A taxpayer who used a mass-marketed tax avoidance scheme has lost his case at the Court of Appeal (CoA) regarding minimum annual payments (MAPs) that had been paid directly to a lender after earlier losses at both lower tax tribunals.
The tax avoidance scheme centred around the film industry and involved the taxpayer acquiring rights to receive proceeds from the exploitation of film rights. The scheme worked by creating losses, as most films are commercially unsuccessful, and interest charges that could be offset against other income. In this case, the taxpayer had invested £300k and using a loan provided by the scheme providers increased the investment to £2m. The point of the loan, the capital of which was lent on a non-recourse basis, was to exaggerate the losses and interest deductions which would be far greater than the cash amount invested so the taxpayer would be in a better overall economic position even if the film failed which was highly likely.
At the lower tribunals it was held that the scheme was not a trade and therefore the losses were not available for offsetting against income and the interest could not be deducted from income. This removed any tax benefit the scheme could have provided. The scheme did provide for MAPs be paid, irrespective of the film’s success so that interest on the loan could be paid. The interest under the loan carried full recourse to the tax avoidance scheme participant. The MAPs were paid directly to the scheme lender.
The taxpayer held that he had assigned the rights to the income therefore was not ‘entitled’ to the income. The relevant legislation states that the person taxable ‘is the person receiving or entitled to the income’. The CoA referred to a recent case regarding an accountant that had helped business associates only to incur a massive tax liability himself (see our analysis here) who had also been found to be entitled to the income. The CoA found this case was applicable though the taxpayer had sought to argue that the case highlighted that where income is assigned it isn’t the taxpayers.
The judge giving the reasoned judgment found that the taxpayer was indeed entitled to the MAPs and the fact that he had assigned some of his rights didn’t negate this entitlement. Another judge, in agreeing with the first judge, also commented that under the Law of Property Act 1925 the assignment would not have been effective for statutory purposes as it was conditional, further the supporting the conclusion that the taxpayer was entitled to the income even though it was paid directly to a lender.
The decision can be found at: Thomas William Good v The Commissioners of HM Revenue And Customs – Find case law (nationalarchives.gov.uk)
This has turned out to be an extremely expensive exercise for the taxpayer. The investment of £300k has failed, with no corresponding income tax deduction and no ability to use interest charges to shelter other taxable income. Further, the avoidance scheme means he now pays more tax than if he hadn’t used the scheme as the MAPs are taxable on him. At the end of the judgement the judge stated: ‘Financially, the taxpayer’s investment in the Scheme has been disastrous’. Further to these costs are the costs incurred in litigating the case over the years.
Please contact us if you have any questions regarding income tax or tax avoidance schemes. Many mass-marketed scheme have been shown to be not effective.
