Plebgate MP caught up in avoidance tangle

Former cabinet minister Andrew Mitchell, who resigned over the Plebgate scandal back in 2012, invested in a film investment scheme that the government has now declared as inappropriate tax avoidance.

The Ingenious Film Partners 2 vehicle backed big films like Avatar, Girl with a Pearl Earring and Shaun of the Dead, and its promoters say it encouraged genuine investment in British film.

As reported by BBC Newsnight last night, HMRC deemed the tax relief provided by the company as “inappropriate”, meaning investors like Mitchell could end up having to pay back hefty sums after Royal Assent is passed in the coming days.

Earlier this week HMRC named Ingenious Film Partners 2 as one of 1,200 candidates for accelerated payment notices under its new powers to force repayment of tax relief up front, rather than waiting for the outcome of a tax tribunal.

Later this month people using these tax schemes disclosed to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) will have to pay the tax HMRC says they owe within 90 days.

Mitchell said in a statement: “When the last Labour government introduced tax incentives to invest in the British film industry, along with many other investors I did so through Ingenious Films. I resigned from Ingenious when I was in government and always pay all tax when due.”

Ingenious Media added that the government had failed to distinguish between commercial businesses and tax avoidance schemes and said it would fight HMRC’s declaration in a tax tribunal in November.

“The film partnerships run by Ingenious Media have already generated over £1bn in taxable income for the UK Treasury, with more to come over the lifetime of the films they funded,” it said in a statement.

The film scheme functioned by generating relief on losses incurred by the partnerships during early years of trading.

Investors were required to put up a minimum of £36,000 and Ingenious would loan the investor a further £64,000 to take the investment to £100,000.

This would then be used to buy shares in film productions which in their first year created roughly a £90,000 loss.

Investors in the scheme could then write off that loss against their tax, and in return for putting in £36,000 would get about the same amount in tax relief and end up owning a £100,000 stake in one or more films.

Ingenious recently issued a warning to 1,300 of its investors that they could be forced to pay back the tax they saved, possibly with interest.

As well as Mitchell, Newsnight identified other senior figures who invested in the scheme, including the former chief secretary to the Treasury Lord Waldegrave and the former chairman of the BBC Lord Grade.

Andrew Mitchell resigned in the wake of the Plebgate incident when he allegedly called Downing Street policemen PC Toby Rowland a “f****** pleb”.

This has since left him with a series of libel actions to fight.

Comments
ShirleyM's picture

Did the investors repay the loan?

ShirleyM | | Permalink

I wonder why Ingenious loans money to people to invest, rather than investing its own money?

Does anyone understand the mechanics of this?

it's hardly surprising M'S are slamming HMRC'S......    1 thanks

Jekyll and Hyde | | Permalink

..... advanced payment rules! I imagine a lot of other MP's are caught up in various schemes themselves. Perhaps there is a conflict of interest here.

My thoughts on this specific scheme, If it is not the primary intention to avoid tax, then I do wonder what types of people are running our country.

ShirleyM's picture

I am guessing, but ....

ShirleyM | | Permalink

I imagine the loans are never paid. Investor A will loan to investor B, and B will loan to A. They will both get tax relief on the supposed 'full' investment.

Anyone know if that's factual?

Tax deferral, rather than avoidance    1 thanks

gilderda | | Permalink

In the early years of the scheme, you have a large amount of loan interest you can claim relief for and very little income from the films as they are still in production. The losses generated can be set against your other taxable income to reduce your tax bill.

In later years, as your loan capital decreases the interest you can claim goes down proportionately. At the same time, the films you originally invested in are now at the cinema or on DVD and generating a return on your initial £100,000 stake. As the article says, this includes some high-profile, high-earning films. You end up paying tax on your share of any profits the partnership makes.

I think it's going to be hard for HMRC to run a GAAR-style argument, or tackle this in the same way they did Working Wheels. There was always the potential for investors in these schemes to make a substantial and taxable profit, but the way they were structured gave the majority of the tax relief "up front".

