Tax Avoidance
The Sunday Times continues its campaign against tax avoidance in high places with this cautionary tale about Underdog - a complicated scheme involving a 'circular flow of funds' which has been successfully challenged by the taxman as it looked as though it was specifically devised for tax purposes.
Now I don't really understand the motivation of people who are already very well off trying to reduce even further their fair share of tax - and that seems to be what this is all about.
In which case the issue is not so much the headline rate of tax - 40, 45 or even 50p - but the lengths that some people will go to in an effort to avoid their tax bills to an artificially low level.
Sir Alex faces £1m loss as tax ruse fails
Ferguson and other investors have seen a ploy involving Disney films turn into a B-movie disaster
By Nicholas Hellen
The movie Underdog was used in a complex film-rights scheme (Rex Features)
SIR ALEX FERGUSON, the retired Manchester United manager, and Sven-Goran Eriksson, the former England football manager, are among nearly 300 wealthy individuals who face average losses of more than £1m each over a tax avoidance scheme that has backfired.
Under the scheme, the investors joined a partnership that bought the rights to two Hollywood movies — the Disney films Enchanted and Underdog — and enabled them to claim tax relief on the borrowing costs of the deal.
But HM Revenue & Customs (HMRC) has successfully challenged the tax avoidance vehicle, known as Eclipse 35, and an attempt to restructure it has so far failed. The result is that investors may face tax bills that could be more than seven times greater than their initial investment.
The £1bn vehicle is one of 40 such schemes that attracted celebrities, financiers and businessmen. Investors hoped that, after HMRC successfully challenged Eclipse 35, Barclays would agree to restructure the deal to reduce the personal liabilities of investors.
SIR ALEX FERGUSON, the retired Manchester United manager, and Sven-Goran Eriksson, the former England football manager, are among nearly 300 wealthy individuals who face average losses of more than £1m each over a tax avoidance scheme that has backfired.
Under the scheme, the investors joined a partnership that bought the rights to two Hollywood movies — the Disney films Enchanted and Underdog — and enabled them to claim tax relief on the borrowing costs of the deal.
But HM Revenue & Customs (HMRC) has successfully challenged the tax avoidance vehicle, known as Eclipse 35, and an attempt to restructure it has so far failed. The result is that investors may face tax bills that could be more than seven times greater than their initial investment.
The £1bn vehicle is one of 40 such schemes that attracted celebrities, financiers and businessmen. Investors hoped that, after HMRC successfully challenged Eclipse 35, Barclays would agree to restructure the deal to reduce the personal liabilities of investors.
Sir Alex Ferguson faces potential liabilities many times his initial investment (Rex Features)The Sunday Times has established the bank has so far refused to do so, so 289 investors — including Ferguson and Eriksson — are now facing potential liabilities many times the size of their initial investments.
Hundreds of wealthy investors in similar schemes are now likely to be pursued by the HMRC.
Eclipse 35 was promoted by Future Capital Partners, an investment firm in Mayfair, central London, and first used in 2006. It was a contorted but potentially lucrative money trail.
The partnership bought worldwide distribution rights to the two films from Disney for £503m. It then relicensed those rights back to Disney for £1.02bn, payable over 20 years. The deal was funded with £50m from investors and £790m in loans from Barclays. Eclipse made a payment to Barclays on the loan of £293m, for which it claims tax relief of £117m.
It looked complicated, but in essence it was a circular flow of funds that created an upfront interest payment on which the investors could claim tax relief. To the taxman, it looked as if it was primarily devised for tax purposes.
Tim Levy, the founder of Future Capital Partners, told a tax tribunal scrutinising Eclipse 35 in 2011: “Tax was important, there is no question about that, but I genuinely believe that these investors were motivated significantly by the nature of the films that were being offered.”
Hundreds of wealthy investors in similar schemes are now likely to be pursued by the HMRC.
Eclipse 35 was promoted by Future Capital Partners, an investment firm in Mayfair, central London, and first used in 2006. It was a contorted but potentially lucrative money trail.
The partnership bought worldwide distribution rights to the two films from Disney for £503m. It then relicensed those rights back to Disney for £1.02bn, payable over 20 years. The deal was funded with £50m from investors and £790m in loans from Barclays. Eclipse made a payment to Barclays on the loan of £293m, for which it claims tax relief of £117m.
It looked complicated, but in essence it was a circular flow of funds that created an upfront interest payment on which the investors could claim tax relief. To the taxman, it looked as if it was primarily devised for tax purposes.
