HMRC is readying a legal challenge to claw back £2bn in tax from various investment schemes after its victory in HMRC v Inverclyde Property Renovation LLP and another [2020] UKUT 161. How did we get here, and what does this say about the affected investors and their advisers?
Sir Steve Redgrave is one among many when it comes to making investments in tax avoidance schemes and the controversy it now gives rise to. Countless sportspersons and entertainers (as well as businessmen, lawyers and accountants) have all invested in ‘schemes’ that have been, or are in the process of being, challenged by HMRC. In many instances, the scheme promoter, be it a bank or specialist tax firm, is now being sued by its clients.
The most well known examples of tax schemes are the film partnerships whereby investors borrowed money to buy a particular film that was immediately leased back to the studio over a period of, say, 20 years. Many iterations of this scheme are to be found, all of which rely on there being a genuine trade, as this then allows the debt interest to be reclaimed on behalf of investors.
The reality of the situation is that the government announces a certain tax break (whether it’s film, social housing or used cars) and there is (or was) a whole industry waiting in the sidelines to turn that into either a tax efficient investment – or, often, a tax scheme. So, in the context of the scheme or investment that Sir Steve participated in, did he invest in these regeneration schemes to help regenerate parts of Scotland, or was his primary interest to save tax? Or was it a combination of the two?
Does motive ultimately matter if the funds he ‘invested’ ended up in the right place, helping the right cause? Does it really matter that his motive (sole, or otherwise) was to mitigate his tax liability? They are his funds to invest how he sees fit and if he receives a tax break personally he should not be pilloried or shamed, especially if his investment is using the tax break as the government intended. But, if he knew that what he was investing in was a tax wheeze and nothing more, then he has no cause for complaint, provided of course he was properly advised of the risk of HMRC challenge.
Herein lies the problem: many investors in schemes that have been challenged by HMRC claim they weren't aware of the risks or even the basic elements of the investment. The power of the tax avoidance industry that was endemic in the UK at the time shouldn’t be ignored. Slick brochures presenting apparently cast-iron government incentives presented by even slicker salesmen, backed by a QC’s opinion. What’s not to love?
The issue here is, of course, one of morality. We’ve seen it with the corporate tax debate. The large American tech firms ‘abusing’ the system for their gain. Who is the moral arbiter when it comes to this ethereal concept? There is nothing illegal or immoral in seeking to reduce the amount of tax we pay within the bounds of the law, indeed the government encourages us to. The issue with the schemes designed to avoid tax is whether the investor knew there were risks in making the investment other than losing their capital. Were they making the investment to make a return or were they making the investment simply to obtain a tax benefit: is it an investment with a tax upside or is it a tax scheme dressed up as an investment?
Sportsmen and women have relatively short careers, often with no income source to turn to once their playing days are over. Making an investment now with one eye on the future should be seen as being prudent, even if the upside is a tax break.
Many scheme providers have vanished since the introduction of government schemes such as DOTAS, GAAR and APNs, ultimately leaving investors, like Sir Steve, exposed. There will undoubtedly be calls to have him shamed and perhaps even have his knighthood removed. It is, however, very easy, with the power of hindsight, to sit in judgement of Sir Steve through today’s lens. Tax schemes are, by and large, a thing of the past, but it wasn’t so long ago that they were almost de rigeur.
At the end of the day, however, the buck stops with the taxpayer. And I’m sure Sir Steve is man enough to take this on the chin.
HMRC is readying a legal challenge to claw back £2bn in tax from various investment schemes after its victory in HMRC v Inverclyde Property Renovation LLP and another [2020] UKUT 161. How did we get here, and what does this say about the affected investors and their advisers?
Sir Steve Redgrave is one among many when it comes to making investments in tax avoidance schemes and the controversy it now gives rise to. Countless sportspersons and entertainers (as well as businessmen, lawyers and accountants) have all invested in ‘schemes’ that have been, or are in the process of being, challenged by HMRC. In many instances, the scheme promoter, be it a bank or specialist tax firm, is now being sued by its clients.
The most well known examples of tax schemes are the film partnerships whereby investors borrowed money to buy a particular film that was immediately leased back to the studio over a period of, say, 20 years. Many iterations of this scheme are to be found, all of which rely on there being a genuine trade, as this then allows the debt interest to be reclaimed on behalf of investors.
The reality of the situation is that the government announces a certain tax break (whether it’s film, social housing or used cars) and there is (or was) a whole industry waiting in the sidelines to turn that into either a tax efficient investment – or, often, a tax scheme. So, in the context of the scheme or investment that Sir Steve participated in, did he invest in these regeneration schemes to help regenerate parts of Scotland, or was his primary interest to save tax? Or was it a combination of the two?
Does motive ultimately matter if the funds he ‘invested’ ended up in the right place, helping the right cause? Does it really matter that his motive (sole, or otherwise) was to mitigate his tax liability? They are his funds to invest how he sees fit and if he receives a tax break personally he should not be pilloried or shamed, especially if his investment is using the tax break as the government intended. But, if he knew that what he was investing in was a tax wheeze and nothing more, then he has no cause for complaint, provided of course he was properly advised of the risk of HMRC challenge.
Herein lies the problem: many investors in schemes that have been challenged by HMRC claim they weren't aware of the risks or even the basic elements of the investment. The power of the tax avoidance industry that was endemic in the UK at the time shouldn’t be ignored. Slick brochures presenting apparently cast-iron government incentives presented by even slicker salesmen, backed by a QC’s opinion. What’s not to love?
The issue here is, of course, one of morality. We’ve seen it with the corporate tax debate. The large American tech firms ‘abusing’ the system for their gain. Who is the moral arbiter when it comes to this ethereal concept? There is nothing illegal or immoral in seeking to reduce the amount of tax we pay within the bounds of the law, indeed the government encourages us to. The issue with the schemes designed to avoid tax is whether the investor knew there were risks in making the investment other than losing their capital. Were they making the investment to make a return or were they making the investment simply to obtain a tax benefit: is it an investment with a tax upside or is it a tax scheme dressed up as an investment?
Sportsmen and women have relatively short careers, often with no income source to turn to once their playing days are over. Making an investment now with one eye on the future should be seen as being prudent, even if the upside is a tax break.
Many scheme providers have vanished since the introduction of government schemes such as DOTAS, GAAR and APNs, ultimately leaving investors, like Sir Steve, exposed. There will undoubtedly be calls to have him shamed and perhaps even have his knighthood removed. It is, however, very easy, with the power of hindsight, to sit in judgement of Sir Steve through today’s lens. Tax schemes are, by and large, a thing of the past, but it wasn’t so long ago that they were almost de rigeur.
At the end of the day, however, the buck stops with the taxpayer. And I’m sure Sir Steve is man enough to take this on the chin.