I'll be interested (mainly because we have two clients invested in other Ingenious schemes) to see what kind of angle they try to use to attack it.

Red Leader's picture

suckers    1 thanks

Red Leader | | Permalink

I don't know why taxpayers bothered with these schemes. Talk about the tax tail wagging the investment dog.

As said by a previous poster, this was really just tax deferral. Even so, these investors just salivate at the year 1 figures (tax saved = money invested), and the promoters know the punters buttons to push.

A DCF analysis would probably show not much better than a 5% return.

Most film schemes

Carat | | Permalink

relied on their activities being considered to be trading. This was always arguable - see the case of Eclipse Films. No trade = no upfront loss relief and no relief for interest paid against the income from he films in subsequent years.

Why    1 thanks

The Black Knight | | Permalink

Why are Mr Mitchell MP tax affairs not confidential until they reach the tribunal?

You can't have much respect for the rules when the enforcer does not agree with them.

did they

justsotax | | Permalink

try and argue something similar with the MPs expenses...

not    1 thanks

The Black Knight | | Permalink

Think that would be a different argument as the expenses are public expenditure and presumably now open to scrutiny.

Someones tax affairs are between him and HMRC and confidential. Unless they are deliberate defaulters or fraudsters or end up in a public arena such as a tribunal ! (or on a disk in a car park of course)

ShirleyM's picture

I found this ...

ShirleyM | | Permalink

http://www.hmrc.gov.uk/press/film-prod-partner.htm

It seems reasonable. It looks as though it will protect genuine investors and refuse tax relief for the ones that exist just for tax purposes.

Does anyone have anything to add? I like to understand how these things work, so any information would help me understand.

Film Schemes    6 thanks

AndyC555 | | Permalink

As gilderda points out (and as very few seem to be picking up on) many of these schemes were genuine investment schemes that were intended to produce long term profits and structured so as to result in short term losses which could be off-set against tax.  Overall, a profit was still the aim.

Isn't this a frequent business model?  You borrow money to set up a business.  In the early years you make losses, often because of interest charges and subsequently you make profits.

Anyone see anything wrong with that?

Someone implies the loans were bogus.  Not as far as I can see with the genuine schemes.

Someone asks why would ingenious lend to people.  Ingenious didn't, banks did.  Why would banks lend rather than invest in the films themselves?  You could ask that of bank loans to ANY business.  Banks are in the business of lending money, not investing directly into thousands of differing businesses.

The problem now is that the media hysteria is such that just about anything that allows a tax deduction is viewed as just HAVING to be a tax fiddle.

As no doubt some wise person remarked during the Salem witch trials, not everyone with a wart on their nose is a witch.  

laurenceexigent's picture

Dirty Underwear

laurenceexigent | | Permalink

This is where it gets interesting. It was never about tax evasion, but rather the PR surrounding Tax Avoidance. Do we seriously believe that Mr Mitchell is the only MP who will be scooped up by the HMRC's rampage through tax avoidance schemes. Lets see how important the morality of the argument really is to the Govt when lots more soiled linen gets exposed. After all I cant see George being too thrilled about being compared to Jimmy Carr or other such despicable types. Can you? 

 

Confidentiality    1 thanks

Cynical_Templar | | Permalink

Doesn't the information come from the public record in that he would have been a member of an LLP which can be found on Companies House?

carnmores's picture

sloppy sub editing

carnmores | | Permalink

ex Chief Whip please

Andrew Mitchell    1 thanks

kenatnam | | Permalink

..would be the perfect head of a Commons Select Committee looking into HMRC's failure to answer its phone in 20% of all cases.

If HMRC could get up to the 93% industry standard then the savings to this country in business time saved would be far greater than its efforts at chasing tax avoidance, which by the way is still not illegal... a bit like policemen chasing you down the street on the off chance that a law is passed some time in the future making what you are legally doing today illegal.