Tim Levy, the founder of Future Capital Partners, told a tax tribunal scrutinising Eclipse 35 in 2011: “Tax was important, there is no question about that, but I genuinely believe that these investors were motivated significantly by the nature of the films that were being offered.”
The Disney film Enchanted was a hit with critics and audiences (Kobal Collection)In April 2012, the tax tribunal upheld HMRC’s challenge. An appeal was dismissed last December, so revenue received by Eclipse 35 cannot be written off against tax.
Worse for the investors, it potentially meant they would be personally liable for income tax on money received by Eclipse 35 which is used to pay off the loan.
An analysis by Pannone, the legal firm, states: “This leads to a disastrous outcome where investors must pay not only their own tax, which they sought to shelter in the scheme, but also tax on ‘income’ they have never received.This could be financially devastating for many.”
The investors had hoped for a getout. They considered that by transferring the Barclays loans to another entity, they could avoid personal tax liabilities on the income.
But last week Levy informed them that Barclays had not agreed to transfer the loans. It is likely other schemes will face the same problem. In an email on Tuesday, Levy wrote: “Neither of the lending banks in the Eclipse Partnerships, being Barclays Bank and Bank of Ireland will currently novate [transfer] the loans entered into by individual members of the Eclipse Partnerships.”
Rebus Investment Solutions, a claims management firm representing 28 Eclipse 35 investors, has estimated the losses could be seven times their initial outlay. It says an average member who invested £173,000, will face a potential total cost of £1.266m in tax and interest.
Many of Rebus’s clients invested more modest sums and those who invested twice the average stake could face a cost of £2.5m.
Rebus said it represented 79 disgruntled investors in 19 other Eclipse partnerships, which have different structures. It wrote to these clients on February 5, warning that they stand to owe around £390,000 for every £60,000 they contributed in cash.
An HMRC spokesman said: “One of the many drawbacks with putting money into avoidance schemes is that you can end up owing a lot more than if you had played by the rules. If it sounds too good to be true, it is.”
Barclays said: “Barcays will not participate in transactions or schemes which have a tax avoidance purpose that does not meet our tax principles.” The exact sums invested by Ferguson and Eriksson are not known. They did not respond to requests for comment.
Worse for the investors, it potentially meant they would be personally liable for income tax on money received by Eclipse 35 which is used to pay off the loan.
An analysis by Pannone, the legal firm, states: “This leads to a disastrous outcome where investors must pay not only their own tax, which they sought to shelter in the scheme, but also tax on ‘income’ they have never received.This could be financially devastating for many.”
The investors had hoped for a getout. They considered that by transferring the Barclays loans to another entity, they could avoid personal tax liabilities on the income.
But last week Levy informed them that Barclays had not agreed to transfer the loans. It is likely other schemes will face the same problem. In an email on Tuesday, Levy wrote: “Neither of the lending banks in the Eclipse Partnerships, being Barclays Bank and Bank of Ireland will currently novate [transfer] the loans entered into by individual members of the Eclipse Partnerships.”
Rebus Investment Solutions, a claims management firm representing 28 Eclipse 35 investors, has estimated the losses could be seven times their initial outlay. It says an average member who invested £173,000, will face a potential total cost of £1.266m in tax and interest.
Many of Rebus’s clients invested more modest sums and those who invested twice the average stake could face a cost of £2.5m.
Rebus said it represented 79 disgruntled investors in 19 other Eclipse partnerships, which have different structures. It wrote to these clients on February 5, warning that they stand to owe around £390,000 for every £60,000 they contributed in cash.
An HMRC spokesman said: “One of the many drawbacks with putting money into avoidance schemes is that you can end up owing a lot more than if you had played by the rules. If it sounds too good to be true, it is.”
Barclays said: “Barcays will not participate in transactions or schemes which have a tax avoidance purpose that does not meet our tax principles.” The exact sums invested by Ferguson and Eriksson are not known. They did not respond to requests for comment.
Sven-Goran Eriksson was among the 289 investors in the film scheme (Dave Pinegar)
Politics of 50p (9 February 2014)
The biggest problem for Labour, as Andrew Grice, explains is that Ed Miliband and Ed Balls lacks credibility on the economy and not only because they were part of the Gordon Brown Government which belatedly introduced a new 50p rate only a few weeks before the 2010 general election - having been perfectly happy, of course, with the old 40p rate which had been in for the previous 13 years ever since Tony Blair won Labour's first landslide victory at the polls.
So the latest announcement is a political ploy rather than about economic or the country's finances - and if Labour were serious about people paying their fair share, they'd get after the huge levels of tax avoidance which plague the UK and/or target unearned rather than earned income.
