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IFAs rush to insure against HMRC probes
13 August 2010
IFAs are increasingly taking out business disruption insurance against regulatory investigations, according to a City law firm. Nervous advisers feel they may be next on the HMRC’s ‘hit list’ after it probed tax professionals for promoting what it deems ‘unacceptable tax avoidance schemes’, says Reynolds Porter Chamberlain (RPC). It says IFAs, as well as solicitors and accountants, who recommend tax avoidance to clients could find themselves subject to dawn raids by HMRC officers and demands to hand over documentation and information relating to their clients to the taxman. In addition, RPC says IFAs fear being sued for poor advice by irate investors annoyed at being caught up in a lengthy HMRC investigation. “We have IFAs coming to us worried they are exposed to risk for putting investors in a product which hasn’t delivered,” says Jonathan Levy, tax dispute resolution specialist at the law firm. “Tax investigations can take years. HMRC is using them as “commercial disruptions” to deter investors.” Any scheme which takes legislation and uses it in a way not envisaged by HMRC in order to gain a tax advantage could face scrutiny, according to Legal & General’s head of tax, Mark Green. RPC says the taxman is eyeing schemes like the recently outlawed film investment partnerships. Ingenious Media, currently under investigation by HMRC, attracted dozens of celebrity backers and raised £5bn by allowing investors in films to claim tax relief in the first year on virtually the total sum invested. The money had to be paid back over 15 years, but through investing wisely wealthy individuals could beat the taxman. Hundreds of near identical schemes are still running, and while not illegal, RPC says they are in HMRC’s sights. Levy says: “The Government has told us it particularly dislikes these schemes.” RPC says even when the structures IFAs recommend to their clients are perfectly legal, they are having to spend thousands of pounds responding to “aggressive” investigations. “Often the cost of defending an investigation can be substantial,” says Adam Craggs, a partner in RPC’s tax disputes team. “Smaller IFAs are struggling with the additional cost of such investigations, which is putting their whole business at risk.” Lighthouse Group’s head of research Andy Gadd says IFAs have to be very careful when looking at tax mitigation schemes to make sure they operate within the law. “Even if the IFA has done everything right, if the case ends up in the courts it will be taken on a case by case basis because unregulated schemes, which most of these are, can not go to the Ombudsman.” But he says it is “ridiculous” IFAs feel the need to take out insurance to cover tax avoidance schemes. “It really depends on your business plan, the strength of your due diligence and how many relevant cases you have.” “These are high risk products. If an IFA hasn’t done the necessary due diligence and explained this to the client, they are not treating them fairly and investors have a right to take them to court.” HMRC recently announced plans to raise an additional £4bn in 2010/11 through more aggressive tax investigation work. Published by IFAonline
