The Judiciary Don’t Like Tax Avoiders

Tax avoidance is a relatively major talking point in today’s media. In Scotland there was the Glasgow Rangers debate, but more importantly we have had massive amounts of tax avoided by groups such as Amazon, Google, Starbucks, Vodafone and Goldman Sachs. Various news agencies sought to investigate tax avoidance schemes and in doing so the Times invited David Hartnett for a meeting. David Hartnett, in unfamiliar, was the Permanent Secretary for Tax at HMRC; I say Permanent, but clearly that wasn’t a title to be taken literally. As he is no longer in that position.

Now, Mr Hartnett has been in the press quite regularly, after all he was the man responsible for the tax settlement with Goldman Sachs. A settlement described as, “not a glorious episode in the history of the revenue”.

Anyway, in more pressing matters it was decided that when Mr Hartnett  met with the staff of the Times it would be in an off the record fashion that, as far as Mr Hartnett was concerned, would mean that anything he said at the meeting wouldn’t be published. More fool him, as during the interview it was suggested to Mr Hartnett that he had been responsible for some lenient settlements. Mr Hartnett, not unsurprisingly, denied such allegations and as means to prove such he decided to refer to a company called ‘Ingenious Media holdings Plc’, and their CEO Patrick McKenna whom he personally touted as a big risk for HMRC as part of the film schemes being used for tax avoidance.

Now, news as news is, decided to publish quotes from Mr Hartnett. The articles themselves are no strangers to the Court after being considered for libel through defamation against others.

Before we go any further let’s have a look at what these Film Schemes are through a piece I have copied here for quickness:

Film Investments

Over the past few years HMRC has challenged and shut down various film tax schemes which it says have abused rules on tax relief for film partnerships or for fraudulently claimed film tax credits and VAT.

One high-profile film scheme, contested by HMRC, reportedly involved investors including Sir Alex Ferguson, Sven-Göran Eriksson and a host of sports stars and City figures.

The 289 investors in Eclipse 35, a film partnership ruled to be an “aggressive” tax avoidance scheme by a tax tribunal in April, could end up paying several times more than the total of £117m tax they sought to avoid as the Revenue examines the large bank loans they took on to participate in the scheme, theFinancial Times reported in 2012.

In March, five men behind a £2.8m film tax scam were jailed for more than 22 years after an HMRC investigation found they fraudulently claimed film tax credits and VAT.

The gang claimed that their film, ‘A Landscape of Lives’, starred Hollywood A-list actors, but it was never intended for the big screen and was a sham production,HMRC said.

One tax expert says that film investment schemes can be expensive and risky.

Dave Horsley, a director at tax advisory firm Six Forward, which has advised clients on film tax matters, said: “At the aggressive end of the [film investment] market, some tax advisers are overlooking simpler, more appropriate, and effective reliefs such as capital allowances, research and development, and enterprise investment schemes as they [have the advantage of not attracting] the high adviser and QC fees of a [film investment] scheme.’’

The taxman strikes back

Tax avoidance schemes are usually promoted by small “boutique” tax firms which find a film and sell them to investors. Typically, most of the money investors pay comes from a “non recourse” loan to which doesn’t have to be repaid, or if it does have to be repaid only from income generated from the film scheme.

The promoter of the scheme will take a minority of the money from investors. Most of the rest of the money is put on deposit in a bank to guarantee future interest and therefore returns for investors. The remainder is invested into the film.

Investors claim income tax relief on their money which in effect goes round in circles. For every £20 higher-rate taxpayers invest they can get £40 from the taxman. “It all works as a cash refund,” says Bill Dodwell, head of tax policy at Deloitte. “The investors don’t part with any money. They make a profit out of the middle of nowhere if the [film scheme] works.”

In the past few years, most film schemes have failed, tax experts say. HMRC has shot them down by going to court. Its main argument has been most of the money from investors has never been invested in a film. Instead it goes on a deposit in a bank to give investors a guaranteed return.

Many of the film investment schemes that have been challenged by HMRC would now be impossible, experts say, because they were designed before a tightening of film-relief rules. Tax relief for individual investors in films was withdrawn in 2008 and so-called “sideways” tax relief (allowing losses on investments to be offset against income), has been limited to £25,000 for most situations.

Film finance

Avoidance schemes are one of the many examples of unintended consequences of changes to the tax system. In 2005 the Labour Government announced tax breaks for low- and large-budget British films.

Under the legislation, introduced in 2006, tax relief would fund 20% of production costs for British films with budgets up to £20m.

The government said that previous legislation on film tax relief was vulnerable to abuse. Under one loophole, called “double dipping”, producers could claim relief on both production costs and the sale and leaseback of the final film print.

To qualify for the new relief, a film had to meet three conditions: be made to be shown commercially in cinemas; pass a “cultural test” administered by the Department for Culture Media and Sport; and incur at least 25% of its total production expenditure on film-making activities in the UK.

The tax breaks for British films have been extended to 2015.

