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Legal: film fund footballer investors should beware the hungry taxman

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June 23 – Players in Britain who have been encouraged to invest in tax avoidance schemes are increasingly being caught offside by UK tax collectors. They need to act now before all is lost. By Tessa Lorimer, Withers

Lionel Messi, one of the most celebrated players in football and currently listed second amongst the world’s highest paid athletes, appeared in court in Spain earlier this month for a trial in which it is alleged that he evaded paying €4.1 million of tax on income earned from his image rights in 2007-09. Spanish prosecutors are calling for prison sentences of up to 22 months for both Messi and his father, who manages Messi’s career and financial affairs, for using offshore companies in Belize and Uruguay to channel the proceeds of his image rights earnings. The judgment is now awaited.

Messi’s defence in court was a simple one: that he didn’t pay much attention to his financial affairs, leaving it to his father to advise him on them and to manage the accountants and bankers who worked for him. Therefore, Messi claimed, he had no knowledge of the planning that is alleged to have enabled the tax evasion.

The Spanish tax authorities are also said to be lining up a case against Messi’s FC Barcelona teammate and fellow high earner Neymar da Silva Santos Júnior, and the club has announced this week that it will pay €5.5 million to settle a charge that the tax relating to Neymar’s transfer from Santos was not properly accounted for in 2013. These cases demonstrate that the Spanish tax authorities are taking a very active and aggressive approach to tax investigations, and are not afraid to target players at the highest level.

These examples from overseas will be painfully familiar to many UK footballers who have been, or are, under investigation by HMRC. A huge number of notable names have hit the news in connection with tax avoidance schemes that have been fought in court by HMRC, including film schemes Eclipse 35, Little Wing and Ingenious Media. Reports of these high profile figures have included Wayne Rooney, David Beckham, Steven Gerrard, Rio Ferdinand, Sir Alex Ferguson, Sven-Göran Eriksson and Gary Lineker, but hundreds more are expected to have signed up to investments. All are likely to have put significant sums into the schemes and then subsequently have been hit with tax bills which often dwarf the initial investment.

Why is it that sportspeople, and particularly footballers, appear to be such a common target for promoters of tax schemes? Looking at it from the latter’s perspective, footballers are an ideal investor in several ways: they frequently have available cash to invest; they trust their managers and advisors to make decisions on what is best for their finances; they are unlikely to ask detailed questions on the legality or suitability of the investments; and are likely to lack a sophisticated knowledge of financial products. As a result, many footballers have found themselves in extreme financial difficulties, with HMRC pursuing them for large sums of tax, resulting in some being forced to sell properties or declare themselves bankrupt.

The answer to the common question of how to spot risky tax schemes is a relatively simple one: if the scheme promises to deliver a substantial reduction in your tax bill, it isn’t likely to be successful! The too-good-to-be-true test is the surest approach, especially in the current climate in which even indisputably legal tax planning is generally regarded as unacceptable.

HMRC has been tasked with cracking down on all forms of tax avoidance and evasion, and film schemes are one of the highest profile examples. The Revenue has been provided with significantly greater powers of detection and is equipped with much more aggressive powers, such as Accelerated Payment Notices (APNs), which demand individuals to pay the full amount of tax in dispute before any court hearing on the case has been heard. These have led to significant hardship in many cases and indeed their use has been challenged – unsuccessfully – by film scheme investors for breaching European Human Rights legislation. Attempts to challenge HMRC in court have been marked by their lack of progress, and our view is that investors are best advised to settle their case with the Revenue to avoid being hit with penalties and further legal costs.

There remains at least one option for tax scheme investors, and particularly footballers, to attempt to recover their losses. Investors such as footballers have a good case for arguing that they were miss-sold the scheme, and should never have been approached with it in the first place. Under the Financial Services and Markets Act 2000 (‘FSMA’), investors in tax schemes must be able to be certified as ‘sophisticated investors’, which means that they must meet one of the following categories:

  • A member of a network of business angels;
  • Has made more than one investment in an unlisted company in the two years preceding that date;
  • Has worked in a professional capacity in the private equity sector, or in the provision of finance for SMEs; or
  • Has been a director of a company with an annual turnover of at least £1 million within the two years in question.

FSMA was introduced to protect investors such as footballers from being targeted by financial intermediaries with investments which are not suitable for them, and where they may not be able to assess the level of risk involved in the scheme. On the basis of the definitions above, most footballers could argue that they do not fit the right profile to invest in the scheme and therefore could sue the promoters and other advisors for miss-selling or negligence. Advisors such as IFAs, accountants and banks are likely to be a better target than promoters, as the former are generally more established businesses and are likely to have professional indemnity insurance cover.

There are many examples of footballers investing in film and other tax avoidance schemes, and the majority are likely to have a strong case for arguing that they were not fully aware of the risks and consequences involved in the investment and may have been negligently miss-sold the investment. Rather than pursuing ineffective disputes with HMRC, they are urged to act fast to recover what money they can from advisers and promoters.

Tessa Lorimer, Special Counsel, Withers’ Tax Investigations team