If you have not yet submitted your tax return and calculated the tax you need to pay by 31 January, you need to move quickly to avoid an automatic £100 penalty for missing the deadline.
And if you’ve paid up already but are scolding yourself for not taking advantage of government-approved tax relief opportunities and you have a larger bill than you would like, at least it probably isn’t of the same magnitude as those received by 100 or so footballers, as reported in The Guardian.
Some of them face £1m plus bills for being involved in highly risky film investment schemes, in what is rather like scoring an own goal in a World Cup final. Widely used in the past but strongly attacked by HMRC in recent years, these schemes should not be confused with less aggressive film investments that may attract EIS relief.
In this piece, we explain the distinction and also why EIS is a tax planning opportunity worth considering as we approach the pre tax year-end planning season.
Last week’s Guardian published a detailed account of the plight facing many footballers who, whilst earning millions each year during the height of their careers, invested large sums into “tax efficient film investment schemes”. These were highly complex in structure and set up to immediately produce a trading loss on which an investor could claim tax relief and, in so doing, significantly defer personal tax liabilities.
HMRC has been challenging the use of these schemes for some time arguing they are not examples of approved investments, do not involve genuine trading entities and have abused the legitimate tax relief opportunities provided by the government to boost the UK’s film industry. As a result, according to Xpro, a welfare organisation for retired football players, when the tax liabilities are finally calculated, they are likely to bankrupt a number of recipients; it has said the footballers it is supporting face £300m in collective repayment demands from HMRC.
To add to the problem, following new legislation given Royal Assent in the 2014 Finance Bill, HMRC now has the power to collect unpaid taxes automatically in advance of a court hearing, after issuing the relevant individuals with an Accelerated Payment Notifications (APNs). According to the FT, HMRC is looking to reclaim £7.1bn of unpaid tax from 33,000 individuals using APNs and records suggest there are 10,000 businesses that participated in arrangements, which it considers to be avoidance vehicles.
Read more about tax relief:
- Top 10 small business tax reliefs
- How can you tell if you’re company will qualify for R&D tax relief?
- Tax relief schemes: Are you taking full advantage of what’s on offer
Many individuals who invested in film investments and other tax planning schemes have either received an APN already or have been advised to expect one in the coming weeks. APNs cannot be appealed, and any taxpayer that receives one must pay the monies outstanding in full within 90 days.
Whilst we are in an environment where becoming involved with complex investment schemes to reduce tax liabilities is certainly not a recommended tax planning strategy, there remain a number of HMRC approved tax planning strategies available, such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) which are seeing increased interest as people look for tax efficient investments that are not considered by HMRC to be aggressive.
The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies and own them for at least 3 years. Provided the companies meet the qualifying trading criteria throughout the 3 year period of ownership, 30 per cent tax relief is available on the cost of the shares to a maximum value of £m and there is no capital gains tax payable on future gains. The cost of the shares is offset against the investor’s personal tax liability and up to £300,000 tax relief can be claimed provided they have a sufficient income tax liability.
One of the qualifying criteria for awarding EIS status to a company is that they must be a genuine trading company and must not exist for the purpose of tax avoidance. “There must be no arrangements (either at the time of issue of the shares or later) to structure a company’s activities with the main purpose of allowing a party other than the company to benefit from the tax advantaged finance which the scheme is intended to incentivise, or where those activities have no commercial purpose other than to generate tax relief,” according to HMRC’s website.
Returning to the example of films, if a company is established with the objective of making a film and is given EIS clearance by HMRC, investing in the company and benefiting from generous tax reliefs available under the EIS is not considered to be tax avoidance. Our advice when considering EIS investments for tax planning purposes is to seek professional advice beforehand and to be comfortable that the company will continue to meet the qualifying criteria for the required three year period.
Lesley Stalker is a tax partner at RJP.