Tax avoidance, is it worth it?

Let’s start with a couple of truisms, tax evasion is against the law, whilst tax avoidance is a legal means of reducing your tax bill. That being said, it is also true that not all tax avoidance is legitimate. Are you with me so far, good; but no-one should be in any doubt that every taxpayer is entitled to minimise their tax liabilities to the greatest extent permitted by the law and, indeed, we accountants have an obligation to ensure that our clients take all steps to achieve this goal.

The fundamental issue to be resolved is what is and what isn’t permissible under our ever-expanding, complex tax legislation. Tax evasion is against the law; tax avoidance is within it, but as former Chancellor George Osborne famously said, “I would expect any taxpayer to minimise their tax liability by any legal means possible, but that does not include abusive tax avoidance”.

Making a mistake could cost you dearly

When you get it right, tax avoidance is wonderful. You, the taxpayer, gets richer at the expense of a government that most of us believe will only waste most of the money that it takes from us anyway. However, when you get it wrong, it can be extremely costly.

Not only will you be obliged to pay back the tax that you thought had been saved, but also, you’ll be charged interest at a penal rate, plus there is the distinct probability of you having to also pay a heavy penalty. Finally, just when it seems it can’t get any worse, there is the potential of being named and shamed in the media, which isn’t great for your career, business prospects and especially your wallet.

Even government ministers can get it wrong

There have been a number of examples in recent years, of senior politicians, from both sides of the House, getting it wrong and being humiliated in the press for doing so.

I will pick a handful of examples to illustrate the point:

• Rishi Sunak – When little Rishi was Chancellor, he was heavily criticised by Sir Keir Starmer who said that “Mr Sunak has very serious questions to answer about his wife’s finances”. “This came after it emerged that Sunak’s wife Akshata Murty had a very dodgy non-dom status, which meant that she did not pay UK tax on income earned abroad, thus saving herself millions. Ms Sunak, to ward off an investigation into potential aggressive tax avoidance, took on UK status and started paying tax.
  
  

• Nadhim Zahawi – also when in the role of Chancellor, arranged for a large block of shares that were due to him, to instead be transferred to a Gibraltar company owned by an offshore trust controlled by his parents. Whilst he denied that he was motivated by tax avoidance; to head off a tax investigation he did a deal with HMRC. allegedly making a £5m settlement with them.
  
  

• Angela Rayner – The then Labour Deputy Prime Minister was caught out, by declaring her second home as her permanent residence and thus avoiding £40,000 in stamp duty. She claims that she was never advised by her legal team, but they have told a somewhat different story. Ms Rayner is still under a cloud and awaiting the results of the ongoing HMRC enquiry into her tax affairs.
  

It’s a sad fact that many politicians never learn from the mistakes of their colleagues, seemingly because they have a sense of entitlement; as is evidenced by Reform’s Deputy Leader Richard Tice, who is getting the kind of press coverage that nobody would want over an alleged dodgy tax scheme and the list goes on and on, with a new name in the headlights seemingly every few weeks.

Aggressive tax avoidance carries a high risk

I’m sure that Messrs Sunak, Zahawi, Rayner and Tice would wholeheartedly agree with the above statement. If you are an individual considering an opportunity, this area of tax is a potential minefield, often with no right answers. At one level, the maxim “if something looks too good to be true, it probably is” should be kept at the forefront of the mind throughout.

On the other hand, with so many weaknesses in tax legislation, artificial arrangements that appear to tick every box, such as salary sacrifice, are established and accepted means of reducing liabilities. Often, even accountants can get caught up in the genius of schemes that seemingly have tacit approval thanks to an opinion from a barrister, but very often this can badly backfire.

If the tax avoidance scheme you’re in is deemed to be “aggressive avoidance” by HMRC, the back tax, penalty interest and fines could be the least of your worries, as reputational damage could cost you much more in the long-term.

Make the risks involved clear, as well as the potential reward

Most of the tax avoidance schemes that have come to light so far have been dreamt up by clever tax lawyers, bolstered by a ‘Counsel’s Opinion’. This is then promoted to accountants, up and down the land. Most wont touch such schemes, but a number will. These individuals appear to have worked on the basis that as there is nothing in law that says you can’t then you can. Wrong, as many have found to their cost.

I worry that many accountants promoting or even evaluating schemes promoted by others, fail to take adequate care or do sufficient due diligence with regard to their clients’ willingness to accept risk.

Accountant’s view

Personally, whilst I’m prepared to take a calculated risk, providing that I’ve done my homework, I would never recommend a scheme to clients unless I was satisfied that a scheme had at least a 90% chance of success. This would be my starting point, before saying a word to clients.

It is clear that some accountants will undoubtedly laugh at such risk aversion and head gung-ho into something that I would regard as high risk, perhaps partly on the basis that HMRC’s current lack of resources mitigates the risk. I am not in this camp and will always try to be even handed in my advice.