A host of sports stars and celebrities, who ploughed money into partnership schemes set up by Ingenious Media Investments in a move to defer tax payments, now face devastating tax bills of up to 20 times their original investment.
Investors in Ingenious Games are understood to have received letters from the company stating that HMRC has denied tax relief for both trading losses and interest costs of the partnership, and for the first time, confirmed that it is seeking to tax the partnership’s full income.
Investors in film partnerships have been bracing themselves for tax bills following a recent court victory by HMRC on the much publicised film scheme, Eclipse 35 which successfully denied investors tax relief on loan interest.
However, in the letter from Ingenious to investors the company says that HMRC has stated it is seeking to tax the partnership’s full income – even though the partners in scheme have never received any income.
It is a move that will have catastrophic consequences for investors as it could mean an additional tax liability in the region of 20 times the original sum they invested in a move to defer tax payments
Ingenious Investments has two partnership schemes – Ingenious Games and Ingenious Films.
It is yet unclear whether investors in Ingenious Films – who include Bob Geldof, Andrew ‘Freddie’ Flintoff, Steven Gerrard, Jamie Carragher, Tim Cahill, Paul Collinwood and Matthew Hoggard have received letters from Ingenious warning them of the tax liability.
However Kit Sorrell, Partner at law firm Pannone, says it is likely that HMRC is enquiring into the scheme and investors should be extremely worried.
In the letter, Ingenious said it is referring the matter to the Tax Tribunal in the same way that Eclipse 35 did and subsequently lost.
The HMRC decision is based on the argument that the partnership was not trading or, if it was trading, it was not trading with a view to make a profit.
However, in the same way Eclipse 35 argued, Ingenious Games believes that having developed and funded a strong range of commercial projects including DiRT, a game from the Colin McRae rally franchise, the question of trading should be beyond doubt.
Film Partnerships were designed to boost the UK film industry by offering tax breaks for investors. However, the schemes have hit the headlines in recent months as they begin to unravel.
Sorrell says what neither investors, nor possibly their tax advisers, appreciated however was that the decision by the Tax Tribunal would also give rise to a tax liability for investors on all partnership income – which has now seemingly been confirmed by the HMRC in the letter to Ingenious Games investors.
Sorrell said: “This latest move is potentially catastrophic for all investors as it seems to have been confirmed that they will be required to pay income tax on ‘income’ they have never received – which now could be up to 20 times their original investment.
“For many investors, this enormous liability will come as an absolute shock and could lead to financial ruin. Many aren’t yet aware that this might happen to them.”
James Clayton, chief executive of Ingenious, said the company had asked to close its partnerships so it could resolve the longstanding dispute at a tribunal.
Sorrell says that a typical situation is as follows. An investor makes a total investment of £20m of which £400,000 is in cash and £19.6m is borrowed from the bank.
In this example, where the scheme is successfully challenged by HMRC, the investor is looking at a tax liability of about £8m – about 20 times the amount of his cash contribution into the investment.
It would have been intended that the ‘income’ the partnership generated would pay back the £19.6m loan and the losses generated through the partnership loan would be offset against partnership income.
Now given the HMRC letter, this investor would face an income tax bill on the partnership income which he never received and which went to repay the £19.6m loan that he invested.
Sorrell says: “Our clients realised that these schemes were complex and they took advice from some of the most prominent names in the financial and tax advice industry before committing themselves. Those advisors, who typically charged investors fees in excess of £50,000, should have advised investors of this risk and the potentially enormous tax liability on the partnership income. Investors ought to have been made aware that, if successfully challenged by HMRC, they could be liable for income tax on ‘income’ they had never received”.
Sorrell warns that many investors may ultimately face bankruptcy from their involvement in these schemes as their opportunity to consider action against their financial and tax advisors for any mistake they may have made in recommending these schemes to them is fast running out.
While Ingenious Games has indicated that it will challenge the proposed action by HMRC at the Tax Tribunal, if HMRC succeeds, many millions of pounds in tax will be clawed back.
Sorrell added: “I would urge anyone who has invested in such a scheme to seek professional advice immediately, whether or not they have received a formal tax demand.”
Attempts were made to contact all the other investors named by the Financial Times but they either declined to comment or did not respond.