Tax trap of the week: Film Schemes - were they missold?

On the one hand tax breaks for the British film industry have just been extended until 2015. There have long been plenty of promoters of film scheme 'investments' that exploit the tax breaks - which have varied over the years. However tax schemes are rarely as simple as they may seem. Just this week I heard of a group of investors who don't understand why they are having to pay tax by reference to film schemes they invested in some years ago.

I suspect some will claim that they were victims of what might be termed 'misselling'. Although equally the investors may not have read the small print. At it's simplest the old film schemes could be described as the equivalent of getting an upfront loan (by way of a tax refund) from HMRC that would, effectively, be repaid over a 15 year period. The law was changed in 2006.

The problem is that, prior to the rule change, many advisers and investors focused only on the upfront tax refund. Investors either did not understand or chose to ignore the longer term cashflows. These were always going to result in tax being paid on profits from the film - and there had to be an expectation of profits or the scheme would not have been commercial. The profits would not be paid out however so the investors have to pay the tax out of their own resources - hence the confusion I noted earlier.

The schemes would still have appeared attractive as long as the investor expected to invest the tax refunds so as to generate a return that should exceed the tax payable over the next 15 years.

Although tax reliefs will continue to be available through to 2015, many past investors are losing faith in their film scheme investments. Some of the more aggressive and/or controversial schemes are being struck down. The courts are deciding that investors were not entitled to tax refunds (under the old rules) after all. The first tier tax tribunal found in favour of HMRC in September as regards two separate film partnerships promoted by Future Films (Samarkand Film Partnership No 3 and Proteus Film Partnership No 1). And 250 investors in another film partnership, that reportedly generated £117 tax benefits, are awaiting the outcome of another tribunal hearing.

The forecast does not look good for the outcome of these appeals or those re other more controversial tax avoidance schemes. As I have long maintained, a favourable Counsel's opinion does not mean you will win if HMRC challenge your tax scheme. It simply means you should be safe from charges of tax evasion if HMRC win. And therefore only liable to pay the tax and interest without any further penalty - if everything was fully disclosed.

Tax twit of the week - Bernie Ecclestone

Last week the F1 supremo, Bernie Ecclestone was challenged by a court in Munich as regards a payment of £27m he made to Mr Gribkowsky, a former banker.

Mr Ecclestone admitted that the money was paid to discourage Mr Grobkowsky from making accusations that would have led to a potentially costly UK tax investigation.

Mr Ecclestone claims that he had done nothing wrong. However he was clearly concerned that either the cost of defending his position, if challenged by HMRC, or of the back taxes, interest and penalties they would have secured would come to MUCH more than £27m.

Somehow I suspect that HMRC may take a look into his affairs now that the quantum of his concerns have been publicised. Don't you? For publicly explaining that he paid £27m in an effort to avoid damaging allegations about his tax affairs being made public, I will be sending Mr Ecclestone my Tax Twit of the week award.

'Lack of Tax Trust' Award of the Week - The Public Accounts Committee

I was surprised and disappointed to note that the Public Accounts Committee felt it necessary to break with tradition when interviewing Anthony Inglese last week. (As reported by the BBC).

Mr Inglese has been Head Lawyer at the Office of Fair Trading in 1991; then Head Lawyer at the Ministry of Defence in 1995; and in 1997 he was appointed Deputy Treasury Solicitor. He joined HMRC in 2008 and is said to be their 'top lawyer'. He leads on Professionalism and Ethics for the Government Legal Service and is a member of the Bar Standards Board. He also gives training at the National School of Government.

Despite Mr Inglese's credentials the Public Accounts Committee, last week, asked him to swear an oath on a Bible to tell the truth. This is not standard practice. I understand that nobody had been asked to swear an oath by a parliamentary committee for more than a decade.

Why did the Committee feel the need to do so on this occasion? Does it reflect worse on them or on Mr Inglese? Perhaps it was the only way to get the Committee to believe the truth. I tend to think that everyone giving evidence before such committees should be placed under oath.

But for now, I am confused as to why they picked on a Revenue official when even James Murdoch hasn't been asked to swear an oath when appearing before a select committee. So, for their heavy-handed approach I give the Public Accounts Committee the Lack of Tax Trust award of the week.

Tax joker of the week: David Cameron

David Cameron finally snapped in the Commons last week. Evidently frustrated by the French support for proposals to put a tax on City of London trades, he quipped:

‘I’m sometimes tempted to ask the French if they would like a cheese tax,’

They certainly didn't respond well back in 2009 when the US announced plans to triple import duties on Roquefort cheese from 100 to 300 per cent. So I think we can confirm that the PM's instinct is right on this one.

Gaines-Cooper case does NOT show futility of HMRC guidance

What it shows is the futility of trying to exploit HMRC general guidance for tax avoidance purposes.

Robert Gaines-Cooper has been challenging HMRC's demands that he pay UK taxes despite his attempts to become non-UK resident in 1976. And I have commented on his continued failure to overturn HMRC's decision in previous blog posts.

Accountancy Age have headlined their latest article on the story: "Gaines-Cooper ruling shows futility of guidance".

I disagree, hence my statement above. As Accountancy Age note towards the end of their article:

Gaines-Cooper left the UK partly to mitigate his tax liabilities; there is £30m at stake; and lest we forget this is a trial that has already lasted six years and looks set to run further. In other words, this is not a run-of-the-mill case. Guidance, on the other hand, is meant for run-of-the-mill cases – the "ordinary sophisticated taxpayer",

And that taxpayers are not not able to rely much on guidance when an action is undertaken in contentious areas because:

it is not in HMRC's interests to provide clear guidance for these cases. Taxpayers and advisors in these situations will have to argue on case law and legislation – a lesson Gaines Cooper has learnt the hard way.

Even this isn't news. It has long been recognised that HMRC guidance, statements of practice and concessions do not have the force of law. They help resolve issues and to provide comfort for most people affected, most of the time. But when tax avoidance plans rely on such non-statutory notices then all bets are off. And no one should be surprised.

Previous relevant posts

• 2010 - Gaines-Cooper judicial review residence case won by HMRC
• 2009 - Tax Tease of the week - resident or non-resident?
• 2008 - Gaines-Cooper loses in Court of Appeal - Residence rules revisited