As reported by BBC’s Newsnight, the former chief whip invested money into Ingenious Film Partners 2, which earlier this week appeared on HMRC’s list of 1200 tax avoidance schemes whose investors could receive accelerate pay notices.
Former chief secretary to the Treasury, Lord Waldegrave, and former chairman of the BBC, Lord Grade, were also identified as investors into the scheme.
Ingenious was marketed as a vehicle to encourage people to invest in British film, but HMRC says it was actually designed to generate tax relief for its investors.
The scheme helped finance films such as X-Men: The Last Stand, Avatar and Hot Fuzz.
Investors made an upfront investment of £36,000, which was topped up to £100,000 using a loan from Ingenious, which was then used to buy shares in film productions.
This created a loss of around £90,000 which investors could write off against their taxes, returning their original £36,000 as well as ownership of their £100,000 stake.
HMRC disputed that “expenses incurred in the course of [Ingenious’s] businesses related wholly and exclusively to the carrying on of any trade”.
But Ingenious said: "HMRC has failed to distinguish between commercial businesses and tax avoidance schemes and have, without proper consideration, deemed all film arrangements to be tax schemes."
In a statement, Mitchell said: "When the last Labour government introduced tax incentives to invest in the British film industry, along with many other investors I did so through Ingenious Films. I resigned from Ingenious when I was in government and always pay all tax when due."
HMRC’s list of avoidance schemes came in anticipation of controversial new powers allowing it to force the upfront payment of contentious tax on the basis of court rulings made in similar cases, expected to come into place once the Finance Bill receives Royal Assent next month.
"Tidal wave"
Partner at international law firm Berwin Leighton Paisner, Neal Todd, said Mitchell’s case was symbolic of growing concerns over a “tidal wave” of tax demands individuals and corporates can expect to receive once HMRC receives its new “weapon”.
"The reforms certainly create a dangerous situation,” he said. “Effectively, the tax authorities will no longer need to persuade a court that a sum is due if there is a dispute.”
He said paying the correct amount of tax is an objective “that we can all support” but added that it was important for HMRC to approach it in a factually correct manner.
“It is vital that the tax system remains rooted in fact, not conjecture on the part of HMRC,” he said. “Many of the investors in film financing and other schemes now targeted by the body say they were making genuine investments to support the UK film industry; they may have just been badly advised.
“Small differences between different people's tax arrangements can affect the tax outcome significantly and tarring tens of thousands of taxpayers with the same brush cannot be a solid foundation for the tax system."
Head of client relations at Rebus Investment Solutions, Martin Taylor, said that while many may see well-known figures embroiled in such schemes as “greedy tax evaders”, most were unaware of the type of investment they were involved in.
“Most people think that everyone involved is wealthy, greedy and looking to avoid tax, but trust me, this is not the case.
“Many have simply been advised badly, and did not know what they were getting themselves into.”
"Naming and shaming"
He described media coverage of the issue as a process of “naming and shaming”, which failed to acknowledge the wider problem created by HMRC’s approach.
“For every well-known figure involved there are 50 or 60 normal people, and this is the side that people do not see.
“These are the people who could face financial ruin at the hands of the reforms, and dealing with them personally is where it really hits home for me.”
Mitchell first became embroiled in scandal in September 2012 after he was alleged to have referred to on duty police officers as “plebs” when they refused to open the main gate for him at Downing Street, as he attempted to leave with his bicycle.
