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45 IFAs facing negligence claims on film plans

Investors in controversial film partnership schemes are preparing negligence claims against at least 45 IFAs ahead of possible tax demands and penalties being issued by HM Revenue & Customs.

The schemes have hit the headlines after a tax tribunal ruled in April that film partnership Eclipse 35 is an “aggressive” tax avoidance scheme, resulting in 289 investors facing a tax liability in excess of the total £117m tax they sought to avoid.

Eclipse 35 was conceived by Future Capital Partners and began operating in April 2007. Investors bought film distribution rights as a means of offsetting income tax, with the rights leased back from investors in return for an annual payment spread over 20 years.

HMRC is sending out tax demands to UK-based Eclipse partners, backdated to 2007. Investors may face a bill for the tax due, the interest and an additional penalty. Claim management firm Rebus Investment Solutions is preparing negligence claims against 45 advisers for recommending Eclipse film partnerships.

Rebus says claims will initally be made to the Financial Ombudsman Service if rejected by IFAs. It may also look to bring claims as part of a lawsuit. The FOS says it will assess claims according to the fact-find and whether the consumer was an experienced enough investor.

Rebus managing director Alastair McEwan says: “Advisers failed in their regulatory obligations when promoting these kinds of products and failed to satisfy the eligibility criteria. The fact remains that the obligations around promoting these products rests entirely with advisers.”

Rebus is not bringing claims against Future Capital Partners.

Future Capital Partners declined to comment on how many advisers it worked with or the levels of commission paid, understood to be over 5 per cent in certain instances.

Tax advice given by advisers is not covered by the FSCS if the IFA goes bust. HMRC would not normally be able to penalise advisers for offering film partnerships as avoidance schemes are not illegal.

Howden director of retail Neil Pointon says film partnerships have been on the radar of professional indemnity insurers for some time. He says: “This latest development will make it more difficult to obtain cover for these activities going forward.”

Equilibrium Asset Management investment manager Mike Deverell, who did not recommend the schemes, says: “These schemes can be a double whammy of losing money on the investment while still owing tax. It is not just negligence claims advisers face but also reputational risk. It is a minefield.”

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Richard Rhys – currently disqualified from acting as a company director – works at Rebus doesn’t he?

    Didn’t he also sell lots of Eclipse LLP investments to clients of his at MNFA?

    Is he suing himself?

  2. I am probably missing something here but surely if the scheme was a legal way of avoiding or reducing your tax liability at the time it was sold, then it could be argued that the correct advice was given at the time. How many U turns have subsequent governments made in the last 10 years in respect of tax relief schemes. How many investors entered into schemes that were tax efficient at the time but became less so because of a change of policy. Was the government sued ?

  3. I thought under RDR to be classed as INDEPENDENT you have to know about these schemes and always consider them for appropriate clients and make appropriate recommendations – along with all the other common products, VCTs ETFs and the like – perhaps I should stick to ISAs and normal collectives – with all these legal costs, fines and time wasted defending your professional advice it might be cheaper in the long run eh?

  4. There’s always someone else to blame isn’t there – of course it’s not going to be the fault of the people who tried to avoid the tax!! They tried it on and failed and now it’s back-fired. Grow up and take it like a man. If it was risk free then everyone would have done it. Stop digging yourselves a bigger hole and losing more money by now running up fees trig to blame someone else.

  5. The fact that claims are not being made against the “manufacturer” but only focuses on the individual “distributing” IFA says everything about what is wrong with the FOS / FSCS system. Why take the manufacturer to court under a “proper” legal system and risk all the costs when you can pursue an individual IFA at no cost and no risk …
    And with regard to being Independent, I would have thought that the downside risks of the scheme failing would be more than sufficient to indicate UN-suitability of the proposition.

  6. Dave

    The fact is these schemes were never signed off by the Revenue and therefore it is only a professional opinion of whether they are legal. Registration does not mean that they are legal, it only means that the Revenue knows where the money is.

    As we are now seeing, the Revenue is now starting to take these things to court as the structures may indeed break the guidelines laid down by the Revenue. Maybe professional advisers should do their due diligence before believing what some accountants and solicitors tell them, or at least get agreements that the liability is with them e.g. third party agreements.

    I hope people have some very good paperwork on this as I suspect there is going to be an awful lot of fall out on this, as big as any mis selling scandal, after all wealthy people have the money to sue.

