END OF THE BEGINNING FOR TAX AVOIDANCE?

Simon-WarneTax avoidance schemes signed up to by high profile celebrities are back in the news, with specialists at Crowe Clark Whitehill advising those who have not paid the correct amount to take urgent notice as it could have consequences for them.

Many will welcome HMRC’s success in the ‘Icebreaker’ tax avoidance scheme, and the fallout from the ‘Ingenious Media’ scheme which saw many well known names back the British film industry and write-off losses against other income.

The reporting of the facts in the ‘Icebreaker’ case revealed that some wealthy individuals had entered into complex arrangements to avoid paying in the region of £120 million of tax by investing in the music industry.

Despite hearing that the celebrities had invested in the music industry, the Tribunal judge Colin Bishop ruled that the main aim was rather to secure tax relief. He ruled that the claimed tax relief had been inflated by a mechanism of ‘entirely circular’ loans which resulted in the value of the tax claims exceeding the amounts invested.

Simon Warne, Tax Partner at Crowe Clark Whitehill, a leading national audit, tax and advisory firm with offices in Tunbridge Wells and Maidstone, said: “In striking out the scheme the judge ruled he was satisfied that the borrowed sums, a key feature in many avoidance arrangements, were not used for the purpose of the trades. Following that decision, the tax claims were dramatically diminished so as to make the scheme effectively valueless.

“Although the scheme promoters are considering their position, and a further appeal is possible, it appears that HMRC is enjoying the moment and will continue to challenge those who engage in tax avoidance, leading some advisers to stop offering such schemes.”

The ruling will have a significant impact on those 950 individuals, including high profile music industry figures, who invested as partners of these schemes with HMRC likely to issue demands which may include back tax, interest and penalties.

While there will be relatively few businesses and individuals caught up in the Icebreaker case, Crowe Clark Whitehill believes that the ruling could have wider implications, as similar schemes will also be affected by the new Follower Notices tax mechanism.

Simon Warne added: “First announced in the Autumn Statement 2013, Follower Notices are now in force, allowing HMRC to issue a notice to any taxpayer who has, in its view, used a tax avoidance scheme similar to one which it has successfully litigated before the First-tier Tribunal or courts.”

The Follower Notice will require that the taxpayer settles its dispute with HMRC so the tax due will have to be paid. Failure to do so will risk a penalty and payment of the tax in dispute will become due in any case within, normally, 90 days. This represents a significant erosion in the value of tax-avoidance schemes, which previously had allowed users to not pay their tax until the legal process had been exhausted.

Accelerated Payments Notices are another new power under which HMRC can order the taxpayer to pay certain elements of disputed tax before the resolution of any enquiry process. This affects existing avoidance schemes, not just new arrangements going forward, so tax payers who have been in dispute with HMRC for many years will now be receiving demands for the tax which HMRC believes is due.

Simon Warne concluded: “It is clear that HMRC now has greater power to tackle avoidance. While some may consider these new powers a step too far, high tax payers will need to work more closely and earlier with their tax advisers than ever before.”

 

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