared losses

But the situation could be much more serious than that.

Before the Appeal Court judgement, investor claims firm Rebus, which specialises in tax avoidance investment schemes, predicted that, "Eclipse investors face a liability of between four and nine times their original cash investment [and] new legislation which comes into effect from 6 April [2013] - [the ‘tycoon tax'] - means they, and very possibly many other investors will have to repay any tax relief they have received".

In the Appeal Court judgement on Eclipse, Lord Justices Clarke and Vos confirmed that investors "will be taxed on the income from the arrangements without any relief for the interest they have already paid".

FCP is now telling its Eclipse investors they face having to pay back eight to 25 times the amount they invested.

Eight to 25 times.

Investors face the real prospect of a dramatic change in their personal circumstances - be forced to sell their homes, delay their retirements and in the worst hit cases face bankruptcy.

 

Cost to advisers

The Appeal Court judgement stated that the Eclipse error has been made by those who created the structures of the partnership.

But investors facing at best a hefty tax bill and at worst bankruptcy will come after the advisers who recommended the schemes to them.

This is not an idle threat. It is already happening.

The industry paid for Financial Services Compensation Scheme (FSCS) - which today announced it will levy investment and life and pension advisers a total of £188m this year - has begun processing about 150 individual claims related to advice to invest in tax 'mitigation' schemes, after being given the green light by lawyers last September.

The FSCS said it had been receiving claims in relation to advice to invest in 80 different tax schemes, including film partnerships and environmental plans, by 'authorised financial advisers' who have now gone bust under the weight of claims against them.

Lawyers are warning advisers to notify their professional indemnity (PI) insurers early if they think they could be facing claims, else they could fall between the cracks of insurance coverage.

Paying levies or going out of business is not the worst that can happen to tax avoidance advisers, however.

Earlier this month, two former financial advisers and an investment banker were among ten individuals charged with tax fraud involving a multi-million pound film investment scheme.

There is no maximum sentence for the crime of cheating the revenue, for which they have been charged, with case law for those found guilty showing custodial terms ranging from a few months to several years.

Prison time does not endear advisers to the regulator, which usually then implements a ban from working in financial services, forcing the end of what can be a career built up over decades.

Wherever you and your clients stand on the ethics of tax avoidance - and on offers of 70% commission - moral considerations are now being superseded by more practical concerns of the personal damage and distress attempting to avoid tax can cause. 

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