HMRC’s zeal over tax avoidance is harming investment in British film

Mark had the following article published in this morning’s Daily Telegraph. To read online click here.

As the New Year broke, Chancellor George Osborne visited Ealing Studios to showcase the thriving British film industry. He hailed the welcome news that aggregate investment last year in UK-based film production had, for the first time, topped £1 billion, aided by a tax break that has attracted huge sums of private cash into the industry.

Priaising the creative sector’s vital economic contribution, the Chancellor enthused about introducing a theatre tax break to match those in place for high-end TV, film, and televised animation – a promise he duly delivered in this month’s Budget.

I welcome the government’s initiatives for the creative industries; my constituency is home to the globally competitive creative sector in Soho and I campaigned for three years for the animation tax credit.

However, I recently listened to a tale of woe from a group of respected and experienced private investors who have found themselves squeezed awkwardly between the government’s ambitions for the creative industries and its other much-vaunted priority – a clampdown on tax avoidance.

Their experience should be a warning to any investor who has sought to engage in an open and transparent relationship with HMRC. It should also give Treasury ministers pause for thought as they pursue their anti-avoidance agenda.

Some years ago, the group approached HMRC with their model for private investment in the UK creative industries. After extensive discussion on its structure, the group was not only given the green light but told that their vehicle was exactly the kind of thing the government envisaged. On the basis of this understanding, the group invested more than £1 billion of risk capital into the British film industry, leading to the production of more than 60 films, including successes such as Notes on a Scandal and Best Exotic Marigold Hotel.

To date, the partnerships have generated over £1.13bn of income, with a further £1.08bn projected over the remaining commercial life of the film slates. All of this income is taxable right here in the UK.

These investors were firmly considered as ‘inside the tent’ by HMRC. Nevertheless, as a precautionary measure, they elected to place themselves on the Revenue’s Disclosure of Tax Avoidance Schemes (DOTAS) register. As tax avoidance measures are now so widely drawn, it has been common practice to err on the side of caution and sign up to HMRC initiatives of this sort. Since the tax authorities increased the fine for non-disclosure from £5,000 to £1 million two years ago, the incentive to register, which hitherto had no downside, has only increased.

The investors thought nothing more of their DOTAS registration until a flurry of high-profile scandals came to light where film investment vehicles had been used by celebrities to slash their tax bills. Rather than sift egregious examples of so-called ‘aggressive avoidance’ from legitimate investment vehicles, HMRC threw a blanket of suspicion over any DOTAS-registered scheme.

Keen to establish their vehicle’s legitimacy as swiftly as possible, and exhausted by the consistent mismanagement of their case by HMRC, the investors elected to put their scheme before an independent tax tribunal.

Currently, if the UK tax authorities wish to challenge the legitimacy of a DOTAS-registered scheme in court, the taxpayer is permitted to hold onto the disputed tax while the case is being resolved. But the government believes this incentivises scheme promoters to delay resolution as long as possible, no matter how tenuous a vehicle’s legitimacy. Under new rules confirmed in the
Budget, disputed tax is paid upfront to HMRC and returned if a scheme is subsequently found to be legitimate.

The problem is, no exception is proposed in cases where taxpayers have demonstrably not sat back and delayed as long as possible. Indeed, my investor constituents are desperate to get their dispute settled by an independent arbiter as a matter of urgency. In their case, it is HMRC baulking progress. Having secured a tribunal date, HMRC has requested an eight-month delay, conveniently pushing the case into the remit of any potential new legislation.

The reasonableness of the government’s proposed policy is not in dispute. Legitimate investors understand the need to deal quickly with the tens of thousands of outstanding mass-marketed avoidance cases clogging up the courts. They simply propose an exception in the case of existing DOTAS-registered schemes whose promoters have taken all reasonable measures to enable a dispute to be brought before the statutory appeals tribunal.

The investors’ arrangements are as far removed from a ‘tenuous’ tax avoidance scheme as it is possible to imagine. Had they been aggressive tax evaders or avoiders, it is highly unlikely that they would already have paid tax on £1 billion of taxable income to the Exchequer or sought to engage in such a transparent relationship with HMRC. They see it as a shocking breach of faith that HMRC is now attempting to impose a requirement on them to pay disputed tax upfront when it is they who are actively delaying the tribunal. Worse still is the message being sent to other private investors who might be deterred from future investment in the UK film industry.

DOTAS was designed to promote openness and transparency in investors’ relationships with HMRC. It is now, in effect, introducing retrospective legislation with DOTAS declaration being used as a stick to beat legitimate investors who never planned on having the liquid assets to meet disputed liabilities.

I fear this augurs ill for the government’s broader, much-vaunted anti-avoidance plans as well as its overarching aim to make Britain ‘open for business’.

The Chancellor is right to encourage investment via additional tax credits. But if those efforts are to be successful, he must reassure legitimate investors that previously agreed, transparent vehicles are not, at some point, going to be subject to unplanned-for, upfront tax liabilities in the event of a sudden change to the rules by HMRC.

Government efforts on tax evasion need to go hand-in-glove with the creation of a comprehensive pre-clearance regime that would allow firms and their tax advisers to road-test proposed taxation schemes with HMRC officials. Ideally, if this were to work efficiently, no new scheme would be permitted to be marketed until approved.

Political alarm bells should now be ringing as Parliament presides over an unprecedented transfer of power to HMRC, itself too often a watchword for incompetence. This agency of the state is being empowered not only to apply the law, but to rewrite it.

The government’s laudable aims both to encourage investment in British industry, and clamp down on aggressive tax avoidance and evasion, should not be incompatible. Shamefully, HMRC is making them so.

Mark Field is MP for the Cities of London and Westminster