Tax Investigation - hitting the celebrity pocket  

The Chancellor is always looking for new ways of boosting the Treasury coffers - this time he had celebrities in his sights.

The Chancellor claims that there is an estimated ?97 billion in underpaid tax every year. He's turned his sights on some of the highest paid earners in the country - celebrities.

The first casualties of this drive are television's golden couple Richard Madeley and Judy Finnegan. HMRC is mounting a tax investigation because, in spite of their golden handcuffs with Channel Four, they still retain the services of an agent. It claims that they have wrongly written off the commission paid to their agent against their tax bills, and it wants to recover money (reportedly a six-figure sum) dating back to the 1990s.

How tax investigations may affect celebrities and their agents

Commission rates paid to agents vary, but the average is ten to fifteen percent of any money the performer earns, and this can be offset against the tax bill. Agents exist to find work for performers, sports personalities and writers, but they also provide a myriad of different services - negotiating financial transactions, dealing with press and publicity, and giving career support. A tax investigation will reveal whether any materials non-disclosure has benefited either the celebrity or the agent.

Legal and financial advisers to the celebrities maintain that they are acting entirely properly and that the Revenue is aggressively reinterpreting established tax laws. HMRC thinks it has uncovered a multi-million pound tax loophole, and a tax investigation into this is designed to deter other celebrities from writing off their commission against their tax bills.

Other celebrities aren't viewing the potential change as a deterrent, but rather have reacted angrily to the suggestion that they have no need for the services of an agent. Comments include: 'disgraceful', 'shocking', and 'attacking a soft target'. One high-profile author said 'I cannot exist without my agent; my entire life is run through him'. Celebrities like this could yet find themselves at the centre of a tax investigation if the legislation is passed.

At the core of the problem is the definition that expenses can only be written off if they are 'wholly, exclusively and necessary' for employment. Because actors and performers work for short contracts, their agents are deemed to fulfil the criteria because it is a large part of their job to look out for new work all the time. But what about an actor who works on a long-running serial or soap? Will we see much-loved characters such as Ken Barlow or Peggy Mitchell in the dock after a tax investigation?

Madeley and Finnigan are reported to earn more than £1m a year each from Channel 4, meaning their agents could be paid between £200,000 and £400,000 a year. Their backdated tax bill would therefore be up to £1.12m. If an agent is lucky enough to represent a high-profile client, chances are that the earnings from that person pays for their business to exist and allows them to look after other less high earning clients - the threat of tax investigations into their earnings could encourage performers and presenters to ditch their agents and they would go out of business. Of course there are some very wealthy agents - but they pay tax on their income too.

The Revenue has already achieved a victory over foreign sports stars with a test case against Andre Agassi, the tennis player. It successfully argued that he should pay tax on a significant proportion of his worldwide sponsorship earnings to reflect the time he spent in Britain. The law lords ruled in favour of the Revenue. Tax inspectors have also secured a victory against Barclays bank, which is being forced to disclose details of all its British-based offshore account holders. The Revenue believes that it will raise £1.5 billion in unpaid taxes from the 9,300 offshore Barclays customers who are believed to live in Britain.

Perhaps celebrities don't deserve our sympathy but if a legal precedent is set in this type of tax investigation, who will the Chancellor go after next?

If you have received notice from HMRC of a tax investigation or Civil Investigation of Fraud proceedings, call us for help and advice today. All enquiries are strictly confidential, so phone 0800 734 3333 or e-mail scott.gilbert@gilberttax.co.uk now

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