Financial newspapers

Tax avoidance schemes

TV presenters Fiona Bruce and Jeremy Paxman are the latest household names to be widely criticized in the media in respect of their tax planning. Both of the presenters set up limited companies known as ‘Personal Service Companies’ through which they agreed to provide services to the BBC for a fee, rather than receiving a salary themselves from the BBC. The BBC therefore paid the companies as opposed to the individuals. That being the case, it is corporation tax that is payable by the presenters’ companies (currently 20% for small profits) rather than income tax by the individuals. Both presenters have therefore avoided income tax of 40% on earnings over the basic rate threshold and 50% on earnings in excess of additional rate threshold, as well as national insurance – a very significant saving.

The Intermediaries legislation, known as ‘IR35’, was introduced on 6 April 2000 with the aim of preventing the avoidance of tax and national insurance through intermediaries, such as Personal Service Companies, where an individual would otherwise be regarded as an employee for the purposes of tax and national insurance. Whether there has been abuse of IR35 will be determined should HMRC investigate. If there has been such abuse, both presenters could potentially face a very substantial back-dated tax bill.

We have also recently seen Jimmy Carr come under fire in respect of his tax affairs. He was branded ‘immoral’ by David Cameron for investing in the K2 scheme claiming that it is ‘unfair’ to other tax payers. Others have likened investors such as Jimmy Carr to benefit cheats.

Legal avoidance or mitigation of tax through effectively planning your personal finances is however normal and common. Indeed, it is perhaps unrealistic to expect anyone, when confronted with their options, to elect to pay more tax than is necessary. Tax evasion however, is a very different thing and, of course, illegal.

K2 is under investigation by HMRC, as are several other schemes…

We have recently come across a number of tax avoidance schemes in the form of partnerships which have failed and ultimately caused investors loss rather than providing any financial benefit to them. Indeed, HMRC is taking a hard line with such schemes. Examples include film and carbon credit partnerships which have been sold by financial advisers and accountants (amongst others) as a way of lowering investors’ tax bills. Typically, the investments into these schemes are substantial but only a fraction of the investment is made from the investors’ own funds – the majority having been borrowed from a lender on unusual and complex terms.

The recent case of Eclipse Film Partners No 35 LLP [2012] UKFTT 270 (TC) involved 289 members borrowing funds to make their respective investments into the film partnership. Each made a prepayment of the interest payable on those borrowings for which they claimed tax relief. Such interest is only eligible for tax relief however, where the capital contributed is used wholly for the purposes of the trade carried on by the partnership. The tax relief claimed by the investors has been denied as the partnership failed to convince the Tribunal that it was actually carrying on a trade at all.

The Tribunal went on to say that partnership, although not technically trading, was “not a mere device to obtain fiscal advantage”. There are however other types of scheme which appear to be just that. We have encountered partnerships which seem to have been designed with the sole purpose of generating substantial tax advantages for investors through what may have been an entirely fictitious operation.

We are currently assisting an investor to whom an investment was marketed as a government-backed environmental scheme relating to land in Brazil and carbon credit trading. This scheme is also currently under investigation. Again, a large proportion of the funds invested were borrowed by the investors on unusual terms. The limited liability partnerships involved entered into a number of contracts shortly before the end of the financial year under which several million pounds was paid out in fees to (apparently) fund research and development. This created a massive loss in the first financial year and the investors were able to claim substantial tax rebates. Given the government’s progressively strict anti-avoidance stance, it should come as no surprise that when HMRC received the partnership returns enquiries were made.

As we understand it, there may not have been any business activity whatsoever and those behind this scheme are likely to be prosecuted. The partnership therefore appears to have been purely a device to obtain the tax rebates which have, to date, been denied.

It seems that many investors in these schemes were not properly advised, particularly in respect of the real risk that HMRC would deny the claims for relief. The net result is that investors are left saddled with substantial loans and tax bills.

It may well be that some of the investors in these schemes went into them knowing that they were chancing their arm with the Revenue. Most people however are prudent when dealing with the Revenue and rely upon professional advice when carefully weighing up the risks and benefits of such schemes. It appears however that some of these people may have been misled.

For any further information, please contact Laura Hazell.