Gains in Ponzi Style investment

Gains in Ponzi Style investment

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My client actually made a gain (albeit a very small one) by pulling out most of his investment before it was recently found to be a fraudulent investment. Due to his involvement, forms are required to be completed by the FSA and the Police which he is going to oblige.

A couple of questions:-

1) NCIS - do I have to make a report?

2) Tax - How would he deal with the overall gain of £2k (actually £400 after having paid £1600 tax on interest received in 2007/08 (year 1)). In his 2007/08 tax return, we have already declared a 'gain' of around £4k as gross interest from investment (hence £1600 tax was already paid). However, due to further re-investments and withdrawals, the overall 'gain' is now only half that = £2k. In summary - year 1, the 'gain' was £4k but in year 2 (2008/09 - however only found out that this is a fraudulent investment in July 2009) the loss was £2k after subsequent small reinvestments and draw back. Would the £2k be considered as a capital loss in 2008/09? Or should the 2007/08 tax return be amended?????

Help !!

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By User deleted
11th Aug 2009 20:15

For CGT to be relevant
you need to have disposed of some kind of asset.

In a ponzi scheme, I am not sure that there is such an underlying asset? Do you acquire any kind of right when you sign up that might be an asset? I suspect not?

Interest is payment for the use of money by time - are you sure that the interest is interest as well?

I wonder if the amounts are taxable at all - is not a bit like gambling?

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By User deleted
11th Aug 2009 20:52

for CGT to be relevant
You don't need to have disposed of some kind of asset - TCGA 1992 s22.

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David Winch
By David Winch
11th Aug 2009 21:13

NCIS ???
NCIS - are we having a 'senior' / 'blonde' / 'CRAFT' moment here - or have you not been keeping up to date? !!

NCIS was swallowed up by SOCA (the Serious Organised Crime Agency) some years ago.

Strictly speaking you do have to make a report to SOCA as you are aware that someone has been engaged in money laundering. However the report can be brief as the police are already fully aware of the crime and investigating it and your client is helping them with their enquiries. Say that in the 'white space' so that the reader of the report knows it.

David Winch

P.S. If you have not been keeping up to date do get some money laundering training before too long. You may be unaware of the changes to the Money Laundering Regulations introduced in 2007 - some of these are significant. Also the detail of the law on what is reportable and what is not has changed, as has the law concerning 'tipping off'. Finally all accountancy firms are now required to have their compliance with the MLR supervised either by a professional body (such as ICAEW, ACCA, ICB) or by HMRC (who charge an annual fee for this).

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By User deleted
12th Aug 2009 09:14

Indeed SOCA
Sorry David – a moment of madness to mention NCIS. Its SOCA indeed and I shall complete a limited report.

As to the tax issue – basically the ‘investment’ was signed up as a loan to the investment company of which the return is to be 5% interest per month. There are also strict withdrawal terms. In 2007/08, £4k of interest was receivable and this was duly entered into the Tax Return. In 2008/09, part of the investment plus interest was withdrawn to the tune of - total cash withdrawals exceeding total investment by £2k. Hence, there is an overall ‘gain’ of £2k. I’ve mentioned the word ‘gain’ in the context that the withdrawals exceeded amount invested – not in terms of Capital Gains.

Not sure whether this is correct but personally I think, we should leave the 2007/08 as it is. In 2008/09, now that we know that it is a sham investment, we report a capital loss of £2k being loan written off.

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