Various individuals invested large sums and then took out additional ‘non recourse’ loans (which means that full repayment was not required) to invest in a trading partnership.
A person might put in £100, take a loan for £900 and so invest £1,000. If the partnership made a loss rather than a profit, you would have made a loss of £1,000. That loss is set against other income. If you have a tax rate of 45%, you have thus saved £450 in tax for a cost of £100 plus expenses of the scheme.
Fundamental to the appeal was that the lower courts had erred in finding that the activities carried out by the partnership did not amount to a trade.
The Court of Appeal found the lower courts were entitled to reach their conclusion.
If there is no trade, the loss is not a trading loss and cannot be set against other income. The scheme therefore failed.
The partnership must now decide whether to request permission to appeal to the Supreme Court.
When we have a final decision, as when no appeal is made or a further appeal is heard, and if the final decision is in favour of HMRC, the tax will be payable.
In the example above, the tax would be 450% more than the amount put in. There will also be interest to pay. HMRC may also seek financial penalties.
There are a number of other schemes also under challenge. While the facts vary, many revolve around whether there is a trade or whether the use of ‘non recourse’ loans can create an allowable loss.
Investments into the schemes currently going through the courts were made some years ago.
In some instances, the investors may have been high earning then but are no longer so.
Failure of the scheme will create a large tax bill which they will have difficulty paying. Some are likely to lose their home. Some may become bankrupt. Many will no doubt, with hindsight, question the wisdom of the original investment.
Going forward, it is likely that HMRC will be publicising the consequences of past failures with a view to making it less likely that people are tempted in to making such investments.
Those investing into any tax scheme should know that there is a high likelihood of HMRC challenge.
This case is likely to be pulled in to the on-going debate about tax avoidance, that is deliberately planning to organise one’s affairs to pay less tax than one otherwise might.
At one end of this spectrum of behaviour are ISAs, at the other is planning which effectively is using a lie and is thus approaching illegal tax evasion.
Taxpayers and advisers need to start having some pretty frank conversations both about what is likely to ‘work’ and what levels of risk certain tax planning involves.