Rachel Reeves in her recent Spring Statement (that suspiciously resembled a second budget) announced that she was in the process of launching an all-out attack on the tax avoidance industry. She did not however clarify what activities she considers as tax avoidance and which are in the category of tax evasion.
HMRC have now issued a document entitled “Closing in on promoters of marketed tax avoidance,” Predictably this resulted in a rather angry reaction from many tax professionals and scheme promoters, with most voicing the tried and tested mantra that “tax avoidance is legal”.
This is where matters get contentious, since in far too many cases, the term tax avoidance is used to describe transactions that from the outset, are clearly pushing the boundaries between avoidance and evasion. Most accountants and barristers, who specialise in this area, accept the principle that tax evasion breaks the law.
Nearly fifteen years ago, the then Chancellor, George Osborne, was arguably the first person to attempt to move the semantic goalposts by coining the phrase, ‘abusive avoidance’, in an attempt to define the point at which pushing the envelope of tax avoidance crossed the line into tax evasion.
The point at which avoidance ends and evasion begins
At the extremes, the situation is pretty much black and white as to whether that invisible line has been crossed. If somebody runs a business and fails to declare their profits for the purpose of tax, this is evasion. At the other end of the scale, if a businessman with Stage-4 cancer and only months to live, gives a few thousand pounds to each of his children to reduce the size of his estate for inheritance tax purposes, this in theory, could be described as legal tax avoidance. There is, however, a great deal that falls between the two extremes.
Even our wonderful tax department has a definition of tax avoidance in its manuals; this makes reference to “bending the rules” (but not actually breaking them) and stating that tax avoidance involves “operating within the letter, but not the spirit, of the law”.
investigative think tank Taxwatch, who study and advise on compliance with tax law, published a very informative article in 2019, which analyses a number of tax cases and is well worth reading. So, if you would to read more, go to: https://www.taxwatchuk.org/is_tax_avoidance_legal/
The Taxwatch article ends with their conclusion that “This idea, that all tax avoidance is legal, is a myth. In most cases tax avoidance is not legal at all, and for several decades courts around the world have taken an increasingly aggressive stance towards tax avoidance schemes, striking them down and imposing penalties on those involved.”
Is it worth it?
Regular readers of this Blog will recall that I often comment on tax tribunal cases that have tax avoidance cases at their heart. In most of those posts, I’ve reported that HMRC’s track record shows far more wins than losses, especially when the tax office have challenged highly artificial schemes that have been painstakingly devised to support the defence that they fall within the ambit of tax avoidance.
The latest tax avoidance ‘flavour of the month’ scheme, is to convert salaries into loans to avoid income tax and NIC. But a warning to anyone considering such a scheme, the Revenue’s success rate in court, when challenging such schemes, is virtually 100%, which should not come as a surprise as the law in this area has been pretty clear for many years.
Lawyers cannot simply draw up a contract which claims that a payment between an employer and an employee, which is often the same person, such as the sole Director of a limited company, is not income when everyone involved was clear that, in reality, it was disguised income.
Still legal, but not for much longer!
Until the Treasury’s recent consultation paper, which was issued to coincide with the Spring Statement, leads to a change in the law, the ‘loan for salary’ and other such schemes can still be promoted with supportive opinions from barristers, who face no consequences when their clever wheezes prove to be ineffective.
The promoters of these ‘dodgy’ schemes are usually canny enough to ensure that they can salt away their big fat fees for arranging these shady schemes, that ultimately lead to disastrous financial consequences for their clients. These promotors hide behind the flimsy fig-leaf of a barrister’s opinion and thus there is no legal come-back from disappointed clients, who’ve been stupid enough to try to take advantage of legal loopholes.
In extreme cases, these clients have had to pay all of the tax that had always been due, plus significant interest and penalties. They may also suffer embarrassing reputational damage, as exemplified by the efforts of both Jimmy Carr and Frankie Dettori, who both attempted and failed to keep their names out of the papers.
Is it time to clean house?
I’ve no doubt that most of you reading this Blog are UK taxpayers, whether or not you’re also involved with a business, and I suspect that you may well agree that it is unlikely that joe public would challenge the view that cleaning up the tax avoidance industry would be good for us all, especially Rachel Reeves.
A complete clean-up of the extreme and mostly legally untested, tax avoidance schemes, will clearly increase tax revenues, free up HMRC inspectors to do their day jobs and stamp out practices by a few that give all accountants a bad name. It will also save prospective marks from becoming the next Jimmy Carr and make life cleaner and simpler for most accountants and financial advisers, many of whom have to clean up the messes caused by promoters of schemes that fail.
Accountant’s view
Personally. I will not lose any sleep over those individuals who promote very clever but rarely fool proof schemes and who eventually lose out. Nor will I be upset if those high-priced lawyers and financial scheme organisers, catch a financial and legal cold, if courts actually bite the bullet and deem that their advice should actually be classified as encouragement to commit tax evasion.
