FOS rules in favour of investors in tax mitigation scheme


Investigations into Tax Mitigation Schemes

Although this case may raise alarm bells for many advisers who may be fearful of an onslaught of similar cases, last year it was reported that not many schemes have failed before the courts when challenged by HMRC. However, schemes continue to be the subject of investigation and so this could just be the tip of the iceberg. Investigations have been and continue to be conducted into a number of schemes such as music industry investment schemes, stamp duty land tax mitigation schemes and film financing schemes.

Such schemes seek to work within the terms of existing tax legislation so as to allow individuals to maximise available tax relief but recently have been subject to intense scrutiny from HMRC.

Last year the FOS stated that only a handful of tax mitigation schemes were making it onto their desk. These tended to relate to investors being introduced to investments by a non-FSA regulated individual, in which case the FOS stated that there was not a lot that they could do as they lacked jurisdiction to deal with the complaint.

If investors were to bring claims against advisers it is likely that their main argument would be that they were mis-sold the schemes and the risks involved were never fully explained, (for example the risk that the investor risks more than the original capital investment, particularly if the scheme is leveraged and utilises loan facilities).


This award could encourage investors to bring similar claims against their advisers. Investors (especially wealthy individuals) have always been interested in ways to reduce the levels of tax that they are paying. However, with HMRC taking a stronger stance against the use of tax mitigation schemes, this could lead to more schemes being investigated by HMRC. In turn investors who have lost out on their tax relief (and who may have suffered further losses) may seek to recover these sums from those that introduced them to, recommended or set up the schemes.

The risks for financial advisers are compounded by the presence of claims management companies, who have the ability to pool together a number of investors related to the schemes which increases the quantum of claims and allows those investors to share the professional costs of lawyers and experts. IFAs, accountants and their insurers will be watching with interest to see whether more claimants will seek to bring such claims to FOS. Even though there is a £150,000 limit on the awards that FOS can make the High Court’s recent judgment of Infocus has cast considerable doubt on whether complainants can accept a FOS award and still pursue their adviser for the balance of any loss over £150,0000 through the courts. The Court of Appeal will need to reconcile the competing judgments on this issue.

CMS Cameron McKenna has considerable experience in advising and defending professionals and their insurers faced with claims arising out of such schemes or other complex financial investments. Please contact one of our team if you would like to discuss further.