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Patent investors face investigation

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22nd Apr 2013
Freelance journalist
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Wealthy investors who bought shares in intellectual property companies could face criminal investigations as HMRC increases pressure on aggressive tax planning.

The UK tax authority recently sent letters to clients of BlackStar, a UK tax and investment adviser, warning them that “arrangements relating to subscription of shares” in two companies were the subject of a criminal investigation. Suspected offences include conspiracy to cheat the public revenue and offences contrary to the Fraud Act, HMRC said in its letter.

The investors bought shares in two companies (Luxpand Limited and Showcase Booths Limited), which HMRC suspects were designed to create artificial losses for tax relief.

BlackStar responded in an email to its clients that HMRC’s threat of criminal investigation was a “disruptive and intimidating tactic” to obstruct legitimate investment schemes.

Criminal prosecutions

Most tax disputes are settled by out of court agreements through civil procedures. In the past few years, however, HMRC has begun to use the threat of criminal prosecution against aggressive tax planning. HMRC is now targeting the investors in the schemes, not just the accountants who promote them.

Last year, two former directors of Vantis were jailed for trying to defraud taxpayers of £70m.

Since 2010, HMRC says it has prosecuted more than 1,560 individuals for tax crimes, with a 91% success rate in court. But politicians have criticised HMRC’s record on challenging tax evasion.

In February, the House of Commons Public Accounts Committee criticised HMRC for  failing to block tax avoidance schemes worth billions of pounds.

Promoters of tax avoidance schemes were “running rings” around HMRC, said Margaret Hodge, chair of the House of Commons spending watchdog.

Tax avoidance schemes used by thousands of wealthy individuals and small businesses have put about £10bn of tax revenue at risk, HMRC has estimated.

In the email, seen by AccountingWEB, the tax adviser reassured investors: “We have seen copies of what appears to be a standard letter from HMRC and we have subsequently taken specialist legal advice from a lawyer in this field who has confirmed to us that investors are not under criminal investigation. Rather it is the legitimacy of the investments being called into question.”

AccountingWEB understands that investors subscribed to two BlackStar investments involving new companies that applied for patents in 2011. Companies that were not granted patents folded, creating tax losses for investors who claimed relief on their self-assessment tax returns.

The BlackStar letter added that all of its investments “have been made on a commercial basis to profit and this has been borne out by the success achieved at the various patent office hearings”.

Tax experts said that the clients for the two investments, many of whom are thought to be working in financial services, were being targeted because they are considered sophisticated investors.

If a sophisticated investor is shown to have made a false entry in their tax return, HMRC would find it easier to prove that the error was due to dishonesty than if it was prosecuting a less experienced investor, experts said.

One reason why HMRC writes directly to investors is to encourage them to settle tax any owed. If there is a criminal case to answer, then investors may decide to act as a witness for HMRC against their tax adviser.

Tessa Lorimer, a former HMRC prosecutor who is now a barrister at GSC Solicitors, said: “The aim of targeting sophisticated investors is to act as deterrent. HMRC will be upping this type of criminal investigation because it is under pressure to clampdown on tax evasion. If there are criminal prosecutions of investors in tax schemes no one will touch them with a barge pole.”

The two investments marketed by BlackStar could have generated tax losses of anything up to £10m for investors, which would have created up to £4m in tax relief, according to a tax expert familiar with the scheme. BlackStar declined to comment on this figure or details of the investments.

HMRC said it could not comment on an individual cases but a spokesman confirmed a criminal investigation into  “specific tax avoidance schemes” was continuing.

BlackStar - whose tax practice includes former partners at Big Four accountancy firms - said that it had been negotiating with HMRC over the two disputed investment schemes until the department decided to begin a formal investigation.

BlackStar said in a statement: “HMRC refused the concept that any of the investments were successful, despite BlackStar co-operating and supplying them with all the paperwork and explanations. As a result, HMRC has chosen to attack the products by bringing the threat of a criminal investigation.

“This is a disruptive and intimidating tactic that HMRC has used with other firms when not satisfied with the results achieved through a more dignified enquiry process. Our view is that this is a blatant attempt to bring this successful range of investments to an abrupt end.”

HMRC’s criminal investigation into the investments is still gathering evidence. It is not certain that the investigation will result in a criminal prosecution through the courts.

Replies (11)

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By The Black Knight
22nd Apr 2013 12:22

why are they allowed to do this?

I am all in favour of aggressive tax avoidance being dealt with and if evasion is involved then criminal charges should be brought.

BUT surely allegations of criminal conduct when there is insufficient evidence for a trial cannot be right either.

Can a fair trial be achieved after this publicity or have HMRC deliberately scuppered their own case?

I think some of the cultural behaviour of HMRC staff needs looking at too, as some of it falls very short of ethical.

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By taxtroubleshooter
22nd Apr 2013 12:34

Scaremongering headlines make fundraising more difficult

The headline suggests that investors in patents in general will be investigated, which is clearly not the case. As many fund-seeking businesses and their advisors will tell you, it is difficult enough already to talk about tax-advantaged investment or tax structures (such as a Patent Box  or SEIS-compliant company) without being unfairly tainted by the activities of those allegedly stretching the rules on those tax breaks to breaking point and beyond, so we don't need this sort of scaremongering. It's what I would expect from a certain tabloid with Daily in the title, but not from the usually measured and always informative AccountingWeb.

It made me read the story, but I'd like to think I would have anyway even if it hadn't been so provocative and - for me at least - misleading. May I suggest that you change it to something more representative of the HMRC attack on a specific alleged abuse of approved tax advantages?

 

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By why always me
22nd Apr 2013 14:41

Why would you want to lose money

Excuse my ignorance, but if these people lost money, surely entitled to relief. Why would you lose money to 40% on tax??

