News & Insights

Tax avoidance schemes – advising on the risk of failure

Tom Maple looks at two recent cases regarding tax avoidance and the need for advisers advising on all tax avoidance schemes to provide clear comprehensive advice.

Notwithstanding a number of high-profile cases and the introduction of the Counter Avoidance Directorate (whose objective is to stop tax avoidance schemes), 63% of those surveyed in a recent HMRC survey thought that the use of tax avoidance schemes is still widespread. A review of the press and the finding of the Supreme Court lends credibility to the public’s view.

The two most recent cases to hit the press are those involving the film partnership scheme, Eclipse 35, and, latterly a tax avoidance scheme involving Jersey and Cayman Islands companies, Clavis Liberty.

Summary of Eclipse and Clavis Liberty

Eclipse 35 was a film partnership scheme. Its 289 investors, which included Sir Alex Ferguson and Sven-Goran Eriksson, stood to gain approximately £400,000 in tax reliefs through a £1bn film deal with Disney. After investing £500m into the films Enchanted and Underdog the scheme was shut down by the Court of Appeal who confirmed that the scheme was not commercially trading with a view to making a profit. That decision was confirmed last month in the Supreme Court.

Clavis Liberty involved a limited partnership registered in Jersey (Clavis Liberty Fund 1 LP) who claimed it was carrying out trade in the UK. Each of its users contributed a sum of money which was supplemented by a large bank loan to acquire rights to dividends declared by a Cayman Islands registered company. The partnership claimed a deduction for the cost of the dividend rights but sought to exclude the dividend payments paid from its trading profits, thereby creating a loss. The scheme was challenged by HMRC. That led to a hearing of the tax tribunal, the result of which was a finding in favour of HMRC.

Effect of Rulings

The effect of both rulings is that the investors of both schemes will not (assuming the Clavis Liberty decision is not overturned) obtain the tax saving that they expected. This is likely to leave investors with not only significant tax liabilities which they were hoping to avoid, but large legal fees as well as the costs of the scheme itself.

Tax avoidance will be around for as long as there is taxation. However, the majority of tax avoidance schemes are, by definition, relatively high risk, all the more so since the introduction of the Counter Avoidance Directorate. Therefore, it is vital that clear advice about the relative merits and risks associated with different tax avoidance schemes are given to every potential investor to ensure that they can make a properly informed decision about whether they want to engage in the scheme. Fail to do so and the adviser’s insurers could be facing a substantial negligence claim and damages pay-out.
The author, Tom Maple, a Partner and Head of our Dispute Resolution team, has acted for a number of individuals where the appropriate advice was not given and as a result insurers have had to pay out multi-million pound settlements to compensate the investor against the losses they suffered. The all too common defence that “our firm’s engagement letter stated that the scheme might fail” is highly unlikely to succeed – clear advice tailored to each individual’s circumstances is the only and best defence.

If you have invested in a tax avoidance scheme and are of the opinion that the advice given by the adviser was inadequate, please contact Tom Maple on 0118 951 6309.