Hoisted by own Pethard

The Black Knight | | Permalink

"Hoisted by own Pethard"

comes to mind.

They really don't have clue do they.

How do you find out that an LLP is a tax avoidance scheme though? that is not part of the public record, and I doubt if the scheme provider or the client is going to wave a flag about it. There has to have been some inappropriate behaviour somewhere.

Phone hacking, bin rustling, or perhaps bribery and corruption.

The correct course of action is to take these matters to the tribunal and let the process of law take place! Not engage in a media pasty throwing incident.

I am anti avoidance schemes, because they often don't work. But both sides need to play by the rules so that the law is upheld.

 

Who's fault is it?    3 thanks

The Rogue | | Permalink

Government writes tax law; tax accountant sees potential; client with a bit of spare cash is asked the question "do you want to pay less tax?"; client who knows nothing about tax (that's why he has a tax accountant) says "yes - no brainer"; scheme gets under way; Government says "buggar" and closes loophole.

That's how it used to be but now the last step is Government cries "witch" and makes scapegoat of nasty taxpayer when the problem is that their tax law had flaws in the first place.

naomi2000's picture

Loans

naomi2000 | | Permalink

Hi Shirley,

 

The loan mechanics vary from scheme to scheme and provider to provider but typically the promotor identifies a third party bank with expertise in film finance to work with and part of the investor's application is actually an application for the loan.  So the loan will be from a real third party bank but the initial steps will have been made by the promotor. 

Does that help ?

 

ShirleyM's picture

Yes thanks, Naomi

ShirleyM | | Permalink

Investors were required to put up a minimum of £36,000 and Ingenious would loan the investor a further £64,000 to take the investment to £100,000.

It appeared in the report than Ingenious themselves were advancing the funds. I thought it sounded odd and that is why I queried it, so thanks for the explanation.

Someone somewhere has it in for this guy!    1 thanks

Vaughan Blake1 | | Permalink

The Black Knight wrote:

Why are Mr Mitchell MP tax affairs not confidential until they reach the tribunal?

Don't you think?

Were films actually made ?

ds | | Permalink

If the film businesses were going concerns and production was started and heaven forbid they actually made a profit, then what is the problem? Film production is costly and risky and success is never guaranteed !

 

I had to laugh when these tax incentives were first introduced by Labour so that they could be seen as being part of the trendy cool Britannia crowd. But why only for the film industry? What about manufacturing in general? Probably the reason was more to do with not wanting to be seen to be involved with dirty industries which are better left to the Indians and Chinese to get on with while the rest of us can carry on supping on MP expenses provided  socialist Champagne and maxing out the country's credit cards.

does look that way

The Black Knight | | Permalink

Vaughan Blake1 wrote:

The Black Knight wrote:

Why are Mr Mitchell MP tax affairs not confidential until they reach the tribunal?

Don't you think?

Does look that way doesn't it.

Strange thinking    2 thanks

vstrad | | Permalink

Unlike some schemes, this one did actually invest in real films. In doing so, it brought joy to millions and generated hundreds of skilled jobs in the UK - which was, of course, why the Government introduced the tax concessions in the first place.

It's almost as if Governments want some good post-Budget publicity when they announce these schemes but don't want anyone to actually use them.

MPs should have no greater

SJH-ADVDIPMA | | Permalink

MPs should have no greater than £500k assets in order to stand, and should be paid a multiple of avg UK PAYE earnings say 2 times. All of a sudden we may all get richer.

MPs expenses 'presumably now open to scrutiny'.

KateR | | Permalink

No presumption about it, go to IPSA's website and you can view all MPs expense claims.

Fine in theory, but...

Vaughan Blake1 | | Permalink

SJH-ADVDIPMA wrote:
MPs should have no greater than £500k assets in order to stand, and should be paid a multiple of avg UK PAYE earnings say 2 times. All of a sudden we may all get richer.

