Settlement opportunity for participants in tax avoidance schemes

Published on Wednesday, 19 December 2012 12:17
Posted by Vicki Mitchem

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

Following this announcement, we are inviting some participants in certain schemes to settle their tax liabilities by agreement, without the need for litigation. We believe that this settlement opportunity offers both the taxpayers and HMRC the best opportunity to resolve these disputes in a way which is cost-effective and consistent with the law. Where people decline the settlement opportunity, we will increase the pace of our investigations and accelerate disputes into litigation.

We will update these pages with details of the opportunity available for specific schemes as they become available. We aim to contact all those who are eligible for the offer by the end of January 2013.

The settlement opportunity is made in accordance with HMRC's Litigation and Settlement Strategy. HMRC will advance all available arguments if disputes are litigated. As well as continued uncertainty, delay in resolution, additional costs and potential reputational damage, taxpayers who choose the litigation route may end up with a worse tax result than they would obtain under the settlement opportunity.

Outline of the settlement opportunity

The schemes included in the settlement opportunity generally seek to create tax relief much greater than the real economic cost borne by the participants. HMRC has a high success rate in litigating these types of scheme.

The settlement opportunity will be offered to participants in the following schemes:

schemes which seek to use Generally Accepted Accounting Practice (GAAP) to write off expenditure or the value of assets to create losses either for sole traders, or individuals or companies in partnershipschemes seeking to access the film relief legislation for production expenditureschemes seeking to create losses in partnerships through reliefs such as first year allowance, payments made for restrictive covenants, specific capital allowances

There are some schemes with these features which are specifically excluded from the settlement opportunity (see FAQs). More detail will be given for individual schemes which are included but, broadly speaking, we will restrict relief so that expenditure which is not part of the real economic cost borne by the participants will be excluded when calculating losses or capital allowances. 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 the claimed trade will be allowed when computing losses or capital allowances. 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 allowable.

Under this settlement opportunity the treatment of income that is received by the partnership, individual or company will depend on the particular arrangements. In general where there is a contingent right of future income from the asset purchased, it is expected that that income will be taxable in full. 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. The return of the initial finance will be treated as a capital receipt and not taxed.

We reserve the right to rely on all arguments available including those that may deny any relief completely in litigation.

The settlement opportunity is open to partnerships, individual partners, company partners and sole traders who have used certain schemes. The settlement opportunity extended to partners is restricted to the specific circumstances of the schemes covered by this settlement opportunity. It is not open to partners in any other partnerships.


Why does HMRC think the avoidance schemes do not work?

Our view is that these schemes fail to provide the relief claimed either because the majority of the funds employed in the business are not used for relevant expenditure or because the schemes do not meet the requirements for sideways loss relief so that the full relief claimed is not available to the participants. We have had recent successes in litigation including:

Commissioners for Her Majesty's Revenue and Customs v Tower MCashback LLP 1, Eclipse Film Partners No 35 LLP v Revenue & Customs, Icebreaker 1 LLP v Revenue and Customs, Samarkand Film Partnership No 3 v Revenue and Customs, and Alchemist (Devil's Gate) Film Partnership v HMRC.

Who can take up the opportunity?

This settlement opportunity will be available to individuals, companies and partnerships that have entered into certain schemes. Where the unresolved disputes mainly arise between HMRC and the relevant partnership, we hope the partners will collectively agree that the partnership should accept the offer.

We will also be prepared to offer settlements to individual partners even if the partnership as a whole continues to challenge our views. Such settlements will enable the partner to finalise their tax position, taking no further interest in the result of any subsequent litigation with the partnership.

The settlement opportunity extended to individual partners is open only to individual partners and company partners who have used specific tax avoidance schemes. It is not open to partners in any other partnerships.

What happens if individual partner/s settle but there are insufficient partners who accept the offer to bind the partnership?

We will use additional resources to accelerate the progression of the partnership enquiry with the likelihood that it will be litigated quickly. However, the individual partner will still be entitled to the terms of the settlement opportunity, providing HMRC still consider the dispute appropriate for this settlement opportunity.

Is the settlement opportunity open to everyone who has taken part in a partnership or sideways loss scheme?

No. The settlement opportunity is open only to those who have participated in specific avoidance schemes.

There is no current settlement opportunity for participants in the following schemes, but we are still considering our position.

Film partnership sale and lease back schemesInterest relief schemes that result in a claim to interest relief under S353(1) ICTA 88 which is used as a deduction against general income.

The opportunity is not available to participants in

Any partnerships where we have already commenced criminal investigations or any cases which, during the course of an enquiry, are identified as falling within our criminal investigation policy, or civil investigation of fraud proceduresCases which we consider are not appropriate for this settlement opportunity, such as cases where we have very strong grounds to assert that none of the tax relief claimed is due. We retain the right to decline to include any particular case.

How will I know if the settlement opportunity is open to me?

We will write to participants in specific partnerships, companies and individual sole trader arrangements we believe are eligible to take part in the settlement opportunity. We will update these pages as further details of the schemes covered become available. We aim to issue letters to all eligible participants by 31 January 2013.

What are the benefits to me if I accept the settlement opportunity?

We are inviting users of these schemes to settle without recourse to litigation. This will minimise costs to both customers and HMRC, and ensure that customers can have certainty about their tax liabilities. The settlement opportunity will provide the certainty of some measure of tax relief whereas litigation may result in a worse outcome.

I am involved in more than one avoidance scheme that comes within this settlement opportunity. Should I consider the terms of each avoidance scheme separately?

Yes, the terms of the settlement may vary from one to another so each avoidance scheme needs to be considered based on the arrangements used.

I have a number of HMRC enquiries into other aspects of my return that have not yet concluded. Can I just settle on the partnership scheme?

The avoidance issue can be settled by contract, leaving the other issues to be resolved separately.

What if the litigation concludes a higher amount of relief is due to partners in the scheme?

The settlement previously agreed with the individuals will remain final and will not be disturbed.

I am a partner in a partnership not included in this settlement opportunity. I would like to finalise the tax payable on my share of the partnership profits early. Can I settle on a similar basis without waiting for the other partners to agree the partnership profits with HMRC?

These avoidance schemes dictate fixed shares for the partners. There is therefore no dispute about allocation between partners. This settlement process will only be suitable where a partner's allocated share is not liable to change.

The settlement opportunity extended to individual partners is open only to individual partners and company partners who have used specific tax avoidance schemes. It is not open to partners in any other partnerships.

Should I take professional advice?

Whether to take advice is ultimately up to you, but it is likely to be in your best interests to seek independent legal or other professional advice to help you make a fully informed decision.

What happens if I do not settle?

In tandem with offering the settlement opportunity we are also directing additional resource into litigating those participants who do not take up the opportunity, to ensure those cases reach the Tribunal as quickly as possible. In such circumstances we will advance all arguments reasonably available to us at both partner and partnership level, including those that may deny relief completely.

Is the settlement opportunity open ended?

No. If the opportunity is not taken up, we will continue to progress our enquiries with a view to litigating the partnership to an accelerated timescale.

There is no deadline for acceptance, but as litigation nears it will become more likely that we will consider the dispute is no longer appropriate for this settlement opportunity.

Source: ©HMRC

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