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Michael Holly
Michael Holly, Solicitor
Category: Law
Satisfied Customers: 6820
Experience:  I have 20 years of experience as a solicitor in litigation and other areas
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I invested £250,000 (plus gearing) in a film scheme (2003/4)

Resolved Question:

Hi
I invested £250,000 (plus gearing) in a film scheme (2003/4) which now turns out to have been fraudulent. The films were never made and the promoters of the fund ran off with the money. It was a limited partnership, and so my relationship with the fund was by way of contract under English Law.
At the time I reclaimed tax based on this investment - and the reclaim was paid by HMRC (approx £450,000).
HMRC are now prosecuting the promoters for fraud and look likely to win. They will then ask me to repay the tax reclaim, which is invalidated by the fact that the scheme was fraudulent, plus penalties and 12 years' interest (i.e. circa £1m). I do not have anything like this amount of money so would be facing bankruptcy.
Is there any defence against this HMRC repayment claim along the lines that I was a victim of a fraudulent contract and so cannot be held liable to repay - because HMRC was also a victim of the same fraud? Or alternatively a statute of limitations because 12 years have passe and so should shoulder their share of the loss? (HMRC did open an enquiry into this film scheme in circa 2005)
Submitted: 2 years ago.
Category: Law
Expert:  Michael Holly replied 2 years ago.

Since HMRC are prosecuting they clearly acccept it was fraudulent. Unless you recover money from the prosecution process on what basis can they prosecute you?

Best regards

Michael

Customer: replied 2 years ago.

Hi Michael

The nature of the film partnership was that there were corporate members who took most of the revenues form the films and there were private partners like me who took all of the tax credits associated with the film making (under the then tax incentives for film making.)

I submitted my tax reclaim and got my £450k in 2004 based on the fact that the partnership would be making these films. This reclaim was based on my equity investment of £250k, plus a notional £1m of debt that the partnership was drawing on my behalf to fund the films. So I got back 40% of the deemed £1.25m investment (approximate numbers).

The revenue then decided they didn't like these schemes and started digging. they discovered in this instance that the designated members had run off with the cash. They therefore say no films were made and so please can I repay them the money, plus interest and penalties - because they only paid me the reclaim because of the tax incentives surrounding film making.

My question is: a) are they too late under the time-barring statutes - even though they opened the enquiry in 2005, or b) do I have any defense that I am a victim of a fraudulent contract and so cannot be held liable to make good the HMRC seeing as doing so would bankrupt me?

Thanks

Jon

Expert:  Michael Holly replied 2 years ago.

Dear Jon

I need to do a little reasearch on this. Please leave it with me. I am working on JA all this weekend so I will get back to you either later today or tomorrow.

Best regards

Michael

Customer: replied 2 years ago.

Thank you

Expert:  Michael Holly replied 2 years ago.

Dear Jon

The situation is a little confusing as there is no reason why s9 of the Limitation Act should not apply and the debt be statute barred.

The standard response of HMRC appears to be that the debt is an "ongoing debt" and because the money is owed to the Crown the statute of limitation does not apply however in the articles I have checked this appears to be a posture as they do not prosecute which indicates that this is a tactical position and they are not confident it will succeed in court. Rather than test the argument in court and risk losing, they seem content to recover on the cases where it is not disputed.

As such I would maintain it is statute barred and ask for the legal authorities that support any response you might get along the lines of their usual argument.

I hope this makes some sort of sense. If there are any further points please reply

Best wishes

Michael

Customer: replied 2 years ago.

Hi Michael - that is helpful, thank you. However my understanding (not based on very firm ground) is that by opening an enquiry into the tax affairs of the partnership within the statutory period would mean that the statute of limitations would therefore not apply? Does that ring true with you?

I was assuming that this would be the case and was therefore wondering about the alternate possibility: namely that I might have some defence against being forced to repay the tax given that I was a victim of a fraudulent contract?

Expert:  Michael Holly replied 2 years ago.

Dear Jon

They can argue that it is ongoing but the enquiry was opened 10 years ago. They had 4 years after they opened the enquiry to make a decision before limitation expired. A court might well decide that 4 years is long enough.

Being the victim of a fraudulent contract would not help. A court would take the view that your remedy is against those that committed the fraud and the issue of any tax liability is a separate matter between you and HMRC.

Best regards

Michael

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