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Time for Round 2? The future of tax scheme claims

22 February 2024
Whilst the original surge of claims arising out of tax schemes are drawing to a close, Lucy Tolond highlights a new wave of claims relating to tax avoidance or 'tax efficient structures' which may be on the horizon.

Claims against professional advisers arising from participation in tax schemes were prevalent in the early to mid-2010s, with a number of high-profile claims, such as those brought by the members of the 'Eclipse' and 'MCashback' schemes.

Tax schemes typically involve an underlying investment such as shares in a company, or membership in an LLP, often in the film or media sector or in the field of medical research and innovation.  The investments were often artificial, and were promoted to potential investors on the basis that the investor would be entitled to tax relief for the trading losses the company or LLP was anticipated to make that could be set off against their personal income or capital gains to reduce their tax liability.  Many historic schemes also included gearing loans, meaning that the tax losses claimed by investors could be many multiples of the sum actually invested. 

The implementation of the Disclosure of Tax Avoidance Schemes (DOTAS) rules in 2004 led to a sea-change in the mid-2010s in the approach taken by HMRC to challenging tax schemes.  HMRC took an aggressive line, opening multiple enquiries, issuing Closure Notices and serving Accelerated Payment Notices (APNs) on scheme investors.  Many investors lost their underlying investment and were required to repay to HMRC most of the tax benefits that the avoidance schemes were intended to realise, plus interest and costs.  Investors subsequently sought to recover losses from the professional advisers involved in the schemes. 

Those claims were typically formulated on the basis that the scheme had been incorrectly designed, that the tax structure contended for could never have been effective, and/or that the risks of failure had not been properly explained to claimants.  Claims arising from participation in tax scheme claims often attracted media attention, as many members of such schemes were high-profile individuals.  Such claims were invariably very complex, with complex issues of liability, causation, loss and limitation (as Closure Notices and APNs were often issued many years after the initial investment in the scheme).

2023 saw the latest round in the long-running litigation arising from the original wave of failed tax schemes, with the Court of Appeal handing down judgment in McClean & Ors v Thornhill.  In that case, the Court of Appeal rejected an appeal made by a number of investors in a film finance scheme against Mr Andrew Thornhill KC, a tax barrister and (at the time) head of Pump Court Tax Chambers who had been appointed to advise the promoter of three tax avoidance schemes.  The original investments were made in 2003/2004.  The Claimants argued that by providing an opinion on the likely tax consequences of the scheme to the promoters, Mr Thornhill had assumed a duty of care to the investors in tort.  The Court of Appeal rejected the appeal:  it was not reasonable for the claimants to have relied on Mr Thornhill's advice as if it had been given to them, and nor was it foreseeable that they would do so. 

The Court of Appeal held that the claimants and the scheme promoters were "commercial counterparties" and it was therefore inappropriate for the scheme members to have relied on Mr Thornhill's advice.  The investors were wealthy individuals, who could have consulted their own tax advisers, and who had been required to warrant that they had done so. 

Whilst the original surge of claims arising out of tax schemes are drawing to a close, there are indications that a new wave of claims relating to tax avoidance or 'tax efficient structures' may be on the horizon. Tax schemes continue to be the subject of scrutiny by HMRC, and there has been significant media attention recently around various tax avoidance schemes that have been promoted to buy-to-let landlords, which promoters claim will avoid income tax, stamp duty and inheritance tax.  It is thought that landlords who have signed up to the scheme have avoided c.£50m in tax to date.  The potential consequences for landords may include significant unintended tax liabilities (including interest and penalties). 

There have also been suggestions that these sort of arrangements might cause landlords inadvertently to default on their mortgages. HMRC has recently issued new guidance over tax avoidance schemes aimed at landlords, stating that it does not consider these schemes to be effective, and that landlords who use the arrangements could trigger additional tax charges, plus interest and penalties.  HMRC has also announced that they have started investigating incorporation relief claims from 2017 onwards, and has asked taxpayers to make voluntary disclosures so that historic claims can be checked.

A number of high-profile claimant firms have issued statements suggesting that buy-to-let investors contact them to explore the possibility of bringing claims and/or class actions against the scheme promoters.  It is not known how many similar schemes are operating in the market, but it seems likely that claims will materialise against the promoter of these or similar schemes. 

HMRC also continues to investigate the misuse of Research and Development (R&D) tax credits.  Introduced in 2000, R&D Tax Credits are intended to drive high-tech innovation, and offer businesses financial incentives to work on innovative science and technology projects. There has been widespread abuse of the scheme, with recent estimates suggesting that as much as £1.13 billion has been lost to erroneous R&D claims. 

HMRC's failure to prevent the abuse of the scheme has been condemned in the House of Lords as a "major financial scandal". As HMRC starts to commence action against companies which have claimed incorrectly, claims may materialise against accountants and tax advisers, who have been criticised for pushing the boundaries of the scheme, presenting the credits to clients as "free cash from HMRC" or asserting that "HMRC never checks" the veracity of the claims. The Charted Institute of Taxation and the Institute of Chartered Accountants Scotland have also raised concerns about the involvement of their members in claims made under the scheme. 

*A previous version of this article was published in Nexus Claims Update: Q4 2023

For more information please contact Lucy Tolond. 

Further Reading