The other problem for Labour is that the shadow chancellor, Ed Balls, has been relentless in his criticism of the Coalition Government for the past 4 years, yet none of his predictions about mass unemployment of a double dip recession have come true - not only that his own deficit reduction plans (for paying of the UK's accumulated debt and getting the country to live within its means) are not very much different from what the Conservatives and Lib Dems are doing already.
In effect the message from Ed Miliband and Ed Balls is the same one we've been hearing for the past 4 years - 'Nicer cuts under Labour'.
Without, of course, explaining the details of what such a policy would mean for UK public spending.
Inside Westminster: Labour’s 50p tax announcement was a needless own goal
By Andrew Grice
‘We did it with too much glee. That sent the wrong message,’ said a Labour MP
In the run-up to the 1997 general election, New Labour sent a powerful signal to the public by announcing that it would not raise the top rate of income tax from 40p. Gordon Brown’s instinct as shadow Chancellor was to raise it to 50p but Tony Blair overruled him.
As we gear up for next year’s election, Ed Miliband’s One Nation Labour has deliberately sent the opposite signal, promising to raise the current 45p top rate on incomes over £150,000 to 50p. It is just as symbolic as the 1997 decision.
Of course, times have changed. The financial crisis prompted Mr Brown to raise the 40p rate to 50p, a month before the 2010 election. The Coalition’s controversial decision to reduce the level to 45p has undermined its “all in it together” mantra. Having made so much hay with this “£3bn tax cut for millionaires”, Mr Miliband could hardly refuse to bring back the 50p rate if he wins power next year.
Yet the way Labour revealed its hand this week was messy and flawed. Ed Balls, the shadow Chancellor, had two big announcements in a speech to the Fabian Society: a tougher stance on fiscal policy, in which he promised to eliminate the annual deficit as soon as possible in the 2015-20 parliament, and restoring the 50p rate. He and Mr Miliband saw them as two sides of the same 50p coin: a higher top rate would be a “fair” way to cut the deficit as it would raise some revenue.
What Labour insiders call the “tough stuff” on spending cuts to balance the nation’s books was trailed in the newspapers on the morning of the Balls speech. But the 50p announcement was made in the speech, guaranteeing it would immediately eclipse the party’s harder line on spending. The joke among Westminster journalists was: “The ‘tough on the deficit’ story ran on the news bulletins for 11 hours. Unfortunately, most people were asleep for nine of them.”
But the presentational cock-up was no laughing matter among Labour MPs. One, a Miliband loyalist, told me: “We managed to trump our own story on the deficit. A golden opportunity to regain trust on the economy was missed. All the voters noticed is that we will put up the top tax rate.”
Labour MPs are puzzled why Mr Balls had to give us two announcements for the price of one. Most accept the 50p decision but many think it should have been held back until the media had covered the “tough stuff” for some days, to ensure the public got the message. The media was bound to focus on the sexier tax story rather than the drier subject of Labour’s fiscal stance. The proposed tax hike also reunited the Tory tribe: as Conservative-supporting newspapers condemned Labour’s move, they urged Tory MPs to stop destabilising David Cameron, allaying his fears they would punish him for his stance on press regulation and the Leveson report.
Labour’s other problem is that its plan to portray the 50p policy as a meaningful contribution to clearing the deficit proved short-lived. The independent Institute for Fiscal Studies (IFS) judged that the proposal might raise only £100m rather than the £1bn to £2bn Labour hoped – a droplet in the bucket when the annual deficit is £111bn. Some shadow ministers supported the hike on the basis that it would raise serious money and are now unsure it is worth the candle. The Labour leadership is quite happy to have a row with the Tories about the possible revenue but the IFS verdict relegates the 50p rate pledge to symbolic value. “We did it with too much glee; that sent the wrong message,” said one MP.
Labour’s timing was also strange because the tax move was bound to attract flak from business leaders, who are already anxious about what they regard as Mr Miliband’s “anti-big business agenda” after his attacks on the energy firms and the banks.
As individuals, not many company bosses are likely to vote Labour but the public statements they make do matter. They send a signal to the middle class voters wooed successfully by Mr Blair and Mr Miliband will need some of them if he is to win a majority next year. He denies pursuing a “35 per cent strategy” in which Labour mobilises its core vote to sneak past the winning post, or relies on a post-election deal with the Liberal Democrats after becoming the largest party. But I do not meet many Labour MPs who think they can win an overall majority. Privately, many are building bridges with the Lib Dems. They welcomed this week’s under-reported speech by Vince Cable, the Lib Dem Business Secretary, making clear his personal approach to cutting the deficit was remarkably similar to Labour’s new line. Labour insiders privately described it as “a love letter to us on yellow paper” and “a job application to be Chancellor in a Lib-Lab government”.
