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August 2019 Tax Investigation Round Up

August's round up of the latest tax investigation news and cases:

  • Ingenious film scheme ruled tax avoidance at appeal
  • Errors on self-assessment statements deemed a fiasco
  • Call centre boss and accountant jailed in £2.3m tax fraud
  • Number of inheritance tax investigations increases

Ingenious film scheme ruled tax avoidance at appeal

A dispute between HMRC and a series of game and investment schemes overseen by the Ingenious group of companies has finally received a verdict. Between 2000 and 2013, the group was involved with tax liabilities related to promotions for Hollywood movies that included Life of Pi, Avatar and Die Hard 4, with members of Ingenious encouraging high-profile individuals such as actors and professional sportspeople to invest in the LLPs.

During this time there were 35 loss claims that were raised, with the total amount of tax losses exceeding £1.6billion. However, the LLPs asserted that some of this tax was able to be recovered by HMRC. Regardless of this, HMRC won the most recent phase in this lengthy tax tribunal that has been in progress for the last three years. The result is £450million of unpaid tax having the potential to be recovered by HMRC, with investors who failed to pay the tax when prompted in the past possibly facing additional interest charges and penalty fees.

An HMRC spokesperson said: ‘We are pleased with the very positive outcome in HMRC’s favour in this case. This win defeats eight avoidance schemes which used film or games investments to create losses.

‘Users of the scheme were given the opportunity to settle their tax affairs a number of years ago and many did. Those who chose to take the case to court are now worse off than those who settled with us.

‘HMRC has won around 90% of tax avoidance cases taken to litigation in the past three years, with many more settling before it reaches that stage.’

Meanwhile, it is anticipated that Ingenious will appeal the decision, having stated its disappointment with the result and asserting that the break-even threshold for the movies involved conformed to the industry average; therefore, in their opinion, the commercial and contractual errors made by the First Tier Tribunal need to be addressed by a higher court.

Regardless, the tribunal decided that HMRC was owed the outstanding tax payments, as the expenditure incurred by the LLPs counted as capital as opposed to income in nature.

Errors on self-assessment statements deemed a fiasco

The final payment date for taxpayers who had made errors on their self-assessment forms arrived on Wednesday 31st July, yet as a result of a glitch within the HMRC IT system, they had not been informed that there was a problem. This resulted in individual taxpayers being completely unaware that they owed additional tax up to a limit of £1,000. This in turn could potentially lead to interest charges and the sudden appearance of unexpected due payments on their accounts.

However, the issue was discovered much earlier than July, as it first came to light back in January of this year. It surfaced when HMRC realised that its systems were not processing all payments on account for 2018/19, missing out taxpayers’ first payment demands due in that month. Any taxpayers who noticed the lack of payment demand and contacted HMRC about it will have received a corrected update, but those who were unaware that there was a problem will have not received a demand for the second payment that was due by the end of July 2019.

This mistake on HMRC’s part has been referred to as a fiasco, as large numbers of taxpayers will believe that they did not owe anything at the end of July, despite this not being the case. To exacerbate the matter, HMRC had known about this error for six months yet failed to rectify it.

Since then, HMRC has confirmed that no late payment fees or additional interest will be issued for those involved, but it is highly recommended that confused or uncertain taxpayers contact the department to confirm whether or not there is anything outstanding on their account. Failure to do so is likely to result in a much higher payment being required in the New Year, essentially combining the July 2019 and January 2020 payments, which could prove unmanageable for the taxpayer.

Call centre boss and accountant jailed in £2.3m tax fraud

David Buckley was the managing director of Compensation Professionals Network Ltd between 2008 and 2012. HMRC discovered that during this time he was involved in serious tax evasion in the form of stealing PAYE deductions from employees and failing to pay VAT that totalled £2.3million.

The call centre where Buckley was made a director in 2009 bought and sold leads for personal injury and PPI claims, with around 100 employees working on its premises. Rather than paying the required taxes, he purchased shares in other companies as a means of sustaining his own failing business. Buckley was assisted in this illegal activity by accountant Mahmood Sadiq Poptani, who he hired in 2011. Poptani personally moved £453,000 of illegal money overseas between April 2011 and February 2012, therefore being a key figure in the unlawful activity.

The pair were arrested in November 2015, two years after Compensation Professionals Network Ltd entered liquidation, and went on trial at Winchester Crown Court on 15 July 2019. Buckley pleaded guilty to one count of the fraudulent evasion of VAT and two counts of the fraudulent evasion of income tax, whilst Poptani admitted to one count of concealing criminal property.

Ten days later, on 25 July, in a swift act of justice, Buckley and Poptani were sentenced to four years and eleven months and two years and eight months imprisonment, respectively.

Number of inheritance tax investigations increases

HMRC opened 5,537 inheritance tax (IHT) investigations during the tax year of 2018/19, which equates to almost a quarter of the 22,000 estates that are liable for inheritance tax over the period. This represents a rise of 7.8% compared to the previous tax year, which is being attributed to the introduction of the residence nil rate band (RNRB) in April 2017, further complicating an already confusing system. The RNRB allocates married couples and civil partners an additional £150,000 each of tax-free property-based inheritance, which will increase to £175,000 from 6 April 2020.

Although the 2018/19 IHT figures have not yet been released, in 2017/18 receipts totalled £5.2bn, which was 8% higher than in 2016/17, and this year’s IHT open to investigation is estimated to be in the region of £1.3billion. This is due to both compliance issues and tax avoidance, which together are causing a sharp rise in investigative action being required.

The fact that the IHT system is hard to navigate is no secret, as the Office of Tax Simplification stated that a major overhaul is necessary so that its structure can be better understood by all.

An HMRC spokesperson said: ‘The majority of people pay the correct IHT. Investigations are opened into the small proportion of cases where compliance issues have been detected to ensure that everyone pays their fair share of tax.’

However, with one in four estates facing investigations over IHT, it is clear that clarification of this over-complicated system is required.

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