Film fraud, tax avoidance, footballers, and retrospective legislation

D Rosen 1. Tax relief to investors in the British film industry: Some years ago, the Treasury opted to attract investors into the British film industry by offering tax relief to offset losses by investors against other tax liabilities. Such tax schemes also attracted a number of opportunists to exploit such tax advantages by appearing

Home » David Rosen » Film fraud, tax avoidance, footballers, and retrospective legislation

D Rosen

1. Tax relief to investors in the British film industry:

Some years ago, the Treasury opted to attract investors into the British film industry by offering tax relief to offset losses by investors against other tax liabilities.

Such tax schemes also attracted a number of opportunists to exploit such tax advantages by appearing to make a film/s which were entirely bogus and never existed.

Before considering a film fraud in its rawest form, let us consider the tax avoidance scheme.

There is a very thin line between tax avoidance and tax evasion. The former appears to be legal, (ignoring of course whether it is moral). The latter is illegal.

2. Failure of Tax-Avoidance scheme:

In the case of Icebreaker LLP v Revenue & Customs [2010] UKFTT 6 upon appeal to the first-tier Tribunal Tax Chamber, the Commissioners for Her Majesty’s Revenue & Customs were successful in defending the decision that such a scheme to avoid tax, failed on the basis primarily that losses claimed were not a trading expense. This case involved a number of investors including Gary Barlow, Howard Donald, and Mark Owen of Take That.

The Icebreaker concept was broadly speaking as follows:

The focus would be upon revenue expenditure generated through a film distributor, rather than capital expenditure. That distributor would not own intellectual property rights to the films produced, but would instead license those rights for a period of years from the producer.

Investors generally borrowed monies to make capital contributions.

There would be a whole host of other linked and associated companies involved in the production including management companies, etc…

The bank account used, was a blocked deposit/closed account.

The Revenue argued that no actual payments were ever made on the basis of the ‘banking mechanics of the Bank and the claimed elements of circularity’.

An usual but clear pattern of those who invested in this scheme was that an investor could not possibly lose more than their net capital contribution. ‘That was the whole purpose of the structure. When accounting principles are intended to produce a true and fair view, it surely cannot be that much of a surprise that we conclude that an accounting and tax loss of nearly £1.5 million should be denied, when the members joined an LLP whose transactions ensured that the LLP, and its members, could not possibly lose more than the members’ contributions, net of the limited-recourse bank borrowings’.

The aim of the Icebreaker concept was set out in a document entitled ‘Information Memorandum’, to set up a scheme whereby ‘92% of each member’s capital contribution…would be available as a trading loss…to be claimed against a Member’s other income’.

Although there were ‘contentions that there were sham elements to the documentation’, the finding of the first-tier Tax Chamber did not make any finding of fraud against Icebreaker. They were predominantly concerned as to whether the tax-avoidance scheme worked and could be relied upon.

3. Film fraud:

Film fraud is a form of financial fraud whereby a person/s is induced by way of fraudulent misrepresentation, and deceit to invest either in the distribution of a film having been produced, which never existed, other than on paper. To induce a potential investor, copious notes and false documentation were produced to give such projects an air of credibility. Scripts were falsified, and other Companies joined in the conspiracy to oil the wheels of the devil’s bogus film project.

Those professional and financial advisors in a position of trust, and knowing what representations they made to their clients would be entirely relied upon, aided and abetted, counselled and procured investors to part with their monies for investment purposes.

These advisors claimed their share of fees and commissions. In some instances, with monies supposedly in closed/blocked deposit accounts, investments were made with returns not being passed on the original investor.

These schemes were primarily designed to steal from the public purse, and deprive citizens of the advantages of tax collection.

Fees advanced for a scheme which was doomed to fail, have been obtained with a view to causing loss to the victim footballer/sportsman, and a gain to themselves contrary to the Theft Act 1978, and the Fraud Act 2006. These are criminal offences which will likely result in imprisonment. Abusing positions and fraudulent misrepresentations by advisors would exacerbate any term of sentence to prison.

