More than 150 wealthy investors in controversial film investment schemes, which HMRC says amount to tax avoidance, have lost a human rights challenge to new powers tax inspectors have been deploying to demand upfront payments.
George Osborne last year granted HMRC powers to demand disputed tax, even if agreement over sums owing had not been reached. At the time he said removing from aggressive tax planners the financial benefits of drawn-out disputes would “fundamentally reduce the incentive to engage in tax avoidance”.
The chancellor’s move prompted a judicial review brought on behalf of 154 members and former members of film and video games investment schemes promoted by Ingenious Media, a company controlled by businessman Patrick McKenna.
Ingenious Media schemes helped fund films such as Life of Pi, Girl with a Pearl Earring and Avatar, and attracted investment from bankers, footballers, pop stars and other wealthy individuals. Such schemes are carefully structured, however, so they can be incorporated into tax planning strategies, with resulting losses offset against income tax.
Lawyers for investors challenging HMRC’s new powers told the high court that taking funds before tax disputes had been resolved was unreasonable, an abuse of natural justice and in breach of human rights — specifically the right to a fair trial and to the protection of property. The judge, Mrs Justice Simler, did not agree.
David Richardson, HMRC’s director of counter avoidance, said: “This is an important result, and good news for the vast majority of taxpayers who do not try to avoid paying their fair share of tax. Those who use tax avoidance schemes need to know they can no longer hold on to the money while their affairs are investigated. They have to pay their tax upfront like everybody else.”
HMRC expects to have issued 64,000 tax notices to those using controversial tax schemes by the end of next year, which it anticipates will bring forward about £5.5bn in tax it believes is owed by 2020.
Jason Collins, head of tax at Pinsent Masons, the law firm that brought the judicial review on behalf of investors, said: “We are disappointed by the judgment, which in our view does not adequately address a number of serious issues raised by this new legislation.
“For many of the claimants, HMRC checked and repaid the tax in question over 10 years ago when it could have instead held on to the money pending any further investigations – yet it is now trying to use new legislation to claw money back.”
Collins said he would now discuss options with the claimants.
In 2012, an unnamed senior HMRC figure told a newspaper that some of the film investments promoted by Ingenious Media were “schemes for scumbags”. This prompted McKenna to bring a legal case, forcing the tax authority to admit the remark had in fact been made by then head of HMRC, Dave Hartnett.