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  1. Law
February 14, 2013

As HMRC Investigates Montpelier Accountants, Beware Fraudulent Tax Avoidance Schemes

By Spear's

YOU WILL HAVE heard in the news that HMRC are investigating Montpelier Accountants for promoting a marketed tax avoidance scheme which HMRC suspect is fraudulent.

This latest development has taken place against a backdrop of political rhetoric against tax avoidance. At the Lib Dem party conference in September 2012, Danny Alexander said ‘We have this message to the small minority of wealthy people who don’t play by the rules: we are coming to get you and you will pay your fair share [of tax]’

Then, on 22nd January 2013, the Director of Prosecutions, gave a keynote address to the press, in which he announced that tax payers as well as those who devise or operate dishonest tax avoidance schemes are to be targeted for prosecution.

As a result, when it comes to the Montpelier case, HMRC are not only targeting the promoters of the scheme for investigation but also the ‘sophisticated investors’ who invested in the scheme.

In theory, the distinction between a legitimate and a fraudulent scheme is simple. A legitimate tax avoidance scheme will stand or fail on the merits of the scheme, whereas tax evasion involves fraud. In practice, however, fraudulent schemes are much more difficult to detect.

Marketed schemes are typically dressed with Counsel’s advice which will confirm that provided certain contrived arrangements take place a tax advantage will be allowable, even in circumstances in which those tax advantages are not intended to be available.

Making the scheme work in practice however is much more difficult. The promoter of a fraudulent scheme will mislead HMRC and the investors by manipulating turnover, falsifying documents, making payments or loans etc that do not reflect commercial reality.

Often the investor is persuaded to enter in to a professional services agreement with the promoter at the same time. As part of the agreement, the investor may be told how to account for the scheme in the tax return, and may as part of the agreement, have their legal costs for any challenge to the scheme by HMRC covered. This has two advantages for the promoters of the fraudulent scheme:

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1. All the investors are kept under the same ‘roof’ so that the promoters control the information which is passed to HMRC

2. The information which the investors are passed comes from the promoters so that it isn’t until a case is prosecuted that the investors realise that they have been duped.

If the investor happens to be FSA regulated, and hence a sophisticated investor, the case against that individual is very easy to prosecute because the Crown can rely on his status to infer dishonesty in criminal proceedings. A criminal conviction will inevitably result in a substantial term in prison for the offender, along with the confiscation of his assets.

The vast majority of investors in these marketed tax avoidance schemes are not ‘sophisticated’ investors and therefore may be easy for the fraudster to dupe, and moreover, even ‘sophisticated investors’ can be the victim of fraud themselves.

In my experience, investors in fraudulent tax avoidance schemes are often victims of a fraud themselves, and it is imperative that they obtain independent legal advice as a matter of urgency. After all, in this economic climate, a high net worth individual who finds himself facing prosecution is unlikely to find himself before a sympathetic jury.

Tessa Lorimer was a senior prosecutor with HMRC for 22 years; last year she moved to
GSC Solicitors

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