By Kalvin P. Chapman
IN 2014 HMRC was endowed with new powers to force people to pay back to HMRC tax that was withheld as a result of tax mitigation products that HMRC now disputes.
The rules, contained in the Finance Act 2014, allowed HMRC to dispute a tax product, serve an Accelerated Payment Notice (“APN”), take back for you the tax that you saved under the disputed scheme and then allow any challenges to HMRC’s challenge of the scheme.
Throughout the golden era of big banking, when London was the undisputed centre for world banking, between the mid 1980s and up to 2010, the monies received by high earners was always subject to varying amounts of high tax. The top rate of tax is paid on taxable income over £150,000 of income. Dividends were not included, but all other income (roughly speaking) was included. Tax rates have been between 50p and 60p on amounts over £150,000 (though it has been as high as 75p and 90p). When you earn £10 million and you have to hand back £5 million to the tax man, most people would look for ways to minimise the amounts paid out to the tax man. It is a natural thing to wish to consider.
There are, and have been, many legal ways of managing your finances in which your tax liabilities can be mitigated. The largest auditing and accounting firms actually wrote much of the the tax legislation for various governments, because they understand the day-to-day transactions under existing tax laws. It is exceptionally complex and many mandarins would simply find that their first drafts would have too many conflicts with existing UK law and EU law. So, the easiest way is to pay a group of tax experts to draft the laws.
The problem with this is that these same auditing and accounting companies also represented the wealthiest people. These clients would look to their tax experts for ways to legally mitigate tax liabilities. As the tax experts got to draft the new legislation they also got to understand the ways in which said legislation could be used to produce tax mitigation products. This is perfectly legal and ethical.
However, the money created in the 2002 to 2007 period was astonishing. Never before had such sums of money been available to the few in finance. Annual Bonuses can often be greater than (by a massive factor) the amount ordinary people would ever be able to earn in a lifetime. Bank Bonuses during this period was substantially greater than the Banks paid in tax. Tax experts had to create more ways to minimise tax. The most significant products created during this period were film production products, but there were a whole series of means with which to minimise tax, such as employee benefit trusts (which are now also being challenged).
Imagine if you are a footballer. Imagine if you know your useful income producing time will be up to the age of 35. After that, your ability to produce a huge income is limited. So, the income received before this approximate age has to potentially be used to keep you for the rest of your life. Now imagine that before you even get your income, you have to pay half of it to HMRC. Then 10% to managers. Then another 10% to your advisors. Of course footballers would want to look at ways to minimise their outgoings in tax. Simply look up the number of premier league footballers that were required to declare bankruptcy within five years of leaving premiership football. Many of them found that their tax advisors sold them defective products. The advisors get to carry on earning money – the footballers end up insolvent.
In the 1997 and early 2000s period, the Labour Government looked to try and place the UK as an attractive place for film and TV making. In order to do so, they needed to be able to offer taxation that would be attractive to the film makers and, more importantly, to make backing film production equally attractive, especially if the investment in films would resulted in a substantial loss, as happens occasionally. Not all films gross $100 million in their first weekend. See this list of the highest losing films, many lost over $100 million.
Hundreds, potentially thousands, of tax mitigation products were created to take advantage of film production tax advantages. The set up is complex, but essentially the individual would put in so much money for the production of the film and then double it (sometimes more) with a loan. The loan and its fees and interest could create losses. If ultimately the film production made a loss on paper, the investors would get substantial tax write offs or other tax benefits. The LLPs that were set up would end up, on paper, insolvent. The benefits conferred by the tax man could, if done right, produce a tax positive environment for the investor.
The problem was, the competition for ever more profitable schemes was great. All accountants, tax advisors and auditors were offering tax mitigation products. So, the producers of the tax mitigation products got ever more creative with their products as the need for such products grew substantially between 2005 and 2007.
When the coalition Government was announced in 2010, one of the priorities was to target unfair and unlawful tax avoidance schemes. They did this with gusto. The Finance Act 2014 was created in concert with HMRC taking a zero tolerance approach to film schemes (and many others also). Tax avoidance schemes were targeted mercilessly by HMRC. HMRC created a new team, and that team rarely lost in Court (though they have a few times). Following four years of targeting these tax avoidance schemes, HMRC then got the APNs. In its first year they forced tax payers to hand over £1 billion. At two years this is now £3 billion. In the background the tax avoidance schemes were all losing their judicial reviews against the APN scheme. There are about two outstanding appeals, and the chances of success will likely depend on whether they take their cases to the Supreme Court.
So, what can YOU do about this?
An APN requires payment or an appeal against the APN. Very strict time limits apply, after which HMRC imposes penalties. You are highly unlikely to be able to avoid the APN demand.
In many cases, the APN only represents a payment in advance of a challenge to a scheme. So, the payment does not necessarily mean that the money is lost. It means that HMRC has the money and will refund it if HMRC’s challenge against the tax mitigation scheme is lost. This does happen.
Two years in, and HMRC has confirmed that it has received £3 billion from over 60,000 APNs.
What can you do? If you receive an APN it is essential that you speak to a litigation solicitor.
Unfortunately, many of the recipients of APNs have instead talked to the tax accountants who sold them the tax avoidance scheme to begin with. They are (quite properly) told that challenging an APN is unlikely to work – some might work. But, crucially, these accountants/auditors and occasionally tax lawyers, do not want their clients talking to litigation solicitors. That is because we litigation lawyers can consider whether the case would warrant going after the makers of the scheme and, more crucially, against those that sold the scheme.
There is only limited time within which to consider this. Many tax avoidance schemes were entered into pre 2010. Primary limitation lasts for six years. That means any case, as at the date of publishing this article, that was entered into before 1 October 2010 is now time barred and a claim in Court (on the primary limitation) is lost.
However, there are two exceptions to this. One is if you were unaware of negligence in the sale of the scheme. That gives you an extra three years form the date that you first reasonably could have become aware that there was negligent advice. It is only imitated to bringing a claim in negligence. The other allows a six year period from the first reasonable date at which you would be expected to have known that fraud was involved and the fraud meant that you were unaware of the right of action. This will almost certainly be unlikely in a case involving the sale of a tax mitigation product. One cannot be prescriptive about this, but fraud is highly unlikely to be involved.
As such, if you have received an APN and wish to consider whether there is a claim against the people who created the tax product or those that sold it to you, please contact Muldoon Britton today through our “Contact us” page or by calling 0161 826 6922.
 Wikipedia List of box office bombs
https://en.wikipedia.org/wiki/List_of_box_office_bombs HMRC Press Release 5 September 2016 “Taxman brings in billions of tax upfront from tax avoiders”