Wealthy investors including Sir Alex Ferguson, Sven-Göran Eriksson and a host of sports stars and City figures could be liable for huge individual tax bills after an attempt to reduce their liabilities backfired.
The 289 investors in Eclipse 35, a film partnership ruled to be an “aggressive” tax avoidance scheme by a tax tribunal in April, could end up paying several times more than the total of £117 million tax they sought to avoid as the Revenue & Customs examines the large bank loans they took on to participate in the scheme.
The Revenue’s latest crackdown resonates in a week in which the tax affairs of celebrities including Jimmy Carr, the comedian, and Gary Barlow, the Take That singer, have been highlighted by an investigation by the Times newspaper, causing a political furore.
David Cameron this week criticised some aggressive tax avoidance schemes as “morally wrong”.
The investors put £50 million of their own capital into the scheme, conceived by Future Capital Partners, and borrowed £790 million from Barclays Bank to buy the film distribution rights to two Disney films, offsetting the interest charged against income tax. Disney agreed to lease the rights back from investors in return for an annual payment spread over 20 years.
However, the Revenue told the Financial Times this week that it was treating the “sub-licensing” payments as income and liable for tax, meaning investors stand to receive tax bills far greater than the income tax they originally tried to avoid.
The Revenue confirmed that it was in the process of sending tax demands to UK-based Eclipse partners, levied on the millions of pounds of income earned and backdated to 2007 when it began operating.
“They will be receiving tax bills for the income from the partnership, backdated. It is as if the scheme never existed,” it said. One law firm said some investors could face “financial ruin”.
At least three investors have already contacted lawyers to see if they can sue financial advisers for negligence over Eclipse 35. Future Capital Partners, which conceived the scheme, has filed an appeal, but said it was up to investors to decide whether to pursue it.
Thousands of participants in similar film investments could also be affected, as the Revenue assesses them in the wake of its victory.
Baljinder Boparan, an investor in Eclipse 35 and wife of Ranjit Boparan, the owner of the Two Sisters food group, said she would end up paying more tax than she had invested. Her spokesman said she was consulting lawyers.
“It has gone horribly wrong,” said Kit Sorrell, senior professional negligence partner at Pannone, the Manchester law firm. “Investors will be required to pay income tax on ‘income’ they have never received.
He is acting for two people who claim that they were not advised that if the Revenue challenged the scheme they could be liable for tax on its income.
“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,” Mr Sorrell said.
Other investors in Eclipse 35 included Lance Uggla, chief executive of Markit, the research company; David Casterton, chief executive for London and Emea of ICAP, the interdealer broker; Richard Baker, the chairman of DFS, the furniture retailer; Philippa Rose, founder of a City headhunter; and dozens of middle-ranking City bankers. All declined to comment.
Sir Alex Ferguson, Manchester United’s manager, declined to comment and Mr Eriksson, the former England football manager, could not be reached for comment.
Several firms of wealth advisers marketed the scheme, and clients paid them fees of up to £50,000 a time, Mr Sorrell said.
Future Capital said it stood behind the investment. “We now have a situation where because of the current economic environment, HMRC [the Revenue] and latterly the government are challenging what are both legally structured and commercial investments,” it said.