The scheme is widely viewed as a success, helping fund films in Britain includingHarry Potter and the Deathly Hallows and Brighton Rock. Earlier in May, it was announced that filming of the next Star Wars movie will return to the UK – a decision partly attributed to tax breaks for film makers.

The scheme for film tax relief isn’t the only help for film makers, however.

Accountant Farook Owadally used the enterprise incentive scheme (EIS) to help raise funds for film about Liverpool Football Club’s thrilling European Cup final victory in 2005 over AC Milan in Istanbul.

The financing for the film, One Night in Istanbul, involved Big Ears Entertainment, of which Owadally is one of the directors, in association with Stray Dog Films and nearly 30 other investors, including Liverpool FC players. The use of the enterprise incentive scheme (EIS) made it possible to bring in a wider number of investors, Owadally said he chose EIS because it enabled the investor to claim EIS tax relief of 30% on their investment.

Will there be a sequel to film avoidance schemes? Tax breaks for investment in deprived areas could be a contender, although HMRC is consulting on tightening rules for the business premises renovation allowance (BPRA) amid reports that some wealthy investors are exploiting it.

HMRC is also reviewing tax rules for limited liability partnerships, which means that accountants could have their self-employment status challenged.

These and other tax schemes may be caught by the new general anti-abuse rule (GAAR) enacted to counter tax avoidance. The legislation, which comes into effect in July, would differentiate between what counts as responsible tax planning and what is abusive tax avoidance.

This new law should save HMRC time and money because it won’t need to legislate against each individual tax avoidance scheme deemed to be aggressive.



The leaks have led to this court case: R (on the application of Ingenious Media Holdings plc and Patrick McKenna v Her Majesty’s Revenue and Customs [2013] EWHC 3258 (Admin)

The main outlay of the case circulates on Human Rights Law, and in particular Article 8, the right to a private life. Mr McKenna is effectively arguing that Mr Hartnett should not have been disclosing this information.

Article 8 is a Qualified right, that is to say that it is not absolute and can be deviated from in various circumstances. Indeed this is recognised by the UK and summed up in this short example:

Qualified rights – rights which require a balance between the rights of the individual and the needs of the wider community or state interest. These include: the right to respect for private and family life (Article 8); the right to manifest one’s religion or beliefs (Article 9); freedom of expression (Article 10); freedom of assembly and association (Article 11); the right to peaceful enjoyment of property (Protocol 1, Article 1); and, to some extent, the right to education (Protocol 1, Article 2).

Interference with qualified rights is permissible only if:

• There is a clear legal basis for the interference with the

Qualified right that people can find out about and

Understand, and

• The action/interference seeks to achieve a legitimate aim.

Legitimate aims are set out in each article containing a

Qualified right and they vary from article to article. They

Include, for example, the interests of national security, the

Prevention of disorder or crime, and public safety. Any

Interference with one of the rights contained in Articles

8–11 must fall under one of the permitted aims set out in

The relevant article, and

• The action is necessary in a democratic society. This

Means that the action or interference must be in response

To ‘a pressing social need’, and must be no greater than

That necessary to address the social need.


Now, in my personal opinion I cannot understand why Mr Hartnett would be commenting on the affairs of individual tax payers. That, to me, would seem to deviate from the standard HMRC party line so to speak and I cannot quite understand why the judge in the case decided that this was actually okay.

The judge himself concluded that there was a rational connection between HMRC’s job to collect tax and the disclosures that Mr Hartnett made to the Times. He accepted that there had been interference under Article 8(1) that private life includes the right of confidentiality. However the judge then goes on to justify the interference under Article 8(2) by stating that it was ‘proportionate’ and he did not consider that there had been any interference with Article 8(1) in the sense of any damage to reputation, but if there was interference in that sense that it too was justified and proportionate.

The judge also decided that there was no breach of Article 1 protocol 1 that the disclosures made were effectively detrimental to a legal business service. Again, any infringement here was seen as Justified with no abuse of power because Mr McKenna was no deliberately targeted!

To me, this seems all very strange. Fair enough, the comments were made ‘off the record’ but wouldn’t HMRC are Mr Hartnett have made sure of that rather than risk the possibility of it being published? Also, the disclosure itself is the major breach here not the context. Is there any merit in leaking such information to journalists when your function is to collect tax?

At the end of the day, yes tax should have a level of transparency but this, for me….rightly or wrongly, is a massive breach of trust. Is this perhaps a political move away from support of ECHR? Politicians, particularly in the executive, appear to have a distain towards convention rights.


Overall feeling://

Quite simply, this apparent breach of Human Rights leads to one major insight into the mind of the Judiciary. In recent years tax avoidance stories have been popular in the news, and omnipresent in the courts. I am not sure if there is political influence in this or not, however I would suggest that the outcome of this case points towards a slight intolerance toward tax avoiders be they proven or accused and that is a pattern that will be interesting to watch develop over the coming period of time and could open some legal discussion of its own.




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