The other weakness in Labour’s position is that the party is unable to tell us whether the 50p rate would be temporary or permanent. This is because Mr Balls wants it to be temporary while Mr Miliband sees it as a permanent fixture. In their see-saw relationship, I suspect, Mr Miliband is now the one riding high and calling the shots.
The 50p rate will doubtless be popular with the vast majority of voters, who would not have to pay it. But that doesn’t guarantee that they will vote Labour. However much people like the message, if they don’t trust the messenger, they will not vote for him.
50p Tax (29 January 2014)
If you ask me the problem with the UK's tax system is not so much a 40p or 45p or even a 50p tax rate, but the fact that so many people (and companies) in the UK are involved in aggressive tax avoidance schemes.
Now as a matter of principle I object to a 50p tax rate, because I think it's ridiculous for any government to take more than half of what a person earns - and a 50p tax rate does exactly that once you add on National Insurance costs.
To my mind penal rates of income tax are a disincentive for people to make money and it would be much better if the government focused on taxing unearned income - which would be much fairer and more progressive all round.
So, speaking personally, I think that the Government's total tax take should never exceed 50% of what someone earns and that the real focus of attention should be on elaborate tax avoidance measures - which is where the big money is lost in the UK.
All of this is back in the news again because Labour's shadow chancellor, Ed Balls, has announced that his party will put the top tax rate back up to 50p, if they win the next election.
Which is really odd because the People's Party was not remotely interested in raising tax rates - until the dying days of the last Labour Government when it finally introduced a new 50p rate in April 2010.
Yet this move came after 13-years in office when Labour had an overall majority in the Westminster Parliament, yet this belated 'deathbed conversion' had much more to do with politics than economics and, of course, the fact that the May 2010 general election was just round the corner.
The Institute for Fiscal Studies (IFS) has poured cold water on Labour's plans and their best guesstimate is that a 50p tax rate (which is supposed to be a temporary measure) will not raise significant funds.
Which brings me back to my first point - UK tax policy ought to be about tackling aggressive tax avoidance and taxing unearned income because that is where the real problems lie.
Ferguson and Eriksson lose film tax relief battle
Sir Alex Ferguson is a member of a film investment scheme that sought £117 million in tax reliefAndrew Yates/ Getty Images
Now as a matter of principle I object to a 50p tax rate, because I think it's ridiculous for any government to take more than half of what a person earns - and a 50p tax rate does exactly that once you add on National Insurance costs.
To my mind penal rates of income tax are a disincentive for people to make money and it would be much better if the government focused on taxing unearned income - which would be much fairer and more progressive all round.
So, speaking personally, I think that the Government's total tax take should never exceed 50% of what someone earns and that the real focus of attention should be on elaborate tax avoidance measures - which is where the big money is lost in the UK.
All of this is back in the news again because Labour's shadow chancellor, Ed Balls, has announced that his party will put the top tax rate back up to 50p, if they win the next election.
Which is really odd because the People's Party was not remotely interested in raising tax rates - until the dying days of the last Labour Government when it finally introduced a new 50p rate in April 2010.
Yet this move came after 13-years in office when Labour had an overall majority in the Westminster Parliament, yet this belated 'deathbed conversion' had much more to do with politics than economics and, of course, the fact that the May 2010 general election was just round the corner.
The Institute for Fiscal Studies (IFS) has poured cold water on Labour's plans and their best guesstimate is that a 50p tax rate (which is supposed to be a temporary measure) will not raise significant funds.
Which brings me back to my first point - UK tax policy ought to be about tackling aggressive tax avoidance and taxing unearned income because that is where the real problems lie.
Tax Avoidance (27 January 2014)
Why is it that people who are already extremely wealthy find it so difficult to pay their fare share of tax?
Even someone like Sir Alex Ferguson, who is wheeled out regularly to support the Labour Party, seems to favour elaborate tax avoidance schemes - according to this report from the Times newspaper.
Only this time HM Revenue & Customs won its High Court battle to stop stop wealthy investors from claiming £404,000 in tax relief - from funds worth only £173,000.