  7. Hold on tax advice is unregulated active so why are the FOS even looking at it.

    If they take this on thern all tax adviser including Accountants and Solicitors should pay fees to the FOS.

  8. The time has to come when an adviser gives advice appropriate to the client and available products at the time and cannot be held responsible for politically driven changes in the future -otherwise we must all cease to trade. The client also must take personal responsibility for their action – particularly when that action was most probably driven by greed rather than by their generosity to the film industry.

    One could very easily argue that this is no different to advising a client in 1995 of the tax efficieny and benefit of pension fund saving that was then ‘tax raped by the Labour’ Chanchellor some years later – is the IFA responsible for this??

    It is good though that FOS says they will consider the information on the fact-find before making a decision as they failed to do this with the Keydata situation and made a blanket decision which I am sure will fly back in their face when an IFA stands tall and says his human and legal right of defence was breached by such action.

    PS not involved in either of these issues but feel very strongly for our profession which is becoming the scapegoat for everything – I am surprised we have not yet had a claim for the failure of the English football team to convert penalties !!

  9. I just don’t get it.
    The scheme was launched in 2007 as a result of the Arts industry putting pressure on the Government to encourage investment in British films and the performing arts by giving tax-breaks to investors. Not without risk – you may not be investing in a “Harry Potter” but an art film which is going to lose more money than it took to produce. In fact the risks were high, but the potential rewards were high. No different to some “conventional” OEICs out there using core instruments like the “Outer Mongolian Light Railway and Yak Butter Company.”
    The scheme was HMRC approved.
    So are ISAs.
    If HMRC can suddenly decide, retrospectively, that it made a wrong decision and demand repayment of all tax paid, how secure is the ISA that we have promoted for years?

    And what is the difference between the man on the Clapham omnibus investing £10K pa into an ISA that has no income or capital gains tax penalties and the man in the Roller behind the same omnibus whose occupant invests £100K pa into a similarly efficient scheme?
    I suspect the politics of envy.
    As for the IFA advice, I suspect many of these transactions with VHNW individuals were carried out through their managers or company finance directors and the individual did no more than sign where told to. Don’t blame Jimmy Carr or his management company for accepting the same advice we would give, with health warnings, to the man on the Clapham omnibus when setting up his ISA.
    Standard report letters usually contain, alongside the “past performance is not necessarily…” and “unit prices can plummet as well as fall….” type of risk warning, a sentence claiming that the advice contained reflected the current HMRC regulations and that no liability could be accepted for future changes in taxation legislation. Providing that such was mentioned in a suitability report, the IFAs concerned SHOULD be fireproof.
    (It is certainly in all my pension ,ISA and investment reports.)

    Will the accountants who oversaw the transactions for their clients, and probably recommended that they talked to an adviser about these schemes in the first place to save tax for their clients, get sued?

    I doubt it.

    Roll on retirement (Two weeks.)

  10. I agree with Peter Herd. There are three issues here, the investment advice (product being the film scheme), the tax advice (for which one would hope an accountant or tax specialist was engaged by the client) and lastly a legal adviser (again one would hope a legal specialist was engaged by teh adviser).
    Of these three, the ironic thing is that 2 out of three have the defence of a longstop. Guess who doesn’t have one.

    One of the three’s claims for professional negligence to their ombudsman think have to be made within 6 months of the negligence or pursued through the courts instead (guess which one this is and isn’t).

    Finally, if the clienst were high risk investors, then the investment adviser should stick to proving the suitability of the product and not comment on the tax or legal issues in their defence otehr than referring the complainant back to the tax and legal specialists they were told to use.

    If the IFAs defence is robust enough, tehn arguably, whilst the FOS may look at the case, they shoudl eb prepared to dismiss it quickly as vexatious if the client was a high risk investor or NOT under their jurisdiction as the complaint is about the tax and legal advice, for which the Law Society etc should be contacted only after the complaint to the legal advisers etc.
    This continual passing of the buck to the agent of teh client MUST stop (Keydata, Arch Cru, Film swaps, what next?)
    P.s. as posted elsewhere despite no client complainst about advice from us on Keydata, FOS have been side stepped and now refsue to consider cases due to teh fact that adviser clients have not complained about the advice and it is this that is allowing FSCS to refuse to mediate on Keydata cases and instead continue to threaten legal action which will not actually result in any recovery for FSCS as claims from FSCS without complainst from clients are not being covered by a lot of advisers PI (understandably, if I was PI company I wouldn’t pay out if the client hasn’t complained about what had been done by the person I had insuredm, but by the combiend failures of Keydata itself on HMRC issues and the more significant losses and in fact claimed total loss since FSA/PWC obtained administration via the courts)

