Investors facing action over failed tax saving schemes need to keep their nerve and face a quantum leap if they want to secure significant compensation from their advisers.
Lawyers are warning investors may receive a reduced pay out, if any at all, if they do not ride out action from HM Revenue and Customs (HMRC).
The legal point is establishing ‘quantum’ or the value of any loss.
Settling early with HMRC for reduced penalties and interest could result in a lower compensation pay-out from investment advisers.
So, investors could suffer a significant loss without having the evidence to prove the final figure because they paid up before going to a tax tribunal or court as the figure they pay sets the loss.
Tax expert Jason Collins, who works for law firm Pinsent Masons, has highlighted those investors who settle early could undermine their case for misselling
£2.6 million compensation
He spoke out after the Financial Ombudsman Service (FOS) helped five investors win a £2.6 million pay out against their advisors 20Twenty Independent Ltd.
The advice given by the firm to invest in a tax mitigation scheme which involved Crossover Film Partnerships was not only ‘unsuitable’ but the clients were not informed of the ‘true nature’ of likely losses.
Mr Collins says that if investors want to pursue a claim for misselling against their financial advisers, they will have to let litigation with the taxman ‘run its course’.
“There will be lots of taxpayers who will have been promised generous tax relief but they will have found themselves stuck in a quagmire of investigation by HMRC and aggressive litigation,” he said.
He added that investors would need to consider the terms offered by HMRC for settling their existing liabilities, but while they were not being particularly generous, the settlement could have an impact on their misselling claim.
One of the problems being highlighted is that the schemes being investigated by HMRC involve gearing which means the adviser received a commission on the amount being geared and not on the amount of their client’s investment.
Incentive to sell
This means that advisers had a lucrative incentive to sell some tax mitigation products.
The advice may be for investors to sit back and let litigation with HMRC run its course even though the schemes involved were backed, and indeed still are, by legal opinion from leading QCs.
The whole area of tax mitigation schemes has become increasingly controversial and affecting a range of wealthy investors from fund managers to Premiership footballers.
Many of these investors are now facing tax bills but may have potentially been missold their investments in carbon trading, property and film partnership schemes.
In the case of Crossover Film Partnerships, the issue was that investments did not qualify for tax relief and the ombudsman found that investors were not informed of the potential risks because the scheme was borrowing money for more investments, which is known as ‘gearing’ or ‘leverage’.