Sir Alex Ferguson is a member of a film investment scheme that sought £117 million in tax reliefAndrew Yates/ Getty Images
By Alexi Mostrous Special Correspondent
Sven-Göran Eriksson, the former England manager, and Sir Alex Ferguson, the ex-Manchester United manager, are among hundreds of wealthy investors facing a gloomy Christmas after Revenue & Customs again defeated their claims to £117 million in tax relief.
The 289 members of Eclipse 35, a controversial film investment scheme, sought the tax relief as part of a complex £1 billion deal to license distribution rights to two Disney productions called Enchanted and Underdog.
Yesterday a High Court judge confirmed an earlier ruling that the scheme was not “a trade”, depriving its members of the possibility of claiming tax relief. If Eclipse 35 had worked, members could have enjoyed an average of £404,000 in tax relief on a personal investment of £173,000.
Mr Justice Sales agreed with tax judges last year who ruled that Eclipse 35 did not have “any capability whatsoever to be part of any strategic or day-to-day planning for the marketing or release of the two films”.
He also found that the main income streams from the films involved “no prospect of loss or gain”, an important aspect of a trade.
The Eclipse members put up £50 million of their own cash which, together with £790 million in loans from Barclays Bank, were used to buy distribution rights. Disney agreed to lease back the rights in return for an annual payment over 20 years. Members argued that tax relief was claimable on the large interest payments arising on the Barclays loan.
Last year, the Revenue signalled that it might try to tax payments coming back to investors from Disney, meaning that they could receive tax bills significantly greater than the relief they might have received.
Many corporations have distanced themselves from investment schemes such as Eclipse 35, citing an increasing intolerance of anything seen to be tax avoidance.
“If Eclipse came up again, would we help fund it?” said a source at Barclays, which financed Eclipse 35 in 2007, last July. “No.”
Last year, Dave Hartnett, the former head of the Revenue, said that his department would increase legal action against film investment schemes. “I think we’ll clean up on film schemes over the next few years,” he said.
Eclipse 35 was set up by Future Capital Partners (FCP), which received £44 million in fees. Disney was paid £6 million. FCP denies that it promotes tax avoidance schemes and says it commercial operations for profit.
An FCP spokesman said: “We are naturally disappointed as we consider that Eclipse 35 is a commercial, trading, film business, which we expect to generate at least £474 million of UK taxable net profits over its life — over one and a half times the amount of tax relief that was claimed.”
Sven-Göran Eriksson, the former England manager, and Sir Alex Ferguson, the ex-Manchester United manager, are among hundreds of wealthy investors facing a gloomy Christmas after Revenue & Customs again defeated their claims to £117 million in tax relief.
The 289 members of Eclipse 35, a controversial film investment scheme, sought the tax relief as part of a complex £1 billion deal to license distribution rights to two Disney productions called Enchanted and Underdog.
Yesterday a High Court judge confirmed an earlier ruling that the scheme was not “a trade”, depriving its members of the possibility of claiming tax relief. If Eclipse 35 had worked, members could have enjoyed an average of £404,000 in tax relief on a personal investment of £173,000.
Mr Justice Sales agreed with tax judges last year who ruled that Eclipse 35 did not have “any capability whatsoever to be part of any strategic or day-to-day planning for the marketing or release of the two films”.
He also found that the main income streams from the films involved “no prospect of loss or gain”, an important aspect of a trade.
The Eclipse members put up £50 million of their own cash which, together with £790 million in loans from Barclays Bank, were used to buy distribution rights. Disney agreed to lease back the rights in return for an annual payment over 20 years. Members argued that tax relief was claimable on the large interest payments arising on the Barclays loan.
Last year, the Revenue signalled that it might try to tax payments coming back to investors from Disney, meaning that they could receive tax bills significantly greater than the relief they might have received.
Many corporations have distanced themselves from investment schemes such as Eclipse 35, citing an increasing intolerance of anything seen to be tax avoidance.
“If Eclipse came up again, would we help fund it?” said a source at Barclays, which financed Eclipse 35 in 2007, last July. “No.”
Last year, Dave Hartnett, the former head of the Revenue, said that his department would increase legal action against film investment schemes. “I think we’ll clean up on film schemes over the next few years,” he said.
Eclipse 35 was set up by Future Capital Partners (FCP), which received £44 million in fees. Disney was paid £6 million. FCP denies that it promotes tax avoidance schemes and says it commercial operations for profit.
An FCP spokesman said: “We are naturally disappointed as we consider that Eclipse 35 is a commercial, trading, film business, which we expect to generate at least £474 million of UK taxable net profits over its life — over one and a half times the amount of tax relief that was claimed.”
