Disgruntled investors who put their money and trust into tax mitigation schemes which were later closed down by HM Revenue and Customs (HMRC) are increasingly suing their advisers, says a top City law firm.
Reynolds Porter Chamberlain (RPC) says there’s been a surge in the number of professional negligence claims being launched against those who promoted the schemes following a crackdown by HMRC.
Most of the claimants are those who participated in the boom years of tax mitigation schemes between 2005 and 2007, but many were later successfully challenged and closed by the taxman.
Those investors have now had to pay disputed taxes plus interest to HMRC and are now attempting to recoup their losses by making a claiming against their advisers and the scheme promoters, bemoaning that they were given negligent advice when recommending the scheme.
RPC says that the claims have been made against a wide range of the defendants, including financial advisers and accountancy firms.
Robert Morris, a partner with the law firm, said HMRC is closely examining tax mitigation schemes which were created before the global financial crises hit.
He added: “HMRC is taking a hard-line approach to those investors and it’s frightening a lot of the investors into paying their disputed tax, without showing that the amount is actually lawfully due.”
He said that many of the investors are now paying up what the taxman is asking for rather than challenging their claim.
Then, he said, the same individuals are trying to recover their money from their advisers by arguing that the scheme’s promoters did not properly carry out due diligence before selling the schemes.
The investors also claim that they weren’t properly warned about the risks of a potential HMRC inquiry.
The situation is of growing concern to professional indemnity insurers and Mr Morris urged them to defend the claims because many were ‘shaky’.
Some of those making claims are also arguing that the investment vehicles were inappropriate for their financial circumstances and some say that the schemes shouldn’t have even been recommended.
However, it looks likely that most claimants will be unsuccessful since they will discover that their claim has been time-barred or will be struck out because it was filed with hindsight.
Some of the claims have still to be examined by a tax tribunal.
HMRC has told the National Audit Office that it is investigating more than 40,000 cases of alleged tax avoidance, with around £10 billion in unpaid tax at stake, though they make clear that they are struggling to control the situation.
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