  11. Whatever the rights and wrongs of the recommending these particular tax mitigation plans may be the comments included in this article demonstrate a level a of gratuitous nastiness that does the industry no credit whatsoever.
    We know that caveat emptor in the financial services went out of the window a long time ago, so customers are basically “off the hook”. That does not automatically put advisers “on the hook”. There is the concept of commercial risk. There is also the concept of “The Government changed its mind”.
    Most film partnerships were a deferment rather than avoidance scheme, with the prime benefit being able to utilise the freed tax money for other purposes. Every scheme I saw gave a default break even rate, that is, unless the money you retained could earn in excess of that return, it wasn’t worth doing. Paying down an overdraft or retaining the money in one’s business were examples of potentially, but not guaranteed, beneficial situations.
    Just as in 1988 for Personal Pensions the Government were positively encouraging these schemes to finance growth in a flourishing industry. The tax, for most schemes, was not avoided, merely deferred, so even inflation lent a helping hand. The the success of a flourishing industry would also increase the tax take. A “win-win” situation.
    But there was always a level of risk, and all the schemes I saw laid out those risks quite extensively. Because most of the schemes built in a number of safety features they would not automatically be classed as high risk, although there had to be an element of risk. If the client was genuinely unaware of those risks one should enquire of the capability of the adviser, because all those clients had to be very high earners, and could therefore be assumed to have a reasonable level of intelligence; and probably a decent level of commercial intelligence.
    What is coming out is that some of the schemes may not have done what was stated in the brochure, in which case it would have been impossible for the adviser to anticipate the actual behaviour of the scheme.
    There were, and are, massively aggressive tax avoidance schemes available. Film partnerships, properly constructed, should never have fallen into that category.
    Given that most of schemes tried to optimise return whilst minimising risk it is difficult to know where the dividing line is between sensible risk optimisation and aggressive mis-use of the legislation. Since the Government never tell anyone were that line is until they are in financial trouble perhaps everyone should avoid using any Government underpinned scheme until the Government produce their own Code of Conduct, which would include the promise not to renege on the basic tax promises made when times turn a little bad. But then who would trust a Government to comply with any Code of Conduct.

  12. @gregb Sorry but you have the industry wrong. Conversions are a religious matter, and it would surely take a miracle for England to “convert” penalties.

  13. @ my ‘friend’ Glen – would the ‘Mc’ in your name perhaps offer the motivation for such miraculous comments? I always think it is best to comment on the party only if you attended 🙂

    But seriously, it now seems old George O wants a piece of the action with the nice big fines going to him to help balance his books which is effectively placing further financial burden on our profession. I am positive about our profession and our future but we need to find a way to stop the gathering of the leeches (FSA/Govt/Claim firms/FSCS) which will suck the profession dry given half the chance – and then, it will still be our fault for not ‘converting’ to charitable organisations.

  14. Rebus [the claims handler] is only pursuing IFAs and will use FOS if cases are rejected. It doesn’t take a genius to work out why this would be. It’s a cost and risk free option that is being ruthlessly and cynically exploited by those who are motivated entirely by the chance to make a quick buck!

    The relative merits of any tax avoidance scheme are not the point here however those who use them are also solely motivated; by the chance of saving tax. One can only assume that any recommendation would have appropriate risk warnings but whether that will be enough to avoid FOS’s ‘quasi judicial’ re-invention of events is an entirely different question.

    Whilst Rebus says it is considering’ proper’ legal action, I’d be very suprised if this ever proves to be the case. Free lunch via FOS is probably as far as it will go!

  15. To what type of client did the IFA concerned recommend these investments? Retail, HNW or Sophisticated?

    If the answer is “Retail”, then in my opinion that may well have been negligent.

  16. Some IFA’s advised that this was a ‘zero risk’ option but then did not convey on to clients that HMRC were declining to pay the tax rebates as early as 2001 and that the risk was accordingly not ‘zero’. The IFA still let some clients pay into these schemes and exposed their clients to over a decade of revenue liigation as well as interest and demands for repayment of the relief although the IFA knew the Revenue was questioning the entire scheme rebate mechanism but did not tell the client that. That is the basis for my current negligence claim against my IFA.

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