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Stars face massive payback demands as HMRC probes
£2bn film tax loophole

Jeremy Paxman, Anne Robinson, Steven Gerrard, Wayne Rooney, Guy Ritchie and dozens of other celebrities invested up to £1.4m each

By JON REES

Last updated at 3:48 AM on 14th February 2010

Dozens of Britain's highest paid celebrities and business chiefs have been caught up in an investigation into an alleged tax avoidance scheme.

England soccer stars Wayne Rooney and Steven Gerrard, BBC presenters Jeremy Paxman and Anne Robinson, film-maker Guy Ritchie, pop star Peter Gabriel and Labour peer Lord Hollick were among those who pumped money into a fund that exploited a legal loophole giving tax benefits to those investing in the film industry.

Documents seen by The Mail on Sunday suggest they invested sums ranging from £160,000 to £1.4million. Some other investors have already received tax demands for tens of thousands of pounds - big investors may face bills of more than £1million.

Famous backers: Celebrities who put money into the Ingenious film fund now under investigation by HM Revenue and Customs include Guy Ritchie and, right, Jeremy Paxman

Under a policy set up by Gordon Brown when he was Chancellor, investors could slash their tax bills if they backed the film industry. Around £2billion a year was subsequently invested in film funding schemes.

However, HM Revenue & Customs officials now believe that at least one £75million investment fund used by celebrities might have been aimed primarily at avoiding tax and not bolstering the British film industry, so was against the rules.

Stars were partners in schemes run by finance company Ingenious Media, founded by chairman Patrick McKenna. The company has raised about £5billion to put into films over the past decade, including such hits as Avatar and X-Men Origins: Wolverine and Night At The Museum.

The celebrities' names were officially recorded at Companies House, where the partnerships are registered.

Gordon Brown tried to help film-makers, but instead created a £5bn tax scheme for celebrities and bankers

Investors included internationally successful musicians, who put in more than £1million each. Half a dozen top footballers invested an average of about £500,000. Leading businessmen put in even more with a number investing millions.

According to documents seen by The Mail on Sunday, one industrialist has invested £62million with Ingenious in various schemes over the past decade, while a leading media figure has invested £35million. The schemes have also been widely used by bankers seeking to reduce tax on bonuses.

The Mail on Sunday has learned that those who invested in Ingenious's Inside Track fund in the 2003/4 tax year have received letters telling them that the scheme is under investigation. The total sum the Revenue might demand back could run into millions.

Under that year's Inside Track fund, wealthy individuals formed a partnership with producers to put money into films.

The terms of the arrangement allowed the investors to claim tax relief against virtually the total sum ploughed into the film by the partnership - not just the amount that they had personally put in.

The partnerships were normally arranged under a two-for-one basis, meaning that if a celebrity put in £100,000 it would be matched by £200,000 from a film's other backers - but the celebrity could claim tax relief on the full £300,000.

The rebate had to be paid back over 15 years, but by investing the cash wisely investors could beat the taxman. The minimum sum invested was £50,000 and films did not have to qualify as British.

Such schemes have now been outlawed, but were legal at the time as long as the money was genuinely being used to invest in films and not to avoid tax. McKenna has told investors that he believes HMRC's interpretation of the issue is wrong in law.

Investors: Wayne Rooney and Anne Robinson are also among the backers of Ingenious who could be faced with huge bills

It has been claimed that the tax breaks created a 'phantom film industry' with investors putting money into films that had little chance of success in order to reap the tax benefit.

'A lot of films were made where budgets were artificially inflated, producers charged higher fees or films were never released. It became about financial engineering rather than film production and it was costing the Treasury a lot of money,' said James Swarbrick, commercial director of film finance specialists Prescience.

HMRC refused to comment on Ingenious, but is now investigating its 2003/4 Inside Track scheme as it suspects it was not trading on a commercial basis and so acted as a tax avoidance rather than film investment scheme.

HMRC is believed to have been investigating the company for four years. It has written to some investors to tell them they were not entitled to use the tax relief to reduce their overall tax bill.

'This was about financial engineering, not movies'

Ingenious has written to all affected investors informing them of the investigation. The letter states that HMRC believes that 'the partnership was not trading on a commercial basis and so [partners] have underpaid tax'. Ingenious has told investors it does not believe this is correct.

Several investors have also received letters from the taxman directly.

'The letter from Ingenious informing me about the tax investigation arrived virtually simultaneously with a tax demand for more than £50,000 from the Revenue. I had been given no idea that Ingenious had been battling the Revenue for four years,' said one businessman who entered the Ingenious scheme on the recommendation of his tax adviser.

Tax demands were sent out before Christmas to beat the seven-year time limit on HMRC investigations, which for the tax year 2003/04 runs out this year.

Investors fear this means subsequent tax years may be under investigation as well. Investors have been given a month to appeal against the demands from the Revenue.

