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Settlement opportunity for participants in tax avoidance schemes

On 3 December 2012, the Government announced additional investment in HMRC to clamp down on tax avoidance and evasion. 

Tax Networks Ltd does not condone or introduce clients to aggressive schemes, but we do defend clients in distress with aggressive HMRC enquiries.

A mature and reasonable balance needs to be struck, because sometimes we find that clients might have just been “suckered” into something that appeared technically sound according to a glossy salesman.

HMRC are inviting some participants in certain schemes to settle their tax liabilities by agreement, without the need for litigation.

Whilst the settlement opportunity offers both the taxpayers and HMRC an opportunity to resolve these disputes in a cost-effective way consistent with HMRC Litigation & Settlements Strategy, those who are still uncertain face increased pressure tactics as HMRC step up the pace of their investigations.

Take for instance film schemes; HMRC suggest that they will consider an informal settlement regarding those schemes seeking access to film relief legislation for production expenditure. Where the income arises directly from the repayment of the circular loan finance, amounts received over and above the initial finance will be taxed as investment income on an amortised basis over the period of the unwind – typically it is over a projected 15 year period. The return of the initial finance will be treated as a capital receipt and not taxed.

Broadly, this means that subject to the particular facts of the scheme only amounts equivalent to the actual cash contribution funded by the participant and expended in a commercial trade will be allowed when computing losses. Generally, no relief will be allowed for interest on any loan used to fund contributions to the partnership in excess of the initial cash contribution. Where fees are paid for the provision of the wider funding arrangements, tax advice or litigation protection, it is likely that they will not be allowed by HMRC within the informal settlement.

HMRC are restricting settlement opportunities to those who have participated in specific avoidance schemes. They say that there is no current settlement opportunity for participants in film partnership sale and lease back schemes, which can be in parallel with a loan interest relief strategy designed to achieve a claim to interest relief under S353(1) ICTA 88, used as a deduction against general income. More on this subject is covered in the recent Eclipse Film Partners No 35 LLP v Revenue & Customs appeal case.

However, this is not as one-sided as HMRC suggests - non-active participators involved in a properly implemented and technically robust arrangements might have much more latitude prior to 2007. A critical sense check is required.

Clearly, for the uninitiated this is a tax regulatory minefield and those participators who receive an HMRC “solutions” letter might just want a second opinion from us.