Another day, another tax avoidance story. I must thank the Times for providing so much compelling material for my blog, contrary as it is to my natural inclinations to be grateful for anything generated by the Murdoch ‘empire’!
I will start with Jimmy Carr and hisK2tax scheme. David Cameron has said in the context of theK2scheme that:
“Some of these schemes we have seen are quite frankly morally wrong.”
Which inspired the following response from Ed Milliband:
“…. I don’t think it is for politicians to lecture people about morality. I think what the politicians need to do is – if the wrong thing is happening – change the law to prevent that tax avoidance happening.”
It is always entertaining to hear party leaders sound like they should be heading each other’s parties! However, what is particularly interesting about this is that my take on David Cameron’s comment is that he is reflecting people’s views (or the media’s?) on the morality of tax avoidance rather than trying to lecture people. Still, I am sure there is room for a variety of views on that issue.
And so to today’s story, the media hook to which is three-quarters of Take That, and the background to which is the Icebreaker investment scheme. It seems to me to be essential to consider each of these revelations on its’ merits, and on that basis Icebreaker is perhaps a more complex scheme to unravel and comment on the morality of than Tuesday’sK2scheme.
Now I do not claim to be an expert on the operation of Icebreaker, but the following points appear to be relevant:
- HMRC successfully challenged some of the purported tax benefits of the first incarnation of Icebreaker, and is challenging the second version in the Tax Tribunal later this year. Thus the Times’ story is not news to HMRC, which clearly already had concerns about Icebreaker.
- Icebreaker is clearly active in a business sense; its website states that it has been involved in the production and distribution of nearly 150 music albums and the production and distribution of nearly 20 innovative products and software platforms.
- This involvement, again according to the Icebreaker website, takes the form of acquiring licences from writers, inventors etc for exploitation by others on a revenue-sharing basis.
- The minimum capital contribution to Icebreaker is £200,000, of which £160,000 is ‘expected to be available’ in the form of a bank loan.
- Members are expected to play in Icebreaker’s commercial activities, according to the website.
- Icebreaker structures its involvement in projects through Limited Liability Partnerships (“LLPs”).
From this, an experienced tax adviser is able to draw some broad conclusions about the operation of Icebreaker and the tax advantages that it claims to offer, as follows:
- The 80% borrowing to fund the investment is reminiscent of an older generation of film schemes, which functioned principally as tax deferral mechanisms. The basic idea is to generate a significant upfront trading loss, allowable for the investor, which is structured to ‘drip back’ into the LLP over a period of years in the form of licence fees etc. The problem with this type of film scheme was that it appeared to be a matter of only passing interest to the investor whether the films themselves were actually a commercial success; the fact that this appeared to be a side issue rather than the central feature of the scheme was what caused HMRC to seek to block such schemes.
- The reference on the Icebreaker website to investors using their own business and personal experience to play an active part in the trade of the LLP is highly significant. The most significant part of HMRC’s moves to block film schemes was the introduction of an annual cap of £25,000 on loss relief available against other income for inactive partners in a trading partnership, inactive in this context meaning active in the trade for less than 10 hours per week. Thus if Icebreaker can argue that its partners are actively putting their business skills to use in promoting the business of the LLPs, its investors may be able to circumvent this restriction to claim very large amounts of upfront loss relief on their (largely borrowing-funded) investments.
- In the case of many modern film schemes, this latter requirement is often controversially met by investors ‘reviewing’ a few films each week, HMRC’s argument often being that this work is simply by way of a sinecure to meet the 10 hour per week test, and actually has no true relevance to the business of the partnership. It seems distinctly possible that some similar arrangement may well be in place for the (no doubt extremely busy) people who invest in Icebreaker, although they are clearly vetted to some extent to ensure that they have skills that may be relevant to the business of their LLP.
- The mathematics of the scheme are likely to work like this. On the basis that the whole of the amount invested converts into a trading loss for the year of investment, a £1 million investment would produce the following results for a 50% taxpayer:
Cash investment £200,000
Bank borrowing £800,000
Tax relief on total investment £500,000
Net cash inflow re: year 1 £300,000
It is then likely that the borrowing will be repaid over a significant period of years, presumably from the proceeds of the licence agreements entered into by the LLPs. While this will generate taxable profits (which is why I refer to it as a tax deferral scheme), a few key factors need to be borne in mind in this respect:
- For those with a relatively finite professional lifespan (sportsmen, pop musicians etc), it may well be that overall income levels will be much reduced by the time taxable profits begin to arise.
- Those who can afford to invest the kind of amount by Icebreaker, and particularly those who come into category 1, may be well placed to leave the UK by the time that taxable profits begin to arise, thus mitigating or eliminating tax liabilities, depending on where the LLPs trading is carried out; it appear likely from the Icebreaker website that this is largely if not exclusively outside the UK, and thus elimination of tax liabilities would potentially be in point.
- The 50% top income tax rate is being reduced to 45% (by the violently anti-accountant and anti-tax avoidance Chancellor George Osborne, I remind you), and thus even a short-term deferral of tax will be worthwhile for a top rate taxpayer.
None of this speaks to the robustness of the Icebreaker business model in terms of obtaining tax reliefs, which will be tested in the Tax Tribunal, but I would suggest that on the continuum of potentially abusive tax avoidance arrangements it seems to lie somewhere relatively on the side of the angels compared to K2, in that it does actually appear to generate some export income for the UK and play some useful role in the UK economy.
Which brings me neatly to my main point; there is tax avoidance and tax avoidance, and we need an informed debate on where the line should be drawn between what is acceptable to the taxpaying public and what is not. The General Anti-Abuse Rule is a step in this respect, but not necessarily the final word on the matter. What do you think?