Bankruptcy looms for tax scheme investors
By Adam Palin
Investors in tax arrangements that are the focus of a government crackdown face potential financial ruin, advisers warned, as their clients are landed with tax demands well in excess of their initial investments.
While a growing number of investors seek redress against promoters of tax-saving schemes, bills from the tax authority for their involvement threaten personal wealth beyond the amount of tax saved.
Investors in an array of schemes that involved heavy borrowing to leverage tax-saving arrangements face demands to pay tax on their partnerships' "sub-licensing" payments, which HM Revenue & Customs treats as income and therefore liable for tax.
One investor in a film partnership currently under scrutiny told the Financial Times that the tax bill outlined in a recent letter from the tax authority leaves him facing the prospect of bankruptcy.
The Eclipse partnership which he entered involved a highly leveraged investment to buy the distribution rights to films including Pirates of the Caribbean 2: Dead Man's Chest, with intentional operational losses qualifying for income tax relief.
In what he describes as "an incredibly aggressive stance", the investor says HMRC has requested tax on partnership income that was never received by individual investors. The tax bill that he and fellow investors face is many times greater than the amount put in.
"From a total investment of around pound300,000, I anticipate a final liability of seven or eight times what I put in," he says. "It's absolutely life-changing."
Tina Riches, national tax partner at Smith & Williamson, said that many scheme investors, particularly those who have retired or are on modest incomes today, are vulnerable.
"For every celebrity that hits the headlines, there are another 50 members of the public facing potential hardship [as a result of the clampdown]," said Martin Taylor, head of client relations at Rebus, a claims management firm. "There are a lot of worried people out there."
In a statement, the tax authority said that where loans have been used "to artificially inflate the losses claimed" by a scheme investor , "this may give rise to unexpected tax consequences for the users if HMRC don't agree the scheme works as intended, beyond the amount expected to be avoided".
A tribunal found in HMRC's favour against Eclipse 35, a scheme from the same promoter, Future Capital Partners. The group is confident of overturning this verdict at the court of appeal next year.
In correspondence last month, the tax authority said that it views other Eclipse schemes as "nearly identical in structure" to Eclipse 35.
In an earlier letter to the investor, also seen by the FT, HMRC requested that he pay a sum of almost pound900,000 within 28 days of receipt. The notice - which was appealed - recommended payment via cheque, debit or credit card payment.
The investor said an offer to pay the total personal tax relief enjoyed, plus interest, was rejected outright by the tax authority. "If I had stashed my money away in Switzerland, there's a hotline that I could have called to settle [the disputed tax] . . . Where's my deal?"
Michael Avient, personal tax partner at UHY Hacker Young, said: "It is quite clear that the Revenue have been told that they need to collect more tax [from scheme investors]. The Revenue will quite happily bankrupt someone."
HMRC dismisses these claims. Although it does not discuss individual cases, the authority said that "instalment arrangements will be available for those who genuinely need them. HMRC has an outstanding record in supporting those with payment problems."
The Revenue's increasingly hard line against taxpayers deemed to have avoided tax is, however, reflected by comments made this week by one of its senior officers.
Jim Harra, director-general of business tax at HMRC, said that the people taking up such schemes are not the "hardworking" majority. "They are the 43,000 affluent people who knowingly signed up to an avoidance scheme in full awareness they were using artificial arrangements to reduce their tax bill. I have no sympathy for these people."
(c) 2014 The Financial Times Limited