Accountants are facing a £1 billion class action after recommending a tax avoidance scheme to their small business clients.  Company owners were encouraged to buy partly paid ‘E’ shares in what HMRC is calling a ‘disguised remuneration’ scheme.  Now the HMRC is demanding millions in unpaid tax and national insurance contributions (NIC).  Accountants who recommended the scheme are being accused of negligence.

Law firm FS Legal has partnered with barristers chambers, Exchange Chambers, to bring the action.  It is estimated that there are well over 1,000 victims of the so called ‘E’ Shares arrangement (also known as ‘F’ and ‘P’ shares).

The promoters, Blackstar (Europe) Ltd, claimed that employees could avoid income tax and NIC by subscribing for partly paid shares in their companies.  It was operated with the company allotting shares at par to employees and then giving or lending them the full subscription price.  As such, the employee would only pay 1% of the subscription price of the shares, and would then be left with 99% of the purchase price as cash, which the promoters claimed was tax and NIC free.

The company could also deduct the loan or gift from its profit and loss account, reducing the amount of corporation tax it paid.

HMRC had been informed about the arrangement under the ‘disclosure of tax avoidance schemes’ (DOTAS) regulations, which made it likely that users’ tax affairs would be investigated.

Users are 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 the company went into liquidation, leaving them with further substantial liabilities.

Julia Norris, a partner of FS Legal, said: “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.”

James Burgoyne, Director – Claims & Technical, Brunel Professions says that accountants and other financial advisers needed to have clearly documented their position if they had only undertaken a limited role, such as providing an initial introduction only, if they are to defend negligence actions.  “Even if a firm believes it was either not involved or had properly explained the risks, it must be able to provide clear evidence if it is to successfully defend itself,” he said.

FS Legal’s press release has been published on its website. 

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