Icebreaker tax avoidance scheme crushed
HMRC has won a landmark case in which the Icebreaker partnership schemes were shut down, after a first tier tax tribunal ruled it was set up solely to shelter more than £130m in tax.
Around £336m was invested into the scheme, which was developed by entertainment firm Icebreaker Management and adopted by 51 partnerships. The scheme purported to find finance for creative projects within the music industry and offer a return for investors, but in fact generated losses.
Included in the investors were singer Gary Barlow, and two of his Take That bandmates Howard Donald and Mark Owen. The band's manager, Jonathan Wilde, was also involved in investing more than £66m into partnership Larkdale LLP.
Their partnership then reported losses of £25m, which was used to avoid tax on £63m the band had earned from their 2005 reunion world tour and CD sales. They are said to be considering undertaking a world tour late this year to raise the estimated £30m they owe in tax as a result of the scheme’s failure.
They and around 1,000 other investors may have to repay millions of pounds in tax to HMRC.
Following the revelation, MP Margaret Hodge said she thought Barlow should hand back the OBE he received in 2012 for services to music and charity. But David Cameron spoke out against the idea, saying that his award had no connection with his engagement in a tax avoidance scheme.
The aim of Icebreaker - which made use of tax schemes for the creative industries - was to secure sideways relief for members of all the partnerships, the tribunal ruled, and to inflate the scale of relief by unnecessary borrowing.
"...coupled with the illusion that the borrowed money was available for use in the exploitation of intellectual property rights by the device of the purported payment of a large production fee, offset by the equally purported payment of a fee for a share of the resulting revenue.
"In our judgement, the schemes substantially failed in their purpose. We accept, nevertheless, that each of the appellant partnerships was carrying on the trade of the exploitation of property rights," Judge Colin Bishopp ruled.
Some partnerships had appealed against closure notices, which succeeded in part. The Judge ruled that relief should be given for what the tribunal found to be revenue expense incurred in the year to which the closure notice in each case related, though not for what they have found to be capital expenditure or represent a pre-payment.
Icebreaker: The mechanics
The tribunal described how the schemes worked, as follows:
Partnerships entered into agreements for the acquisition and exploitation of certain intellectual property rights. Each partnership acquired a set of rights for a modest amount of money and for much larger payments agreed with an exploitation company that it would exploit the rights.
The revenue from the exploitation was to be shared between the partnership and the exploitation company, which was also required to pay guaranteed sums to the partnership.
In addition, each partnership entered into agreements with the promoter of the arrangements by which, in return for substantial payments, the promoter rendered various services to the partnership.
The members’ capital injections which financed the payments were in each case derived in part from their own resources and in part from secured borrowings from a bank.
Commenting on the case, Jonathan Russell, partner at UK200 Group member firm ReesRussell defended investors of the scheme, saying they were only following advice given.
"The majority of ‘tax schemes’ fail on the grounds that they had no commercial intent other than to save some people tax. However, should individuals who invest in such schemes pay penalties other than those claimed by HMRC?
“The answer must surely be NO as they will often only be taking advice from their advisors. There is a question whether the advisors’ terms of engagement should be looked at," he said.
The AccountingWEB community also shared their views on Any Answers:
Member Glennzy focussed on the high profile Take That investors and the public and media backlash they are receiving for being involved in the scheme: "It does seem to depend on whether or not your face fits as to how much flack you take for being involved in these schemes. I wonder what sort of recourse the lads will have against the company and sold them the scheme to offset the penalties and interest that will land on their doormat soon," he said.
Opinion was also torn between whether or not Barlow should hand his OBE back.
ShirleyM believed he should as she said she finds it difficult to sympathise with someone making a living from those he is cheating. Those who believe he should keep it argue that there is no direct relationship between Barlow's OBE and his tax affairs.
But other memberse, emphasised the point that Barlow is a singer and not a tax expert - and therefore had relied on advice about the scheme from what he had thought to be a professional. However, there was also argument that Barlow was "not naive" and was most likely made fully aware of what the scheme was before he entered into it. But whatever the case, the members said, the scheme was not illegal.
"My blame however is on HMRC for not bringing in proper rules years ago to address these more blatant schemes," Sheepy surmised.