Tax Schemes: Concerned You Might Be At Risk? Investors Have A Limited Time To Claim

Lawyers At Irwin Mitchell Advise Investors to Act Now

20.04.2015

Karen Roberts, Press Officer | 0207 400 8714

Investors caught up in tax schemes which they believed at the time were legitimate but are now under scrutiny or likely to be under scrutiny by HMRC, have a limited time in which to claim they were badly advised, according to law firm Irwin Mitchell. Many  investors, advised into such schemes by their financial advisers may have a sound claim against this adviser, but may fall foul of the law since such claims become ‘statute-barred’ after six years from the date that the tax relief scheme was entered into. 

This issue has become topical following the case over Eclipse 35 tax relief film scheme whereby in a recent Court of Appeal ruling, it was determined that the scheme was in essence, a tax avoidance scheme. This judgment has now left over 300 investors with huge tax bills. Some investors will have to repay tax owed on the original loans that formed part of the scheme (but which the investors did not personally receive) as well as paying interest to the Revenue on the unpaid tax. In many cases, this has resulted in a final tax demand far higher than the original investment. Many are now considering claims against their financial advisers.

The problem stems from the early 2000s when many such investors, including Premier League footballers and pop stars, appear to have been persuaded to enter into various tax schemes that were advertised as legitimate, not only able to defer tax liability but also, in some cases, potentially reduce it. For many this was an opportunity that was too good to be true.  

Now in 2015 many such schemes under close scrutiny by HMRC and are being challenged vigorously through the courts. The Eclipse 35 ruling will have an immediate effect on other similar tax relief schemes, putting a number of investors at risk of significant demands from the taxman. Often the penalties are not merely financial - the pillorying of Gary Barlow of Take That in the media last year illustrates the PR damage that involvement in such schemes can create. 

Irwin Mitchell argues that many financial advisers could well be liable to clients for suggesting such schemes without warning of the potential risks. The duties of financial advisers and institutions include regulatory statutes (the Financial Services and Marketing Act 2000); common law duties (breach of contract and the tort of deceit and negligence); and codes of practice. The extent to which liability for a breach of duty may arise from one or more of these sources will vary from case to case. In most cases, the reach of a regulatory statutory rule may prove to be a straightforward basis for a claim but if not, then investors can rely on the common law to seek a remedy for any losses that they may have suffered.

All financial providers will generally owe a duty to exercise reasonable skill and care when carrying out the services required. Consideration is also given to the nature of the relationship between the financial advisor and the potential investor. The more sophisticated and unusual the proposed investment scheme, the more reliance is placed on the financial advisor to provide proper advice. In addition, the investment schemes must be suited to the individual’s needs such as whether he requires a short term, low risk investment. Again, if the scheme turns out to be wholly unsuitable for the investor, then the financial advisor may be considered to have acted in breach of his duty. 

The financial advisor must also ensure that the investor has a proper understanding of not only the investment scheme but more importantly the risks that are associated with it. Failure to adequately explain such risks could result in a claim for providing misleading advice. It appears that a number of Premier League football players and managers may have been targeted by financial advisers to invest in the Eclipse 35 tax scheme, with reports of financial advisers being regular visitors to training grounds in order to gain the players’ trust and friendship. Were these footballers properly advised about these often novel and complex tax schemes or did they assume their financial advisers would protect them off the pitch whilst they made their money on the pitch? It appears that many investors had no idea that HMRC could potentially rule these schemes to be invalid at the time they entered into them, and just assumed they were a sound investment to make at that time. It’s only years later that they were alerted to the risks. 

Irwin Mitchell feels this highlights a further very important problem. 

As Dominique Dolman, a lawyer at Irwin Mitchell, says: "Investors need to be aware that whilst they may have a sound claim against their financial advisor, they have limited time in which to bring a claim. Claims become ‘statute-barred’ after six years from the date that the tax relief scheme was entered into. Recovering any loss from financial advisers can therefore be difficult especially if the investment was made some time ago and yet HMRC is only now considering taking legal action."

She continued: "However, there is provision for some protection. S14A of the Limitation Act 1980 allows the investor three years to pursue a claim from having 'knowledge' of the negligent act. The investor must have knowledge of the 'factual essence of the act or omission' which caused his loss. He does not need to know the precise details of the alleged negligence but he does have to have enough information to make it reasonable to begin investigating  a potential claim against the financial advisor." However, she adds: " ... failing to act within 3 years of a potential warning about a risky scheme will mean the investor will lose this protection. Investors really do need to be on the ball!"

It will always be incumbent upon the investor to prove that he has suffered a loss as a direct result of the financial advisor acting in breach of duty and if this can be proved, then the most common remedy that the Court will order is an award of damages. In circumstances where a scheme has been advertised in a prospectus then it may also be possible to seek to rescind the contract under the Misrepresentation Act 1967. Compensation can also be awarded for loss and damage to reputation in exceptional circumstances. But investors must not sit on their laurels. If they have any suspicions about either the tax advice provided to them or perhaps more importantly, the lack of advice that they were given at the relevant time, then they must act now. HMRC has a virtually unlimited time in which to pursue claims for unpaid tax. The unsuspecting investor has a much smaller opportunity to make his claim for compensation.