Press Room

5 Aug 2020

HSBC Suit Shows Challenge Of Designing Tax Relief Laws

Andrew Parkes, National Technical Director, discusses the recent HSBC suit regarding failed tax schemes and the challenges that arise from designing tax relief laws, in Law360.

Andrew’s article was published in Law360, 5 August 2020, and can be found here.

The media got a little excited recently over several big names suing HSBC over the “failed” Ingenious Eclipse tax schemes that has left them in a rather unusual and potentially financially embarrassing position. Normally when a tax avoidance scheme collapses, the user has to pay the tax they tried to save and potentially interest (unless they had already paid the money over to HMRC, or in the “olden days,” bought a certificate of tax deposit). In effect no harm, no foul. However, for Geri Halliwell (who was named in recent court papers), amongst others, the design of the scheme means that they will end up paying more tax than if they had not used the scheme. This is because the tax relief they were attempting to claim was denied, but the scheme also relied upon income being generated, and this remains taxable.

The purpose of this article is not to discuss the morality of tax avoidance schemes, defend their users, or attack them as some sort of moral criminals, but to consider how tax reliefs are designed and how HMRC policy experts view their use.

The Sweet Shop

Governments often want people to act a certain way. When they want you not to do something, they will usually pass a law to stop you doing so or try to make money out of your bad behaviour by a “sin tax”. But what about when they do want you to do something? The Government’s new(ish) Behavioral Insights Team a.k.a. The Nudge Unit, can try to influence you to act in a certain way, but people being people, they often react best to a financial incentive. This is another area where there is one rule for Governments and one for the public. If I were to offer you a financial incentive to act in a certain way, it would be a bribe, but when the Chancellor of the Exchequer does it, it’s a tax relief!

The customers

Take the film scheme relief that actually wasn’t at the heart of the Ingenious Schemes mentioned above. Those just used films as the best asset for their purposes and didn’t rely upon the Film Tax Relief. Samarkand Film Partnership schemes, though, are a different matter, but outside the scope of this article.

The original relief was designed to encourage investment in the UK film industry by providing preferential tax treatment of the upfront expenditure on a film, which was recouped as the film made money. The idea was to attract investors into putting their money into British films, which would support British jobs and the schemes were a success.

The shopkeepers

As HMRC themselves acknowledge in their Business Income Manual at BIM56505, many genuine investors used the scheme and indeed, when I was still at HMRC, I was complaining to one of the HMRC Policy Team about how their relief had undone 5 years of my work when the taxpayer invested enough money to claim sufficient Film Tax relief to ensure my hard won settlement was £0. My colleague, and I now realise quite rightly, took me to task over this, pointing out I shouldn’t be complaining about someone who has taken advantage of a tax relief given to them by the Government and which will help support the film industry.

This, in my experience, does indeed sum up the attitude of most HMRC staff who oversee the policy behind reliefs. In fact, I have seen, and been part of, HMRC teams that have taken legislation through Parliament to rectify legislation in order to ensure that people who should be able to get a relief are able to do so.

The wrong sort of customer

Of course, there is a question as to who should get the relief and whether it is being claimed correctly. Readers may recall the short lived 0% Starting Corporation Tax Rate that was introduced in 2002 to incentivise entrepreneurs. As this was a big policy initiative, it was led by the Treasury who were completely taken aback when everyone started to incorporate their businesses to take advantage of the new rate (the one that seemed to cause the most surprise, don’t ask me why, was milkmen) and pay themselves dividends to maximise the relief, although it was a no-brainer to everyone else.

An “anti-avoidance” measure was introduced in 2004, and the rate scrapped in 2006. This is an example of a badly designed policy that was used in an obvious, uncontrived fashion that just hadn’t been thought of by the policy’s designers. Its introduction and scrapping would have been led by HM Treasury, with support from HMRC.


There are always people who use contrived schemes in order to obtain relief that are, by any stretch of the imagination, outside the aims of the policy. Going back to the film tax relief, as well as the “good” investors, an entire industry built up around avoiding tax, either on the income generated by the films once the relief had been taken, or by generating losses.

This is where the policy partnership between HMRC and HM Treasury switches. The introduction of the film relief was led by HM Treasury, but “maintenance” was led by HMRC. They would have been designing and introducing the legislation to stop the tax avoidance schemes. Again, from my experience in HMRC, although HMRC policy people will do their best to make sure that people who should be within the scope of a relief will get that relief, there is nothing they like less than someone who abuses a relief, especially if that relief then has to be withdrawn due to the tax avoidance.

Another point that is often not fully understood is that it is not HMRC or HM Treasury that change the law. Depending on whether the issue is policy development (HM Treasury) or policy maintenance (HMRC) they will take the lead on designing the legislation etc., but they can do nothing without obtaining the support of the relevant Treasury Minister (whether that be the Chancellor or one of his team) and this support is not a foregone conclusion. There are always more things to be done than there is room in the Finance Bill (believe it or not, given the size of some Finance Bills) and the issue may not be deemed sufficiently important by Ministers to bring the change forward.

Once in the Finance Bill, the legislation goes forward for scrutiny and agreement by the House of Commons. Although, here I have to admit that it is unusual for the Government not to “win the day” over the legislation, but again it is not HMRC or HM Treasury that legislate, it is Parliament. This is why the Courts ask what was the intention of Parliament in legislating, not what was the reason HMRC persuaded a Minister to include the issue in a Finance Bill.

Refurb or renew

Sometimes the avoidance gets out of hand and more and more anti-avoidance legislation is needed to try and protect the policy, often adding complexity, uncertainty and denying some intended beneficiaries of the relief they should be getting.

At this point, there is a choice to either keep on tinkering with the legislation or start again. This is effectively what happened with the Film Tax Relief. When the new regime was introduced, the benefit accrues to the producer, the people who make the films not the financiers and celebrities.

This has been a great success for the UK film industry as the BFI will attest, generating £7.9bn for the UK economy in 2016. Plus, as can be seen from the lack of amendments and that it has been copied for TV, theatres and orchestras, so far it has been free from avoidance schemes. The relief has also been copied internationally, with many countries having a similar system, Canada and Ireland to name two.

HM Treasury will try and design a relief that will encourage people to act in a way that will help the economy. HMRC’s policy teams will try to assist people to access the relief whilst also trying to stop avoidance. If this gets out of control, the relief may be scrapped or, hopefully, redesigned.

Andrew Parkes

Andrew is a highly experienced international tax specialist who worked at a senior level in HMRC’s international teams for over 10 years. He has a wealth of experience and technical knowledge.

Email: Andrew Parkes