The last few months have seen a flurry of activity in relation to what the press has termed “middle class tax evasion”, in particular in the context of partnership tax schemes.
HMRC has received additional funds from the Government to clamp down further on tax avoidance and evasion, specifically including partners in partnership tax schemes and “cowboy” tax advisers. Separately, the Crown Prosecution Service (CPS) has unveiled plans to increase the number of tax evasion cases they handle fivefold, with tax consultants or advisers who push dishonest tax schemes and the professionals who invest in them being central targets.
Both are looking to target avoidance by middle class professionals and others, who look to reduce their tax bills using not only illegal schemes to evade tax but also complex schemes which, albeit legally avoiding tax, are outside the spirit of the tax laws.
Following their successful challenge of the Eclipse 35 partnership scheme in April last year, HMRC has, in the last month, won a further case before the courts involving a vaccine research partnership scheme promoted by Matrix Securities.
In addition, it has written to investors in a number of other partnership schemes, offering them the opportunity to settle their tax liabilities by agreement, without the need for litigation. Where settlement is declined, HMRC says it will increase the pace of its investigations and accelerate disputes to litigation.
All this against a background where, in February 2012, a number of employees at various City institutions were allegedly arrested as part of a criminal tax fraud investigation in relation to their personal involvement in film finance schemes.
So, if you are a participant in one of these marketed tax schemes, what should you be considering at this stage?
First, if you have received an offer of settlement from HMRC in relation to your investment in a partnership tax scheme, you should consider whether to accept its terms. At first glance the terms of settlement offered do not appear particularly generous (although this will depend to an extent on your individual circumstances). But acceptance would give a degree of certainty about the potential tax liability (and any interest and penalties) and avoid the risk that, if HMRC were ultimately to succeed in challenging the scheme, significant further tax liabilities could arise, including potentially in respect of income which you have not in fact received. It would also avoid potential future litigation costs.
A decision in this regard may well depend upon the robustness of the particular partnership scheme. HMRC states that the settlement opportunity is not appropriate for cases where it has very strong grounds to assert that none of the tax relief claimed is due, which may imply it is less certain of its chances in the context of certain schemes included within the settlement opportunity. You will need to evaluate the strength of the partnership’s case for defending its position. HMRC has stated that there is no deadline for acceptance of the settlement opportunity, but as litigation nears it may feel that settlement is no longer appropriate.
If you are a partner in a scheme which has already been successfully litigated by HMRC, you may want to consider separately reaching a settlement with HMRC (subject of course to the possibility of further appeals).
Secondly, you may also want to consider exiting the partnership concerned, if this is possible and if you have not done so already.
Thirdly, you may feel that the true risks inherent in the scheme were not adequately communicated to you at the time of investment. Such risks generally include not only loss of anticipated tax reliefs, but also interest (and penalties) in respect of income tax now due, and potentially further tax on income not received. This on top of the original fee payable to the promoter of the scheme, as well as any direct losses arising from the investments themselves; and of course potential litigation costs.
Participants in these schemes may have a number of potential claims arising out of these costs and losses. If the scheme was marketed in a manner that failed to disclose the true risks of the scheme, or deliberately concealed relevant facts then there may be contractual misrepresentation claims and/or claims in deceit. You may also have potential claims in negligence if you entered into a scheme under the advice of a professional adviser including a tax adviser or accountant. If you think you may have such a claim it is important that you act quickly – ordinarily there is a six year limitation period for civil claims and there is a risk that your claim may be time barred if any legal claim is treated as arising from the date when you entered into the scheme.
Fourthly, you may feel some concern as to whether any criminal charges could flow, particularly given recent press coverage as to the CPS’s increased role in “tax evasion” cases and the arrests in February 2012.
As matters currently stand, HMRC has indicated that there will be no offer of settlement in circumstances where cases have already been ‘adopted’ for criminal investigation. If you think that this is or may be the case, expert legal assistance should be sought at the earliest opportunity. At the same time, if, during the course of an enquiry process by HMRC, there are cases that are identified as falling within its criminal investigation policy or civil investigation of fraud procedures, these will not be dealt with under the settlement handling strategy. Again, if you believe that this is, or may be the case, expert legal assistance should be sought at the earliest opportunity.
Finally, you may be concerned about reputational issues arising from your involvement in such schemes. Although your courses of action in this respect may be limited, taking legal advice at an early stage in relation to publicity and confidentiality issues may assist.
One final note of caution arises where litigation is contemplated. Following a landmark ruling by the Supreme Court in January 2013, legal professional privilege will only apply to communications passing between the potential litigant and his lawyers. It will not apply to communications passing between that person and his accountants or other professional advisers, notwithstanding the fact that that advice is or may in fact be tax law advice.
For further information in relation to any of the matters discussed above, please contact Emma Bailey (Tax), Peter Wright (Regulatory/Litigation), James Carlton (Criminal Investigations) or Doug Preece (Partnership).