Innovative Tax Avoidance

Attendees of our 2012 Financial Services seminar may recall mention of the leading case on tax avoidance schemes: Andrew Brown & Others v InnovatorOne Plc & Others, in which judgment was awaited. This has now been handed down and in a detailed and comprehensive judgement ([2012] EWHC 1321 (Comm), Mr Justice Hamblen rejected the claims against those running the tax avoidance schemes.

Facts

In 2002 the Claimants invested in 19 investment schemes which promoted tax incentives for the investors. As with most tax avoidance schemes, the Claimants invested capital into, and became members of, partnerships that traded in a business that attracted a tax advantage; in this instance, the acquisition and exploitation of information and communication technology. To increase their investments, and thus their desired tax advantages, the Claimants supplemented their capital investments with borrowed money.

The Claimants received the full intended tax relief and rebates in the first year of the schemes. The Inland Revenue investigated them in 2003, concerned that the schemes were not commercial and that the necessary technology had not been exploited so as to attract tax relief. Most of the Claimants settled with the Inland Revenue, agreeing to pay tax on their capital contributions to the schemes only (and on not their borrowings).

Allegations

The Claimants sued the managing directors and administrators of the partnerships and schemes, the creator of the schemes, a technology vendor and a firm of solicitors engaged in relation to the schemes and its partners ('the Defendants').

In short, the Claimants alleged that the schemes were fraudulent and/or that the Defendants had made fraudulent misrepresentations and/or been negligent and/or breached their fiduciary duties to the Claimants in promoting the schemes. The Claimants also alleged that the solicitors held their investment monies on a trust, which had been breached; and that the schemes were unauthorised under the FSMA so that the Claimants were entitled to the return of their investments.

Judgment

The Court held that the underlying technologies and their rights were genuine and had real value. It also found that there was no actionable misrepresentation because the representations on which the Claimants relied in the Defendants' promotional materials were just statements of opinion or expectation, and not of fact, which were expressly subject to various assumptions and risks.

The Court declined to impose a duty of care on the Defendants, not least because the schemes were all commercial and not directed at people of modest means. Furthermore, the Claimants had all received advice on the schemes through IFAs, who would have advised the Claimants about the risks of the schemes. The Court also found that there had been no breach of fiduciary duty because such duties were not owed by the Defendants to the Claimants on facts.

In addition, the Court held that any trust had ended when the Claimants became partners in the schemes and there had been no breach of the trust.

Finally, whilst the Court agreed that the schemes were unauthorised, and there had been a breach of FSMA, the Claimants' only claim was against their partnerships; or, alternatively, the Defendants were entitled to relief under FSMA in respect of any such claim against them.

Comment

This is a complex and detailed case, but the Court's refusal to mollycoddle the Claimants, its careful interpretation of the promotional materials and its limiting of the duty of care, are particularly welcome for Insurers of IFAs and their insureds. The appeal was heard in July 2013 with judgement reserved.

This article is published courtesy of law firm DWF Fishburns LLP.