Looking for Aggressive tax avoidance schemes?

June saw the media launch a full frontal attack on aggressive tax avoidance schemes in the wake of a series of ‘revelations’ in The Times. 

Even David Cameron joined in, describing the comedian Jimmy Carr’s involvement in a complex Jersey-based scheme as ‘morally wrong’. 

Tax avoidance and tax evasion

Although politicians (and sometimes HMRC) tend to speak of tax avoidance and tax evasion in the same breath, there is a significant distinction between the two:

Tax avoidance involves arranging your financial matters within the terms of existing legislation to reduce or eliminate tax liabilities. The law now requires details of nearly all complex tax avoidance schemes to be reported to HMRC. Similarly, anyone who uses such a scheme must give details on their tax return (usually just an eight digit reference number given to the scheme by HMRC). Designing and using tax avoidance schemes is not illegal.

Tax evasion will normally involve hiding wealth and/or information from HMRC. The classic example used to be putting money into an offshore bank account and not declaring the interest earned. Tax evasion is illegal and, as Lester Piggott the famous jockey showed, can result in time spent behind bars.

The thickness of that prison wall

To quote Denis Healey, a Labour Chancellor of the 1970s, ‘The difference between tax avoidance and tax evasion is the thickness of a prison wall’. That wall can sometimes appear surprisingly thin.

The schemes which grabbed the headlines this summer were at the ‘aggressive’ end of the tax avoidance spectrum, often pushing the interpretation of the law to its limits. However, the Courts and Tax Tribunals are themselves increasingly adopting a more robust approach to the aggressors. A tax avoidance scheme can be legal, but still fail, leaving the would-be avoider with no tax-saving, interest on overdue tax and legal/advisory costs. 

Past, present and future

A fair slice of the press coverage tended to concentrate on celebrity more than fact, which meant some valuable detail was missing:

The K2 scheme used by Jimmy Carr relied in part on interest–free loans and an employer-financed retirement benefits scheme (EFRBS). 

The latter were the subject of anti-avoidance legislation announced in December 2010 and legislated for in last year’s Finance Act. 

As far as the loans are concerned, HMRC will always want to be satisfied that they are genuine, repayable loans. 

The Eclipse 35 film scheme, which had several high profile football managers among its users, was found not to qualify for tax relief by the First-tier Tribunal in April 2012. However, the investments were made six years earlier, shortly before revised legislation was introduced to restrict tax relief for film investment, other than by film production companies.

At much the same time as all the tax avoidance publicity, the government launched a formal consultation on a General Anti-Abuse Rule (GAAR), targeted at closing down aggressive avoidance schemes. The legislation for this will be in next year’s Finance Act.

What is acceptable?

The attention given these low-profile, highly complex schemes, has once again raised the issue of when acceptable tax planning becomes aggressive tax avoidance. 

The boundary between the two has undoubtedly moved, with the current round of austerity reducing the acceptable area. 

It is hard to imagine today any judge echoing the 1929 comment of Lord Clyde that ‘No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.’ 

Summary

There is no suggestion that normal tax planning, such as arranging ISAs or contributing to a pension, has suddenly become unacceptable avoidance. 

If you think you are paying too much tax, do not let all the recent publicity prevent you from seeing what can be done to reduce your payments to the Exchequer. In many instances there is scope to reduce the Chancellor’s slice by tried and tested (and non-contentious) means.