This is the result of a significant HMRC announcement on March 2nd 2007.
HMRC have closed down most of the Unapproved and possibly the Approved tax shelters for income tax sheltering.
The method of doing this is to restrict the ability of a partner in a partnership to use losses generated above £25,000 against any other income or income of the previous year. The most common and risk free form for these tax-driven partnerships was the LLP or Limited Liability Partnership.
Daniel Feingold of Strategic Tax Planning commented:
"The overall effect of this measure is to make it very hard to shelter income tax, especially for City types and high earners. It can only lead to a possible re-location of trading and dealing platforms to low tax locations via an exodus from the City!"
He also said:
"Ironically it does mean a welcome boost for VCT's (Venture Capital Trusts); that only offer30% tax relief on up to £400,000, but will now appear more attractive".
HMRC had phased out relief that offered 100% Capital Allowances on UK films up to £15 million in value.
Two Companies specialising in Film Partnerships thought they had developed a way to keep the opportunity alive with a scheme based on 'GAAP' Accounting principles. This was to create a film and then right down its value as a loss on opening stock each year to create a corresponding tax loss for partners.
This was certain to be offensive to HMRC and the two companies ‘Ingenious Media’ and ‘Scion Films’, it now appears, never had any clear form of agreement with HMRC that their idea would be accepted.
Film Partnerships had sheltered huge amounts of UK income and acted as one of the few legitimate income tax shelters after the radical restrictions that evolved from the Disclosure Regime introduced on December 2nd 2004.
A number of other Unapproved Schemes had also been developed using various other 100% capital allowances.
These schemes derived their approach from a House of Lords decision: Barclay Bank vs. Mawson 2004, where a complex tax avoidance scheme was approved because underlying it was a real investment in plant that was entitled to capital allowances.
These so-called Capital Allowance schemes involved Environmentally Beneficial Plant, Carbon Credits and other machinery entitled to 100% allowances.
All the schemes had been mired in HMRC investigations and few taxpayers had seen any tax relief.
The Carbon Credits were seen as a particularly artificial way of obtaining tax relief and despite being targeted heavily to very high, (£million plus) earners were facing strong HMRC resistance.
It remains to be seen what will happen to the schemes for previous years and whether HMRC will fight them or settle.
There has also been a knock on effect on some legitimate and approved tax shelters.
The few last Film Sale and Leaseback schemes, and Flat Conversion Allowances - are these caught by the new restrictions?
The problems for these shelters is that they are all organised as LLP's and therefore within the restrictions.
This appears to be a clear HMRC policy (applied in the last 2 years and used across the board) to create uncertainty and chaos and make the business of the Tax Shelter promoters unviable. If the client cannot know whether a particular scheme will work and sees many schemes end up in lengthy investigations and litigation, they will be dissuaded from investing at all!
The way forward will now be through syndicates/bare trusts and direct investment; therefore making the use of tax shelters much more risky and unattractive for all but the few whose tax liabilities and wealth are so large the risk can be justified.
Last chance saloon for Film Tax Shelter.
On 7th March 2007, HMRC issued a clarification excluding Film Schemes under sections 137 to 140 ITTOIA 2005 and relevant incidental expenditure. These sections include the legislation formerly in section 42 Finance (No 2) Act 1992 and section 48 Finance (No 2) Act 1997).
This means that Film schemes under these approved sections and which are being phased out must be invested in before April 5th 2007, now have a brief Golden Status.
Anyone with Clients with income to shelter, should contact me and I will put them in touch with an independent adviser who can advise on the best Film Schemes to invest in!
Sadly, the Flat Conversion Allowances, Wind Farms etc via an LLP were not reprieved, probably because they had no representation to put their case to the HMRC.
The Flat Conversion Allowance Schemes and Film Schemes relying on GAAP can only be invested in via direct investment or a syndicate or bare trust, if at all. They will probably need careful tax and investment analysis!
Other so-called Capital Allowance Schemes will probably not be viable anyway!