UK taxation. Not so bad after all.
Film industry tax investment schemes that were once the holy grail have since left many badly burnt according to Frank Strachan, partner and head of tax at law firm Edwin Coe. “HMRC are adopting a hard line of enforcement followed by bankruptcy for those who do not have the necessary funds to pay after retrospective taxes were applied to many involved with film schemes,” says Strachan. He recently advised a client who purchased a film scheme investment and later his trading company collapsed. HMRC are pursuing the director personally for underpayments of PAYE and NIC and have issued Accelerated Payment Notices to the client.
Mark Pearce, partner at Irwin Mitchell Private Wealth, agrees and says that HMRC’s increasing scrutiny of tax schemes means people must be careful considering tax schemes. “There have been a number of recent cases where HMRC has successfully challenged popular schemes that failed to qualify for tax reliefs. Investors then face the double disadvantage of having to pay tax and being subject to penalties in addition to the costs of investing in the first place.” According to Pearce, although film investment schemes are now yesterday’s news there is still a way for film lovers to invest. “When the dust settles there will still be opportunities but they will be very different to how the past schemes worked.”
Despite HMRC’s scrutiny, Pearce says that the UK retains a number of interesting options for people to reduce their UK taxes. His clients use AIM stocks to lower UK inheritance tax while the use of EIS and VCT schemes to mitigate income and capital gains tax is also an option. “Successive budgets have sought to clarify and support the use of Enterprise Investment Schemes (EIS) to allow for investment in new businesses,” says Pearce. “For clients who may have begun life outside the UK, the so called “non-doms,” the UK has an attractive tax system.”
Pearce explains that, despite the recent tax changed, the ability for non-doms to not be taxed on offshore income and capital gains for fifteen years continues to encourage immigration and investment into the UK. For those non-doms who are not only looking to move to the UK but set up businesses here, the relatively new business investment relief rules allow them to use their offshore income and capital gains in their UK businesses without penalty. “For some this may seem unfair and it’s true the line between encouragement in UK investment and the publics views on wealthy people and companies reducing tax is a fine one,” says Pearce. “However until there is a complete rewrite of UK tax legislation some people will continue to utilise available schemes.”
Relight the fire
Helen Cox is a managing associate in Mishcon de Reya’s tax team and says: “The UK offers a number of tax incentives for individuals who invest in qualifying start-ups or social enterprises to encourage investment in smaller, higher risk companies. The three main venture capital schemes on offer are Enterprise Investment Scheme relief, Seed Enterprise Investment Scheme (SEIS) relief and Social Investment Tax Relief (SITR). These schemes offer income tax relief for investors on their initial investment, offering a tax saving of up to fifty percent of the initial investment; and capital gains tax relief on any gains made on a future sale of the investment, offering a tax saving of up to twenty percent on any gains.”
Aside from personal tax incentives, Cox finds that many HNWs and UHNWs with business interests are attracted to the UK as it offers an attractive and reliable corporate tax regime. “To name just a few advantages,” she explains, “corporation tax rates are relatively low, currently nineteen percent, and expected to fall to seventeen percent in 2020; business owners can often benefit from a ten-percent CGT rate on a sale of their business; dividends can be paid free from withholding tax; the UK has a well-established treaty network; and the UK offers a very generous system of tax reliefs for research and development activities.”
Despite the burned fingers from film schemes, the current UK tax rules have helped put the film fire out and got tax investment back to status quo.