On the Civil Courts side, claims could be brought on the basis of deceit, unlawful means conspiracy, dishonest assistance, unjust enrichment, knowing or unconscionable receipt, fraudulent misrepresentation, fraud, and monies had and received.

A claim could also be made under the Proceeds of Crime Act and the Courts may readily award penal damages entirely disproportionate to those monies invested, whereby the investor seeking to be placed into a position they would have been had those monies not have been invested, may see more monies being returned as a percentage of the entire scheme, rather than individual wins and successes.

4. What if the Company advising, has since ceased to trade/insolvent/administration?

Prest v Petrodel Resources Limited [2013] UKSC 34 Current case Law dictates that a Company which started out legitimately but then turned to the proverbial dark side remains a separate legal entity, and therefore seeking to lift/pierce the corporate veil to pursue the Directors personally for losses would likely not succeed. However, those financial advisors for example who only set up shop to deal exclusively with film fraud, may find themselves being pursued personally, irrespective or not as to whether their business/Company exists.

5. Nature and characteristics of the Investors:

High net worth individuals were targeted by a mixture of agents, financial advisors, bankers, and accountants who all gave credibility to such a tax avoidance scheme, and made representations that there would be an initial loss which could be offset against their other income for Income Tax purposes. There was then a promise of huge financial returns over a period of years on the basis of option agreements, and business plans and presentations provided to these individuals.

These individuals relied upon their professional and financial advisors, and parted with their monies. These advisors were in a position of power, and it appears that they abused their position. In some instances, it was the investor’s entire life savings on the basis it should be treated as a pension plan.

A particular group of sportspeople were targeted by Banks, namely footballers to ‘look after’ their financial interests. They simply followed the advice. They did not know, and were not to know that such schemes did not produce any real trading expenses.

6. Nature of advisors:

Radix malorum est cupiditas: Money/Greed is the root of all evil.

Corporate greed, and an atmosphere of criminogenic behaviour, led to due diligence being lax amongst professional advisors, and either those advisors knowing, or having ought to have known that such a tax avoidance scheme could not work in the absence of any evidence of a film being produced and subsequently distributed.

Yet, fees were taken for such work, and the monies invested, supposedly remaining in closed/blocked deposit accounts, but this was not always the case. The investors whose monies it was, never saw any financial return on the secondary investments. They did not know about them.

7. Retrospective legislation:

In the case of R (on the application of Huitson) v HMRC [2011] EWCA Civ 893 a decision resulting from European jurisprudence, to close an aggressive tax avoidance scheme, went one significant step further by applying the legislation retrospectively by 21 years.

This means that any professional or financial advisor giving advice on tax avoidance schemes and anyone else for that matter, needs to add an additional caveat that such advice may change in the event that legislation can apply retrospectively. Of more concern to those who think deeply and then sleep comfortably at night that they have the comfort of Leading Counsel’s advice protecting them on a legitimate tax avoidance scheme: think again. What was deemed to once be a lawful tax avoidance scheme, could retrospectively become unlawful, and/or tax evasion. The prospect that such a scheme will remain lawful in the long-term, is now very questionable, particularly if such a scheme for tax avoidance was aggressive by its very nature.

It also sends a clear message to those that have been involved in such schemes, to cease to continue, and to self-report, hopefully invoking a deferred prosecution agreement perhaps, or a memorandum of understanding not to prosecute in return for information, etc…

David Rosen - Head of litigation and specialist in fraud law
David Rosen – Head of litigation and specialist in fraud law

Professor David Rosen is a Solicitor-Advocate, Partner and head of Litigation at Darlingtons Solicitors LLP, a Certified Fraud Examiner, a board member of the ACFE UK Chapter, a member of RUSI, and a working member of the Fraud Advisory Panel. He is an associate Professor of Law at Brunel University where he regularly lectures on a variety of subjects, with an emphasis upon commercial fraud, and criminal fraud.

David Rosen • Fraud

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