Artists need to be extra vigilant about tax in the current climate

28 May 2014

Gary Barlow and two fellow Take That singers have found themselves in the spotlight this week after a judge ruled the musicians had invested in a scheme designed for tax avoidance purposes. Not only may they have to pay back millions of pounds in tax after the tribunal ruling but they have also suffered considerable reputational damage as a result.

First let’s be clear tax avoidance is not a criminal activity. However, it is wise to be aware that the HMRC is currently “cracking-down” on aggressive tax avoidance schemes and public rulings on schemes which don’t meet their approval can prove embarrassing as well as expensive for high profile figures who indulge in them. 

For many artists, the concept of being able to invest money in a scheme which they are told is legal, avoids tax and comes recommended by a professional advisor may seem tempting. Artists and celebrities tend to be particularly reliant on the advice of professional advisors in respect of  financial and investment decisions. In reality they often do not understand the precise features of a financial product, the implications of investing in such schemes, or the risk that HMRC will not approve the scheme.

Professional advisors are under a duty to fully explain a scheme to their clients, including all the pitfalls. However it is possible they may not have caught the winds of change or may be more optimistic themselves than is prudent about the scheme they are promoting.  Artists should therefore be sure to take a second opinion and be especially cautious and circumspect in these current climes.

There are, of course, other routes that can be taken for sensible tax planning which does not involve an elaborate tax planning scheme.  For example, contributing to a pension, utilising full ISA allowances, and making gifts to Charity.  However, for many artists the main attraction to the schemes that have been subject to recent scrutiny was the fact they promised to significantly reduce their income tax burden rather than minor tinkering at the edges. 

For those like Gary Barlow and bandmates who have already subscribed to a scheme and feel they may have been poorly advised, another course of action is possible. We are seeing a rise in claims by artists against their advisors for professional negligence where the adviser (be it accountant, lawyer or financial advisor) has failed to perform their duties to the required standard. Claims may be brought on the basis of negligence in recommending a scheme which was unsuitable or flawed, or simply because the necessary advice was not given to enable the investor to make an informed decision before participating in a scheme. In those circumstances, the adviser can potentially be liable for damages and will usually have indemnity insurance to cover against such claims.

The negligence route is not without its own pitfalls however. Claims must usually be brought within 6 years of the alleged negligence, which will often be the date of investing in the scheme, and further the exercise of calculating loss for a claim against a professional advisor is rarely straightforward given that there is often a need to obtain expert evidence to establish what would have happened (in financial terms) but for the negligence.

What is clear is that musicians need to be extra vigilant about their tax affairs right now. It is no longer advisable merely to leave matters to others without engaging on the detail. As Gary Barlow and others have found to their cost, tax avoidance is a hot topic for the HMRC, politicians and the media. Best take a personal interest in sorting things properly now than be faced with the prospect of claiming damages from your adviser when all has gone wrong.

This article first appeared in MusicWeek.

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