The Mail on Sunday also understands that HMRC is investigating Ingenious' film schemes for 2005/6, especially loans provided by Ingenious in this year. Under this scheme an investor could put up £100,000, borrow another £200,000 from Ingenious, which would then put in £100,000 itself, then claim tax relief on the full £400,000.

Now Ingenious has told investors they could face additional tax bills as a result, but can avoid this if they repay the loans within five years of borrowing the money.

McKenna, who refused to comment on the investigation to The Mail on Sunday, has told investors he believes HMRC is 'wrong in law' on the issue.

The regulations regarding film investment have been tightened in recent years amid concerns they were open to abuse.

By the book: Venture capitalist Patrick McKenna insists that everything his company did was within the law

Some schemes were closed officially in 2005, while 'sale and leaseback' schemes that allowed investors to defer paying tax ended in 2007. Film investment schemes are still available but any tax benefit is retained by the film company, not wealthy investors.

At their height, the film funding schemes attracted about £2billion a year. Leading industrialists including designer Sir James Dyson, art collector Charles Saatchi, singer Robbie Williams and footballer David Beckham invested heavily in the schemes.

Among the films affected by the change in rules was the period drama Tulip Fever, which was to star Jude Law and Keira Knightley but was postponed indefinitely, although there is no suggestion that there was any intention not to produce a successful film, while shooting of The Libertine, starring Johnny Depp, was moved to the Isle of Man to take advantage of existing tax breaks there.

John Whiting, tax policy director of the Chartered Institute of Taxation, said: 'Too often the old rules meant the good old Revenue paid out a cheque.

'These are not tax avoidance schemes'

'The key with many of these schemes was in the loan agreements. The loans were often provided on very favourable terms or on the basis they would only be repaid if the film made a profit.

'As an investor you were not interested in whether the film was made. Now the rules have changed and you are interested in making a film that makes money.'

HMRC said: 'The tax breaks for investment in British films have been significantly reformed so that the relief goes where it was always intended to go - to those who produce films and employ talent.

'The loopholes which allowed the tax relief to be abused with no benefit to the film industry have been closed. If we find evidence of abuse we will take steps to put things right.'

Ingenious has also told investors the HMRC enquiries are standard practice where tax relief has been claimed on losses. It said: 'We remain confident we will be able to demonstrate that the partnership trade is conducted on a commercial basis and that partners are entitled to the benefits of the losses they have claimed.'

The Mail on Sunday contacted the individuals named as having invested in the Inside Track fund.

None was prepared to comment except a spokesman for David Beckham, who said: 'David has made a number of successful financial investments in the past. However, he has always chosen to keep these private. Any investment has always been done with propriety and ethically, with complete adherence to the prevailing laws and regulations.'

A spokesman for Ingenious said: 'Our film partnerships are not tax schemes, they are film schemes. The schemes have a cash-flow benefit because investors do not have to wait for years over the life cycle of a film to get their money back.

'HMRC is trying to distinguish between bona fide investment funds and out-and-out tax schemes. We are not in the business of generating tax schemes. Everything we do has a commercial engine attached to it.

'It is standard practice for HMRC to enquire into schemes where tax relief has been claimed on losses. We welcome the scrutiny.'

Top accountants who recommended scheme

One accountancy firm that directed clients to the film funds now under investigation by Revenue & Customs is Vantis, writes MARTIN DELGADO.

Based in Central London and with 1,000 employees across the country, it advises individuals and companies on tax-saving strategies.

But last night it became clear that some of its customers did not know how much of their money was being invested with Ingenious. One Vantis client said: 'I have had no paperwork telling me how much I have invested in these film schemes.'

Vantis was founded in 2002 from the merger of four accountancy firms, and since then chief executive Paul Jackson has overseen a big expansion.

The stock market-listed firm was called in by the High Court last week to investigate Portsmouth Football Club, which is fighting to avoid liquidation.

But Vantis has had difficulties of its own. It posted a £6.5million loss for the year to April 2009, forcing it to lay off between 15 and 20 per cent of its staff, according to industry sources.

In another embarrassing development, two of its executives were charged last year in connection with an alleged £219million tax scam for wealthy clients involving Gift Aid tax relief on charitable donations.

Five people, including Vantis executives David Perrin and Roy Faichney, appeared at Highbury Corner magistrates' court in North London in October.

Both men have repeatedly protested their innocence and a spokesman for the company said at the time that the charges would be 'strenuously defended'.

Vantis suffered another blow when it was caught up in the fallout from the multi-billion-dollar alleged fraud masterminded by American financier and cricket entrepreneur Allen Stanford, now in a Texas prison awaiting trial.

Vantis was unable to collect fees for advisory work carried out on the liquidation of Stanford International Bank because Mr Stanford's assets had, in effect, been frozen by the United States and Switzerland.

No one was available for comment at Vantis.

Read more: http://www.dailymail.co.uk/news/article-1250861/Stars-face-massive-payback-demands-HMRC-probes-2bn-film-tax-loophole.html#ixzz0fU8yDNbr