A tax avoidance scheme for the stars has exploded spectacularly. Yesterday's FT reported:
Wealthy investors including Sir Alex Ferguson, Sven-Göran Eriksson and a host of sports stars and City figures could be liable for huge individual tax bills after an attempt to reduce their liabilities backfired.
The 289 investors in Eclipse 35, a film partnership ruled to be an “aggressive” tax avoidance scheme by a tax tribunal in April, could end up paying several times more than the total of £117m tax they sought to avoid as the Revenue & Customs examines the large bank loans they took on to participate in the scheme.
The scheme was, as you would expect, fiendishly complicated. Tax avoiding celebs borrowed cash and bought up some film distribution rights. The film company leased the film back from our celebrities in return for a 20 year stream of payments. Since the loan had an interest charge, the celebs thought they could offset the interest charge against income tax. The tax avoiding celebs thought that they would get an tax break of £404,000 on a personal investment of £173,000.
In an uncharacteristic moment of clarity, tax man saw right through the scam and called the stream of future transfers as "sub-licensing payments". The Inland Revenue will now demand from our clever celebrities income tax on all those annual pay-outs from the film distribution company. Ultimately, the tax bills will be higher than the income tax that the celebs wanted to avoid in the first place.
To be fair, it wasn't just celebs. There were also a long list of bankers who tried to get a piece of this tax avoidance scam. The Independent reported that there were 11 managers at Deutsche Bank, 10 former and current Goldman Sachs bankers, eight traders and managers at UBS, and more than 25 hedge fund managers from big firms.
My favourite quote came from Kit Sorrell, who has the implausible job title of senior professional negligence partner at a law firm in Manchester.
"It has gone horribly wrong. Investors will be required to pay income tax on ‘income’ they have never received."
The Inland Revenue are about to send out tax demands dating back to 2007.
I do like a story with a happy ending.