Investors could be forced to choose between settlement and ability to pursue mis-selling claims

Out-Law News | 18 Apr 2013 | 10:50 am | 2 min. read

Investors facing the possibility of heavy tax bills after being advised to invest in tax avoidance schemes later targeted by HM Revenue and Customs (HMRC) could be forced to choose between settlement and their ability to pursue a potential mis-selling claim against their financial advisers, a tax expert has said.

Jason Collins was commenting after five investors were awarded £2.6 million by the Financial Ombudsman Service (FOS) in a claim against advisers 20Twenty Independent Ltd. The FOS, which deals with individual consumer complaints against financial institutions, said that advice given to invest in Crossover Film Partnerships by the firm was "unsuitable" and that claimants were not made aware of the "true nature" of potential losses.

According to Collins, investors could be under a duty to let litigation with the tax authorities "run its course" if they wanted to remain eligible to pursue a mis-selling claim against their financial adviser.

"There are very many taxpayers who have invested in schemes promising generous tax relief over the last decade who find themselves in a quagmire of aggressive litigation and investigation by HMRC," he said.

"HMRC has offered terms to settle existing planning. Whilst they are not overly generous, investors will need to think carefully about whether that would impact their ability to pursue a mis-selling claim against their adviser," he said.

"Many of these schemes involve substantial gearing, and the adviser received commission based on the geared amount not the cash put in directly by the customer. There was therefore a clear incentive to push these products. However, many schemes were and are still backed by legal opinions from top QCs, so many investors may decide to buckle down and let the litigation run its course. They may even be under a duty to do so if they want to protect their mis-selling claim," he said.

Wealthy investors ranging from Premiership footballers to hedge fund managers were facing large tax bills after having been advised to invest in complex investment schemes. Potentially mis-sold investments include film partnership schemes, property, carbon trading and fine wine.

In the Crossover Film Partnerships case, the investments did qualify for tax relief. However, the FOS said that the investors were not made fully aware that they risked losses worth more than their initial investment because the scheme involved loans. Some types of investment have the power to borrow money to make further investments; a process known as 'gearing' or 'leverage'. If the cost of borrowing is more than the growth achieved, investors will experience a net loss.

Financial regulators have proposed banning the promotion of what are known as unregulated collective investment schemes (UCIS) to the vast majority of retail investors due to the number of unsuitable sales. Under its proposals, advice on these schemes would generally only be made available to "sophisticated" investors, which would include high net worth individuals who earn more than £100,000 or have more than £250,000 to invest.

HMRC announced that it would allow participants who had invested in certain tax avoidance schemes to settle their tax liabilities, without the need for litigation, last year. Schemes covered by the settlement opportunity include those looking to take advantage of film relief legislation for production expenditure and certain 'partnership loss' schemes. The tax treatment of income received under the scheme will depend on the particular arrangements. However, HMRC has said that it generally expects to tax income in full where there is a contingent right of future income from the asset purchased under the scheme.

Tax expert Jason Collins said that HMRC had also recently announced a consultation on imposing penalties based on the "conduct of the investors" during litigation relating to a tax avoidance scheme. This could mean further financial penalties for those investors who decided against taking advantage of the settlement opportunity in order to protect their right to raise a claim for potential mis-selling against their financial advisers, he said.

"In essence, if HMRC wins any stage of a test case, affected taxpayers must decide whether to fold, even if there is an onward appeal," he said. "If HMRC then ultimately prevails in the appeal, the investors will be liable for a penalty. Any HMRC 'win' during the litigation therefore ups the financial ante."

"HMRC believes this measure is proportionate because it has had favourable judgements in over 85% of cases since 2010, so taxpayers have been warned about their prospects," he said.