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Fighting the tax avoidance war
19 August 2010
IFAs must take a tough approach to HMRC’s clampdown on tax-planning schemes, write Jonathan Levy and Matthew Greene of law firm Reynolds Porter Chamberlain. Some years ago, the UK Government decided to do its bit for the British film industry by introducing specific tax relief for investors in British films. The legislation accelerated tax relief, and for smaller films provided 100% write-off for production and acquisition costs on qualifying films that cost £15m or less to make. The idea was that investors would put their cash into high-risk British films. After the introduction of film reliefs, tax-efficient investments appeared in the marketplace, which were designed to remove or eliminate investment risks. Generally, such products used non-recourse loans to boost the investment. In broad terms, a non-recourse loan is a loan made on terms that the borrower has no personal liability to repay it: it is repaid purely from an income stream that a capital asset is expected to generate. Other tax-efficient products have grown up in the areas of technology and scientific research. Tax-efficient investments are usually designed and marketed by specialist tax promoters, which may be very large firms of professional advisers or smaller boutiques. The promoters will then bring these products to the attention of IFAs, who will, if they deem them suitable, draw them to the attention of their clients. No one enjoys paying tax, and with a top rate of tax of 50% at present, plenty of high-net-worth investors are anxious to shield their income. ‘Unacceptable’ view HMRC regards such tax products with abhorrence. It is neither here nor there that if non-recourse gearing and other tax structures did not exist, investments for worthy high-risk projects might not be forthcoming; HMRC’s view is the use of such structures constitutes unacceptable tax avoidance. As a result, a number of these schemes are under close scrutiny, and it is clearly HMRC’s intention to deny tax benefits wherever possible. One point needs to be made clear. Commercial disruption is a key element in HMRC’s strategy. Even if legally the structuring is sound and works, HMRC is well aware that the longer tax benefits are delayed, the more scope there is for investors and their advisers to lose heart and give up. From HMRC’s point of view, the more that can be done to discourage investment in tax products, the better. As part of a co-ordinated anti-avoidance strategy, the anti-avoidance group of HMRC now manages complex tax investment products on a cross-departmental basis. Documentation frustration The first that investors and their advisers know of HMRC’s attitude is when they receive notification from the tax authorities that their expected tax benefits will not be received, accompanied by a letter asking for voluminous amounts of documentation. When investors provide relevant documents, HMRC asks more questions and for more documentation. At no time does HMRC spell out its technical arguments as to why the product might not, as a matter of law, work. Months and years pass. No result is forthcoming. This is very frustrating both for advisers and investors. HMRC also has a published litigation and settlement strategy. Under this, the authorities state they will treat any dispute on its own merits and that no ‘package deals’ will be offered. Also, where a dispute arises on an all-or-nothing issue, the settlement should also be on all-or-nothing terms so that there can be no compromise or scope for a negotiated settlement. Faced with this intransigence, what should IFAs and their clients do? Here, the role of the independent Tax Tribunal is critical. This organisation is wholly independent of HMRC, and is staffed by experienced tax lawyers and adjudicates on complex tax disputes. Once a case has been referred to the tribunal, an approved timetable can be sought by the taxpayer to push the case through as quickly as possible. In particular, lengthy enquiries can be curtailed by an application to the tribunal for a closure notice. This will force HMRC to conclude their enquiries, which will often have gone on for months or years. It is likely that in any contested case a large mass of materials (emails, notes, memos, contracts, partnership deeds and other legal documents) will have to be examined. Witnesses of fact may need to give evidence as to how and why the investment came about. Expert evidence may also be necessary if, for example, the technical accounting treatment is in issue. The costs of litigation are of course always a concern, but groups of investors can club together and pool their resources in a cost-efficient manner. There is also the possibility of obtaining third-party funding. The major point is to get the matter moving again so that the tribunal can adjudicate as quickly as possible. Patience is key Each tax mitigation product has to be taken on its own merits but certainly, at the moment, the state of the law is favourable. For example, in the recent case of Tower MCashback, the taxpayer has been successful before the Court of Appeal in a claim for capital allowances, where complex tax structuring, including the use of non-recourse loans on a non-commercial basis, was employed. HMRC is fully aware of this fact. Faced with HMRC’s aggressive attitude, there is a natural temptation for advisers and their clients to give up and write off the investment. In our view, such action may be premature. The key point is investors need to know that, while such schemes may work in law, they will likely have to be litigated through the courts to obtain the anticipated tax benefits. In this respect, patience and proper funding are both required. Published by IFAOnline
