Tax avoidance schemes and claims against solicitors

Tax avoidance is now rarely out of the news. Recently, Gary Barlow and Mark Owen of Take That, Colin Jackson and others were all reported to have been involved in various ‘Icebreaker’ tax avoidance schemes. Before that, as a result of their reported involvement in schemes designed to avoid tax, Gabby Logan, Anne Robinson, Jimmy Carr, Wayne Rooney and Chris Moyles have all hit
the headlines.

Complex code

The essence of the problem is this: we have
a complex tax code, with liabilities to tax supplemented by numerous tax reliefs. The
tax reliefs have been introduced by governments for policy purposes – to foster investment in British industry, or to encourage research in particular areas, or even to encourage behaviours such as saving for retirement. However, the reliefs have not always been used as anticipated, which has led to investigations by HMRC and the high-profile failure of many schemes.

A good example of a typical tax avoidance scheme, albeit a relatively rare example now, involves capital allowance tax reliefs introduced between 1997 and 2001. Tax relief was provided on the losses incurred by investors in British films and technology development which could be set against tax liabilities.

Before long, schemes became available which allowed investors to contribute around 25 per cent of the purchase price, with a bank contributing 75 per cent on non-recourse terms. This allowed investors to make a substantial return if the investment was unsuccessful, by claiming relief at 40 per cent (or higher, after the additional rate was introduced). In other words, for an investment of £200,000, leveraged by an £800,000 non-recourse loan, an investor could claim a tax rebate of £400,000 (i.e. 40 per cent of the overall £1m investment). Unsurprisingly, HMRC began to look at these schemes rather more critically and began to challenge a number of schemes. Over the years, particularly from 2004 onward, legislation was introduced removing and restricting these reliefs.

Stamp duty land tax (SDLT) schemes are another good recent example, and one which is of particular relevance to solicitors. Stamp duty avoidance schemes have proliferated in recent years, but have been successfully challenged in a number of cases by HMRC, such as in HMRC v DV3 RS Limited Partnership [2013] EWCA Civ 907.

The scheme involved the purchase of the well-known Dickins & Jones building on Regent Street. The stamp duty ordinarily due on the sale was said to be in excess of £2.6m. By establishing the DV3 RS vehicle in the BVI and a sub-sale agreed between that and another BVI company, it was hoped to make use of the provisions of the Finance Act 2003 concerning sub-sales, reducing the stamp duty to nil. The Court of Appeal rejected the scheme and found that the partnership was liable to pay SDLT.

Over the years, attitudes have hardened
towards tax avoidance. In his Budget speech in 2012, George Osborne stated that he regarded “aggressive tax avoidance” as morally repugnant. Increased resources were made available for
HMRC to seek to challenge tax avoidance. The government and HMRC are seeking to challenge aggressive schemes and to restrict or remove the reliefs that are used in this way. These measures have included the introduction and subsequent extension of the Disclosure of Tax Avoidance Schemes (DOTAS) rules in 2004 and the General Anti-Abuse Rule (GAAR) in 2013. It is this new environment that has led to the failure of many schemes, with those involving celebrities often featuring in the news.

Firing line

What does this mean for the legal profession? Solicitors might advise on the scheme structure or draft documents required to put the scheme in place. Some solicitors may become involved with introducing schemes marketed by third parties to clients, or might advise clients on the validity of the schemes. However they are involved, when things go wrong (and increasingly it is when, not if), professional advisers will find themselves in the firing line if the investors decide to bring a claim.

Recent changes in the 2014 Budget mean that the scale and frequency of such claims are likely to increase. The key change is that the Budget included provisions for taxpayers to pay disputed tax upfront during an investigation by an ‘accelerated payment’ notice. Previously, if HMRC challenged a claim for tax relief, the taxpayer would often be able to keep the benefit of the relief until the investigation and any appeals were finally concluded. That has changed, and now HMRC will be able to demand accelerated payment of tax in three circumstances:

1. where the tax scheme was, or should have been, disclosed under the DOTAS rules;

2. where the tax scheme is caught by the GAAR; and,

3. if another person has fought a case on the same point to the tax tribunal, has lost and is not appealing, then HMRC will serve notice inviting an investor to give in. If the taxpayer does not settle, they risk a penalty and must make upfront payment of the tax in dispute.

All of these are significant, as it means
that investors may suffer a loss much earlier. Previously, failed tax avoidance schemes with large numbers of investors would not necessarily generate significant numbers of claims, for precisely the reason that the investors might retain the tax relief for a number of years while investigations and appeals were exhausted.

Some investors might still progress a claim against their advisers, but others might be less inclined to invest further sums in litigation, and indeed limitation defences might start to arise. Now, where entire groups of investors are facing tax demands by accelerated payment notices, they are significantly more likely to organise themselves, take legal advice, and make a claim against professional advisers.

Taking the example of SDLT schemes, the number of these schemes and subsequent successful challenges by HMRC means that there is a substantial pool of investors, and potential claimants, who will surely be asked to repay tax upfront, and who may then make claims against their advisers.

Is there any good news for solicitors involved in these schemes? It is worth remembering that these claims are not always successful and, in some cases, are abandoned pre-action or discontinued where proceedings are issued. To some degree, wealthy claimant investors will suffer from the opprobrium which tax avoidance attracts in general at present; many will also have a detachment from the litigation and will be less driven by conviction than other claimants.

While the environment for tax avoidance is now significantly more oppressive, for some time at least – perhaps, for so long as we have such a complex tax system – wealthy individuals will engage professional advisers in an attempt to mitigate their tax bill. In many cases, this will be entirely proper. However, solicitors should think very carefully before risking their professional reputation and claims record by becoming involved in aggressive tax schemes. SJ

Julian Miller is a partner and Tom Pangbourne is an associate at DAC Beachcroft ?www.dacbeachcroft.com