What about wives, partners, adult children etc etc?  Just remember that in Whitehall you are never further than one centimetre from a 'loophole'

 

How did Andrew Mitchell's name get out?

louisVW4 | | Permalink

Maybe someone from the Met let slip next to a journalist in a pub!

Answer

Justin Bryant | | Permalink

It is not difficult to find out who has done these schemes. You can find out via a few clicks on the website below, which will show all the members of any UK LLP (you can get the names of the LLPs from Google etc.).

http://companycheck.co.uk/ 

 

get that bit

The Black Knight | | Permalink

Justin Bryant wrote:

It is not difficult to find out who has done these schemes. You can find out via a few clicks on the website below, which will show all the members of any UK LLP (you can get the names of the LLPs from Google etc.).

http://companycheck.co.uk/ 

 

get that bit!

but how is the jump made from LLP to must be an avoidance scheme.

Are they disclosing that a scheme has been used in the accounts?

The Black Knight

Justin Bryant | | Permalink

As I said, you can get the names of the LLPs from Google etc. It is not rocket science. You then just click away on the above companycheck website and one link to a member reveals another LLP and another member and so on. Have a go & you will see what I mean!

This must be some sort of    1 thanks

sallycox | | Permalink

This must be some sort of witch hunt.

Is taking advantage of one's personal allowance classed as 'tax avoidance'? It clearly reduces the amount of tax one has to pay.

Not far short of a witch hunt    1 thanks

AndyC555 | | Permalink

sallycox

I agree it's now a witch hunt and one where those leading the hunt haven't any real clue about what they are hunting.

We are not far away from the situation a while back where a house was daubed with hateful graffiti because some boneheads got confused when they found out that the occupant was a paediatrician.

 

Money for old rope

Huw Williams | | Permalink

Red Leader wrote:

I don't know why taxpayers bothered with these schemes. Talk about the tax tail wagging the investment dog.

As said by a previous poster, this was really just tax deferral. Even so, these investors just salivate at the year 1 figures (tax saved = money invested), and the promoters know the punters buttons to push.

A DCF analysis would probably show not much better than a 5% return.

 

Not sure where you get your 5% from.  If you get a £100,000 investment for nothing (because the amount you put in comes back as tax relief), then you are surely on to a winner all the way.  If the film fails, you get nothing (but you spent nothing).  If the film succeeds you get money for nothing.

ShirleyM's picture

@Huw

ShirleyM | | Permalink

They don't get their full investment back, just tax relief on the investment, if the HMRC settlement opportunity example is correct, as follows:

Example

  • partner A invests £1 million into a partnership
    • £200,000 is cash from his own resources
    • £800,000 is by way of loan finance as part of the scheme
  • the objective is to claim loss relief of £1 million
    • at a tax rate of 40% this equates to £400,000 cash tax
  • relief allowed under the opportunity is limited to £200,000 (less any disallowance for fees)
    • At a tax rate of 40% this equates to £80,000 cash tax

The disallowance for fees are those spent on tax advice, or payments to Independent financial advisers or circular funding arrangements.

@ShirleyM

Huw Williams | | Permalink

I was basing my analysis on the original article which said that the tax relief did equal the cash put in.

@ShirleyM

Huw Williams | | Permalink

Also you are quoting from the HMRC settlement opportunity.  This is for people whose schemes are deemed not to work and are given an opportunity to settle their tax affairs. 

Investors would have gone in on the basis that they would get the full tax relief available at the time, so relief on £90k would be expected on a £36k cash (plus £64k loan) investment.

ShirleyM's picture

Thanks @Huw. We maybe have crossed wires.

ShirleyM | | Permalink

I don't think they get an investment for nothing, as money will still be owed to someone, ie. Ingenious, or some third party lender.

That isn't changed by the settlement opportunity. The only thing that changes is that you don't get immediate tax relief on the whole amount, ie. only the actual cash invested gets tax relief.

Leastways ... that's how I understand it to work.

