Is it worth participating in a tax avoidance scheme? If you thought so before then you may change your opinion after seeing certain developments over the next few months.
Like all accountants we are frequently asked how tax can be avoided. Like most accountants we will review a client’s affairs to ensure that they are organising their affairs in the most tax efficient way.
Like all accountants we are frequently asked by clients whether they ought to buy a new asset, or incur an expense to save tax. Like most accountants (we hope) we will ask that client whether they need that asset, or whether the expense will provide a benefit to the business. After all, you need to spend £100 to save a maximum of £50 in tax, meaning that incurring an unnecessary expense simply to save tax will leave you at least £50 worse off.
Some people, however, believe that the laws of mathematics do not apply to them. Many “invested” in film schemes which worked by multiplying up the initial investment using “loans”. Loans, of course, incur interest and this interest for 10 years or more were chargeable up front. The initial investment and the loans were used to buy films from the film studios who then rented them back. These rents were then used to repay both the loans and the interest. Meanwhile, the “promotors” received substantial fees for organising this circuitous procedure which enabled the original investor to claim tax relief substantially greater than their investment.
Sounds too good to be true? You might have thought so, but others disagreed and thought it worth pursuing. And guess what? The Courts have agreed with you, and the tax office is currently thought to be preparing tax demands on the investors of up to 20 times the original investment. Investors who originally invested £200,000 are expected to receive tax demands of between £2m and £4m by the end of this year or very early in 2017.
People involved include football celebrities as well as some MPs – yes, Members of Parliament, the very people who make and, you would expect, uphold the law both in letter and spirit. It is thought that nearly 800 people are involved and that these demands could result in up to 75% of these people being declared bankrupt.
The newspapers may make very interesting reading next year!
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