Small business owners are taking their accountants to court alleging negligent tax advice which could cost them an estimated £1 billion.
The promoter of a tax avoidance scheme Blackstar (Europe) Ltd, claimed that employees could avoid income tax and national insurance contributions (NIC) by subscribing for partly paid shares in their companies.
Accountants who recommended the scheme to their clients are now being accused of negligence after HMRC demanded millions in unpaid tax and national insurance.
Law firm FS Legal has partnered with barristers chambers, Exchange Chambers, to bring a class action against the accountants involved. It is estimated that there are over 1,000 victims of the so called ‘E’ Shares arrangement (also known as ‘F’ and ‘P’ shares).
The scheme was meant to work with the company allotting partly paid shares at par to employees and then giving or lending them the full subscription price. The employee would only pay 1% of the subscription price of the shares, and was then left with 99% of the purchase price as cash, which the promoters claimed was tax and NIC free.
Blackstar also claimed that the company could deduct the loan or gift from its profit and loss account, reducing the amount of corporation tax it paid.
HMRC knew about the arrangement under the ‘disclosure of tax avoidance schemes’ (DOTAS) regulations, which meant that users of the scheme and their accountants probably expected their tax affairs to be investigated.
The small business owners are now claiming that the details of the scheme and its risks were not properly explained by their accountants. As well as tax and NIC liabilities, they could be called on to pay the full subscription price of the shares if their company subsequently goes into liquidation, leaving them with further significant liabilities.
“The scheme, like many others before it, was always going to be caught by HMRC and have a detrimental impact on the business and employees involved, often causing severe personal hardship. Unfortunately, the advisers told their clients none of this,” said Julia Norris, partner of FS Legal.
James Burgoyne of Brunel Professions says that accountants and other financial advisers who advise clients on their tax affairs need to be conscious of the risks of avoidance schemes. “Straightforward tax advice is rarely controversial,” he said. “But schemes which have been subject to DOTAS disclosure are likely to be investigated by HMRC.”
“Even if a firm believes it properly explained the risks, it must be able to provide clear documentary evidence of this if it is accused of negligence at a later date,” he added.
Categorised in: Financial Services PI News
This post was written by Hazel Postma