Tax avoidance schemes are hitting the headlines on a daily basis, particularly in light of the recent allegations that HSBC supposedly assisted clients to "dodge tax" and the reported involvement of thousands of celebrities, sports stars and politicians in film finance schemes.
Any such scheme which bears the hallmarks of tax avoidance has to be reported to HMRC, who will then allocate a number to it. HMRC have subsequently gone on to serve accelerated payment notices (APNs), introduced by the Government in the Finance Act 2014, on thousands of individuals in relation to film finance schemes.
An APN is a notice that requires the recipient to pay disputed tax ahead of any final determination. There is no right of appeal against an APN but the recipient may make representations to HMRC objecting to it. Tax is due for payment within 90 days of the APN and if payment is not made, a penalty of 5 per cent is imposed. A further penalty of 5 per cent will become due if payment is not received five months thereafter, and a second 5 per cent after a further six months.
APN’s and film finance schemes
Sections 42 and 48 Finance (No.2) Act 1992 provides for the cost of producing films which generate a loss to be offset against other income. Although several film finance schemes have been successfully set up to benefit from the relief, HMRC are concerned to identify any schemes which have the primary purpose of providing a vehicle for tax evasion.
With the first tranche of APNs, HMRC reported in December 2014 that it had received £32 million in disputed tax and expects to raise £7 billion from APNs from 43,000 taxpayers over a two year period from July 2014.
In February 2015 the High Court gave permission for a judicial review of APNs which were served on approximately 100 investors who participated in film partnership arrangements set up by Ingenious Media.
However, on 19 February 2015, the Court of Appeal dismissed a separate appeal by film partnership Eclipse Film Partners No. 35 LLP, stating that the partnership could not be a vehicle for tax relief as it was not trading commercially with a view to profit.
Meanwhile, HMRC have indicated that they were effectively expecting a challenge to the accelerated payments legislation and that they will continue to issue APNs despite the permission granted to Ingenious Media.
The impact for practitioners
The landscape is currently very uncertain for practitioners, both those advising clients who are in receipt of APNs and also those facing professional negligence claims for advice in respect of the alleged tax avoidance schemes. The latter include advice not only in respect of film finance schemes, but also those areas of tax mitigation recently identified by HMRC as currently "in the spotlight": employee bonuses, VAT exemptions for sporting or educational/training supplies and business premises renovation allowance schemes. Claims resulting from aggressive "tax mitigation" schemes are certainly on the rise and underwriters will be keeping a close eye on investigations by HMRC and analysing proposal forms for any evidence of tax mitigation which could be viewed by another as tax evasion.
We understand that the judicial review in Ingenious Media is likely to be heard this summer but we anticipate that in advance of the hearing there is likely to be a raft of similar applications from other parties seeking judicial review. This is in response to the suggestion made by the courts that there should be a moratorium on tax demands for individuals who are actively challenging the APN scheme through judicial review.