The blockbuster Pirates of the Caribbean movie franchise was partly bankrolled by rich British investors trying to avoid paying tax, it has been revealed.

Members of a legal tax avoidance scheme used a loophole in legislation, designed to increase investment in making British films, to buy the world distribution rights to two of the hit Hollywood movies which already been made.

It was suggested that they were then able to write-off their investment against British tax liabilities – potentially resulting the taxpayer subsidising the American film.

The revelation emerged in testimony to the House of Commons Public Accounts Committee as part of its on-going inquiry into tax avoidance schemes.

Giving evidence Tim Levy, Director of Future Capital Partners, admitted that around half the money put into his film tax schemes had actually been invested not in British films but America ones.

He denied that the sole purpose of the investments had been to dodge tax in the UK.

But Margaret Hodge, chair of the PAC, said it was clear that the investment in Pirates of the Caribbean two and three had been designed as a tax dodge describing the situation as “potty”.

“The whole point (of the scheme) was to encourage in investing in making films in Britain,” she said.

“We have now established that was that you used this vehicle to purchase American films that had already been made. The only bit you were doing was using it as a vehicle to provide tax avoidance to the individuals.”

She added she was particularly angry by the revelation as she had been a minister in Culture Department at the time when the scheme was operating. She said she had believed it to be a genuine attempt to boost funding in British film making and was shocked that it had been so badly exploited. The loophole in the legislation has now been closed.

Mr Levy admitted that his company had created an investment vehicle for it clients to put money into Pirates – which had already been made - but said this was because there were not sufficient opportunities to invest in Britain.

“There were a number of investors who were interested in investing in the industry but there was insufficient supply on the product side,” he said.

The Committee also heard from the boss of a company who specialises in selling tax avoidance products to rich individuals.

He admitted that most, if not all, of the products that he sells are subsequently shut down by HMRC. However because tax law is almost never retrospective his clients can still save money on it.

He also said that because HMRC only had limited resources it did not always attempt to recover money invested illegitimately.

“We know that HMRC don’t have the resources to fight a sufficient number of these cases so some of these will go through,” said Aiden James, Director, Tax Trade Advisors.

Mr James was asked how many schemes that he’d marketed were now illegal.

He replied: “Most of them if not all of them”.

He was then asked: “So they’re all illegal and you’re now looking for the next loophole is that fair statement?”

He replied: “Yes.”

Ms Hodge said she was “very grateful” for his honesty but described the situation as “pretty gobsmaking”.

She then asked him: “Do you have any ethical basis for the business model on which you’re making money.

He said: “The law has become very complicated.”

The Deputy Chair of the committee Richard Bacon put it to him: “The model as I understand it is that most of the schemes that you introduce get closed down within a very short period of time.

“So what you do is aggressively target (clients) and get as many though in a short period time on the basis that HMRC cannot pass respective legislation and therefore they have a tax window where they can reduce their tax until HMRC wake up, close that one down by which time you’ve moved on the next one.

He replied: “I would agree with all that you’ve said apart from aggressively market.”