Tax planning advisors prepare for claims from disgruntled clients

Monday, 22 April 2013
Disappointed participants in failed tax-efficient investment schemes are choosing to pursue their advisors for compensation, rather than challenging rulings by an increasingly aggressive HMRC.

There are reports that a sudden spate of professional negligence claims have been filed against tax scheme promoters and advisors after HMRC has issued a decision that the scheme is for some reason invalid.

Most of the claims relate to schemes marketed between 2005 to 2007, often related to film production tax relief and partnership loss. HMRC is contacting clients who used some of these schemes and inviting them to settle the disputed taxes and interest with limited penalties and without litigation. The clients ‒ encouraged by firms that specialise in mis-selling litigation ‒ then try to recover their losses from the advisor who recommended the scheme.

Some of the claims are likely to be time-barred, or will be disallowed because the outcome could not reasonably have been foreseen before the global financial crash struck in 2007-08. But some of the claims are succeeding, although not necessarily because the tax planning angle did not work as promised.

In the most recent case, the Financial Ombudsman allowed a GBP2.6 million claim by five investors against their advisors, 20Twenty Independent. The clients had been advised to invest in Crossover Film Partnerships, but had not been warned of the real risk of large losses linked to the gearing of their investments.

In this particular case the investors were indeed entitled to tax relief as promised, but the investment itself failed to deliver.

In cases where HMRC denies tax relief under a scheme, unhappy clients may be under a duty to challenge the HMRC decision at tribunal before bringing a mis-selling claim against their advisors, according to Jason Collins of law firm Pinsent Masons.

‘There are very many taxpayers who have invested in schemes promising generous tax relief over the last decade who find themselves in a quagmire of aggressive litigation and investigation by HMRC,’ he said. Despite these challenges, many of these schemes were and still are backed by legal opinions from top QCs, he said. ‘Investors may decide to buckle down and let the litigation run its course.’

The clients in the 20Twenty case were represented by Rebus Investment Solutions. It says the claim is merely the tip of an iceberg, and the firm is handling claims from 600-plus clients against a hundred advisors with assets worth more than GBP40 million. It expects to reclaim up to GBP10 million of investor capital by the end of 2013. The Financial Ombudsman confirmed that claims of this type have increased lately.


The content displayed here is subject to our disclaimer. Read more