I am beginning to understand the mechanics of this.    2 thanks

Jekyll and Hyde | | Permalink

LLP's loan's investor the £64k. If film is profitable then investor wins by way of a pay off and then repays the loan. If the film makes a loss, the LLP (and its creditors) seek to recover the loan from the investor in full.

If this is the case I would agree there is genuine risk to the investor and therefore why the investor would seek to invest £100k into the film and seek to claim tax relief on their full investment.

However if the LLP agreed, in advance, that the loan could be written off if the film failed and this loan would not be pursued, then I also agree that there is not an initial investment of £100k, but only £36k. I would understand why HMRC would challenge the £100k investment against the tax relief. I would also consider the £64k, not to be avoidance, but somewhat more deceptive.

  

 

ShirleyM's picture

Exactly J&H    1 thanks

ShirleyM | | Permalink

Which brings us back to my first 2 posts on here. If the loan is a sham, then it is dodgy.

If the loan is a genuine loan, and the investor has to pay it off regardless of profits/losses, then they are claiming tax relief on a genuine investment.

I think the HMRC settlement opportunity seems reasonable and fair to genuine investors, as it sounds like genuine loans would be allowed for tax relief, and only the 'circular funding arrangements' would be disallowed..

glenbogle's picture

Somewhere

glenbogle | | Permalink

A long time ago  Robert Venables said in effect  Film Partnerships were a good idea.

I wonder what would be the learned gentleman's view at present?

Paul D Utherone's picture

re 'Were films actually made

Paul D Utherone | | Permalink

ds wrote:

If the film businesses were going concerns and production was started and heaven forbid they actually made a profit, then what is the problem? Film production is costly and risky and success is never guaranteed !

then in regard to the LLP referred to (Ingenious Film Partners 2) very much so, see the OP "Avatar, Girl with a Pearl Earring and Shaun of the Dead". All of which received full release and must have a tail of revenue from TV & DVD I should have thought.

If you're sad and sit to the end of films, or spin through credits on the OnDemand service to see if there are any 'extras' at the end you quite often see Ingenious as a co-producer.

The question of loans

Huw Williams | | Permalink

I dont know the answer to this.  But I think I have seen arrangements (not Ingenious who may do things differently) where specific-recourse loans were used.  Put it another way, the loans were only paid back out of profits.  There was a commercial logic to this - the loan money had already been committed to the film and effectively written off by an investor who would get his money back if but only if the film made money - so he was no worse off by offering these sorts of loans to generate the additional funding needed to get the film made.

glenbogle's picture

"loans"

glenbogle | | Permalink

It is my understanding that with regards to 'loans' in these schemes  to "participators" , the the loan capital lent is covered by thrd parties  and the lending banks so the borrower is in a non recourse arrangement, i e  he or she does not worry about repaymnent as s/he is protected by these undertakings by other parties.

I think this is something I wish I had on my mortgage.

ShirleyM's picture

@Glen

ShirleyM | | Permalink

Does that mean they retain the tax relief on the 'loan' even when the loan is never repaid, so in effect, the 'investors' are getting tax relief on other people's investment?

"loans"

AndyC555 | | Permalink

glenbogle

Your understanding is based on what? Who are these 'third parties' cheerfully advancing money with no prospect of getting it back? Why are they doing this?

The firm I work for has had some involvement in film schemes and every investment is genuine, every loan a real one.

Seems to me these days that people only need mutter under their breath "I bet it's a con" and every tax plan is declared a scam without any further enquiry required.  

Andy's loans    1 thanks

Huw Williams | | Permalink

We are just talking about our experience.  We are not saying everthing is a scam and no loans are genuien, just that some setups do (or did) have non-recourse finance available.

glenbogle's picture

" Loans"

glenbogle | | Permalink

The third parties cross guaranteeing:

Usually the film owner

The producers

The promoters

the banks

The lending bank

All ensuring that  the 'borrower'  was protected from any default on repayments. This was effected by a series of agreements  between the parties.