This is the first reported case in England & Wales in which an investor in a film partnership has successfully claimed damages. The judgment in Horner v Allison and another  EWHC 3626 (QB) was handed down on 17 December 2012.
The scheme is one of many film partnerships and other tax avoidance schemes designed to provide tax advantages for investors. It is certainly not the case that all such schemes can be put in a box labelled ‘mis-sold’ or ‘fraudulent’ –although, in light of HMRC’s new objectives, all schemes, legitimate or not, can expect to face enquiries and possibly a delay in any obtaining any reliefs claimed.
Film partnership schemes exploited a variety of tax reliefs including relief on interest payments on loans taken to fund partners’ capital contributions, sideways (trading) loss relief and two special tax incentives which were available only for the production of films in the UK. The first was introduced by Section 42 of the Finance (No.2) Act 1992, and the second – available for qualifying films with total expenditure of £15 million or less – by Section 48 of the Finance (No.2) Act 1997. S42 allowed eligible expenditure to be deducted over a minimum of three years. S48 allowed eligible expenditure to be deducted immediately upon completion or acquisition of the film. As a result, investors could expect to receive substantial tax rebates.
In this case, the Claimant, Mr Horner, was a chartered accountant and one of a number of managing directors of Atos KPMG Consulting Ltd. He was a high net worth individual with a very large tax bill – a primary target for tax avoidance schemes.
Accepting a recommendation from a colleague, whom it later transpired received a commission for doing so, Mr Horner went to a presentation by Taipan Creative LLP, of which the defendants, Miss Allison and Mr Ross, were directors. At this presentation, the scheme was described to Mr Horner as ‘a unique low risk high return investment proposition’ with a successful track record of providing substantial tax advantages to investors. Miss Allison also described herself as a specialist in film tax investment schemes and intimated that the scheme had been approved by HMRC.
The scheme he was offered involved investors becoming members of a Limited Liability Partnership (‘LLP’) which invested in films. Investors would be entitled to be refunded up to the whole amount of income tax paid by them in the last three years which would be claimed on the investors’ behalf.
Investors were required to authorise Allison and Ross (or entities controlled by them), to deal with HMRC in relation to the rebates and receive payment. Investors were told that the defendants would then invest 80% of the rebates in films (said to be necessary to qualify for the relief) and that 20% would be paid to the investor. This 20% was said to be a guaranteed return with no risk.
Mr Horner agreed to participate and a claim to HMRC was duly made by the defendants on his behalf. A tax refund of £168,756.30 was received and, as promised, Mr Horner was given his 20% by the defendants (£33,750). However, subsequently HMRC investigated the scheme and, on declaring that the scheme failed to meet the necessary requirements, Mr Horner faced a demand to repay the whole tax rebate with interest and penalties; a total of £207,000. The scheme had not, as intimated by the defendants, been approved by HMRC. It appeared that the entire scheme was a sham.
At paragraph 31 of his judgement, Judge Richard Seymour QC described the operation of the scheme:-
“The contribution which the “investor” was invited to make was “their tax recovery arising from the allocation of losses to them”, what was allocated being “a tax loss which is 2.5 times the value of their investment”. What the “investor” got back was “20% of the rebate received”. That appears to describe a fairly uncomplicated fraud on the Revenue, with an “investor”, through Miss Allison, and possibly Mr Ross, making an inflated claim for losses sustained in investment in the production of films – 2½ times the amount of his potentially available tax refund – and the proceeds being paid to a vehicle controlled by Miss Allison and Mr Ross, out of which 20% was paid back to the “investor”. The beauty of it, from the perspective of whoever devised it, was that it was largely free of risk to them. If the Revenue accepted without question the claim for refund of tax paid, the loss was sustained by the Revenue. If the Revenue accepted a claim and made a refund, but then disallowed the claim, it would be to the taxpayer, and not to whomever devised the scheme, that the Revenue would look for reimbursement.”
The matter to be determined at trial was whether the defendants had misrepresented the scheme.
The claim against Mr Ross was dismissed – it seems that he was himself misled by Miss Allison and the judge accepted that he had not acted dishonestly or recklessly as to whether things said by her were true.
The judge found that Miss Allison however, made representations which she knew to be untrue and as a result was liable to Mr Horner in deceit. Mr Horner was entitled to recover damages from Miss Horner in the sum of the amount of £185,832.25. Whether Miss Allison, currently receiving Disability Living Allowance, has sufficient assets or insurance for the sum to be paid is another question.
Limitation may be a problem for many investors in such schemes as they were at their peak in around 2006. Civil claims must usually be issued at court within 6 years. This time period may be extended for claims involving fraud which may mean some potential Claimants are still within time to make a claim. There are undoubtedly claimants who are part of schemes which have not yet been investigated by HMRC and whose claims may yet come to light when they are.
This case is the first of many anticipated actions in relation to tax avoidance; more and more of these schemes will come to light in the near future as HMRC press forward with their clamp-down on tax avoidance in the hope of closing the £5 billion tax gap attributed to such schemes.
There are a huge variety of avoidance schemes, many legitimate, many not. Some investors may have received inadequate advice and information and been misled – we are currently helping investors who have incurred losses as a result. Please contact Laura Hazell for further information.