Bemused!!

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By Shay Daly
22nd Apr 2013 15:25

Thugs

This is blatant abuse of position by HMRC.Effectively,they are trying to bully taxpayers into submission.HMRC are charged with enforcing the  relevant tax rules.This should not be interpretated as extending to gutter-tactics such as in the instant case.Bullying taxpayers from participating in tax avoidance  is happening on a daily basis.Such behaviour is illegal,unfair and inappropriate  clearly marking out a need for taxpayer protection from thuggery by the law enforcers.

HMRC's approach will make all equity fundraising which has a TAX deduction element more difficult and will have a negative effect on economic behaviour.

An effective watchdog is required to protect taxpayers from this type of institutional abuse.

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By hiu612
22nd Apr 2013 17:11

Why would you want to lose money?

I have no knowledge of the particular structure of this investment, but the usual approach is that the patent application is a long game. Year one costs are often impaired on grounds of prudence, giving a year one loss, and tax relief from sideways set off. But there remains the potential to benefit from any sucessful applications in year 2 / 3 . 4 or beyond. If you throw in a bit of creative loss allocation, your investors can pay a little less to buy the investment than the tax charge they save. If it goes down the pan, nothing lost. If it goes well, they get a good result. That'd be my guess at why people buy into these.

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By ShirleyM
22nd Apr 2013 17:43

Maybe it was a loss on paper?

There have been a few successes by HMRC recently, where people claimed massive losses to get tax relief, through various schemes, but there was no actual financial loss.

I doubt HMRC would pursue any schemes unless they thought they had a chance of success, so maybe these losses are not real losses and are a result of creative accounting, or moving money around?

I guess we will find out if/when it gets into court.

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By TaxMatters
22nd Apr 2013 19:09

This makes a change

For decades we have been inventing things and putting them on the shelf so that the Americans, the Japanese or lately the Chinese can produce something similar, better and cheaper. Thank god we have now found a solution! All we have to do is get the government to offer incentives to invent things them persuade the Revenue to prosecute these criminals for doing it. There is a downside though - the Americans, Japanese and Chinese will be as [***] as hell that we are supplying fewer products for them to imitate - how thoughtless of us Brits. Maybe we should compensate by increasing the aid to the poor poppy farmers in Afghanistan.

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By The Black Knight
23rd Apr 2013 10:08

The answer is simple?

1, Take it to the tribunal and see if it fails as many have.

2, no resources 38 year tribunal waiting list? Divert some resources from CCTV, speed cameras and other repressive expenditure.

3, If it's criminal prosecute, otherwise it was clearly not criminal and everyone is allowed to do it?

4, refill the bucket and spend the cash in getting Britain moving.

It's not rocket science but we do have retards in charge.

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By The Black Knight
23rd Apr 2013 10:29

what?

"Since 2010, HMRC says it has prosecuted more than 1,560 individuals for tax crimes, with a 91% success rate in court. But politicians have criticised HMRC’s record on challenging tax evasion."

Is this benefit fraud? and or missing trader fraud and a spin on tax evasion? Like the bedroom tax and the pasty tax and the tax on old age?

Has anyone else seen these 1500 cases or do you feel like a mushroom too? (kept in the dark and fed on bullshit)

I know there were 3 very stupid plumbers (hardly complex) but then they lost interest after telling us they had caught 600.

The deliberate defaulters list is rather short and shows they are not prosecuting and probably not collecting either.

The Fact is HMRC do not prosecute!! Do not carry out effective investigations. Are blind to the amount of tax going walkies.

They will spend hours and hours on trivial private use add backs though?

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By Ian McTernan CTA
23rd Apr 2013 13:02

Trial by exposure?

This seems to be HMRC's new tactic- to write to all the clients telling them there MIGHT be a criminal investigation and to settle up their tax now- before they have proved anything.

Basically damning the advisor in the eyes of the public before anything is proven and hoping to put enough pressure on them that they fold, as they will find it hard to attract new clients whilst this sword is held over their heads, and they are forced to spend millions on legal fees.

I wonder what the chances are of Blackstar claiming against HMRC for defamation and lying to their clients if a criminal prosecution does not now go ahead or it goes ahead and Blackstar wins.

This is no different than an electricity company writing to you and saying you might be subject to a criminal investigation unless you pay them an extra £1,000 which they will hold against your account defaulting, on the off chance.  No basis in fact (yet), and just as wrong.

HMRC aren't winning any friends with this sort of scattergun approach, and one day they will pick the wrong firm to try it on with and will end up paying millions in compensation when their accusations prove completely groundless.

I'm all in favour of ending tax avoidance schemes and catching tax evaders, but it should be done in co operation with the profession who would be able to write much better, simpler legislation that would close so many of the loopholes that exist and are exploited these days.

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Replying to johngroganjga:
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By The Black Knight
23rd Apr 2013 13:24

Blackstar have won

Ian McTernan CTA wrote:

I wonder what the chances are of Blackstar claiming against HMRC for defamation and lying to their clients if a criminal prosecution does not now go ahead or it goes ahead and Blackstar wins.

Do you get the feeling a deal was done before the press release? Its a bit like public accounts committee enquiry just to make it look as if something is happening for media purposes when we all know that nothing will happen.

How could Blackstar now get a fair trial if this was criminal?

Blackstar will not pursue defamation case because HMRC have a defence?

Whichever way you look at it it appears it is an engineered stalemate?

I wonder if cash changed hands as is common with government corruption?

 

It's clever as the users of the schemes are driven to accountants that are paid up members of the dodgy club (often the unqualified) and we will never know whether the scheme worked or didn't or whether clients paid up on the threat or took the advice of those with the inside track knowledge.

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