Brown v InnovatorOne Plc – good news for advisers involved in tax mitigation structures

A recent judgment of the High Court in Andrew Brown and ors v InnovatorOne plc and Ors [2012] EWHC 1321 (Comm) is welcome news for professional advisers who may have acted for clients involved in the design, implementation or distribution of tax efficient arrangements.

Class action

This was a class action heard by Mr Justice Hamblen over a period of four months in the Commercial Court which had been brought by more than 550 high net worth individuals, each of whom had invested substantial sums of money into one or more of the Innovator technology structures. Investors had claimed tax reliefs under the Capital Allowances Act 2001 under provisions designed to encourage investment in British start-up technologies.

Essentially, investors borrowed 80% of their investment and became partners in limited liability partnerships which would acquire and oversee the exploitation of particular technologies.

Role of the solicitors

The solicitors concerned, Collyer Bristow, acted for Innovator Plc, the company that had brought the technologies to the investment market. In the event, none of the technologies succeeded commercially and HMRC refused to allow full relief on the geared investments made by investors in the technologies.

The investors’ action

The class action was based on the premise that the Innovator technology structures were an elaborate fraud and that two former partners of Collyer Bristow had either conspired to defraud investors or had dishonestly assisted in breaches of trust said to consist in a payment away of investment monies.

The decision

As the Judge recorded, the failure of the arrangements, which led investors to enter into settlements with HMRC for tax relief on their own investments only, left a number of partners aggrieved. Their grievances centred around the perceived lack of commerciality of the structures and the fact that the architect and the driving force behind the arrangements was a Mr Bjorn Stiedl, who in November 2004 was convicted at Southwark Crown Court of pension fraud for which he was subsequently imprisoned. The investors claimed that a partner at Collyer Bristow had become Chairman and a non-executive director of InnovatorOne and that he and his firm were privy to information about Mr Stiedl that was deliberately withheld by them from investors. Moreover, both the partner concerned and Collyer Bristow had remained silent while Mr Stiedl’s associate, Mr Carter, misled HMRC about Mr Steidl’s true status in relation to InnovatorOne. This was because Mr Carter had claimed in a meeting with HMRC that Mr Stiedl was never more than a consultant which was untrue, given that Mr Stiedl was in fact a shadow director of the company.

In almost all respects the judgment was wholly in the defendants’ and Collyer Bristow’s favour. The Judge held that there was no sham or fraud, nor was there a conspiracy to defraud investors. The Judge said:

‘There were aspects of Mr Stiedl’s evidence that I reject … he was, as I have found, the driving force behind the schemes. It is also clear that Mr Stiedl planned to and did derive substantial personal benefit from the schemes… whatever Mr Stiedl may have done in the past, I find that his motivation in instigating these schemes was to make money for all concerned through the success of the schemes and not dishonestly. These were carefully designed schemes with significant input from professionals, including Leading Counsel. They were reviewed and considered by many experts, including numerous IFAs and accountants. They were judged by many honest, conscientious people to be sound, if ingenuous schemes. This is what Mr Stiedl believed them to be… Mr Bailey (the partner at Collyer Bristow) was a commercially minded lawyer who in the interests of his client may have been drawn into roles that with hindsight were unwise, such as acting as Chairman of Innovator. He was also very busy and did not have all the time which ideally would have been available for some of the tasks he and his team took on… No doubt with hindsight there are some matters which Mr Bailey might have done differently but this is not indicative of dishonesty and Mr Bailey did nothing wrong knowingly’. (Paragraphs 1352-1353 and 1389).

Comment

The judgment is a reminder that taxpayers dissatisfied with the fiscal result of an investment may have a long, expensive and uphill task if they are to successfully sue professional advisers who are involved in the tax planning. Most tax structures are considered by Leading Counsel and are implemented in good faith with the intention of providing a particular tax advantage. Successfully attacking a tax planning structure, and those who design and implement it, on the basis of dishonesty, is likely to prove a difficult task.

An alternative course of action is for an investor to seek to persuade HMRC to agree the anticipated tax analysis and failing such agreement, attempt to obtain the most favourable settlement possible with HMRC. In this respect, the mechanism of a group action can significantly reduce the costs associated with an HMRC enquiry and any subsequent appeal that may become necessary to the tax tribunal.