Tax Avoidance & Tax Evasion
Most of us would accept that whilst tax avoidance is legal, some types of tax avoidance are more acceptable than others.
For example, the acceptable end of tax avoidance would certainly include tax planning which involved the use of an ISA to obtain a tax free return, whilst at the other end of the spectrum a tax scheme that manufactures tax deductible losses in a business you have no real exposure to would be regarded by most as unacceptable.
There is a line and it is unadvisable to cross it.
An ‘unacceptable’ tax avoidance might best be described as a scheme that has highly artificial steps inserted into it, has no real commercial substance, and has just one real objective – that is tax avoidance.
Our only advice with regard to this type of avoidance is don’t be tempted. 9 times out of 10 you will simply pay an exorbitant fee to a ‘specialist consultant’ who will ‘guarantee’ exceptional tax savings, whilst claiming that the scheme’s efficacy is backed by ‘respected counsel’s opinion’.
On implementation, you are then likely to find yourself the subject of HMRC’s scrutiny and abandoned by the consultant, just after you discover that counsel’s opinion was ‘taken out of context’. The next stage is negotiating penalties.
Some recent examples of such ill-conceived schemes that have cost the taxpayers many sleepless nights and a small fortune in professional adviser’s fees are:
UBS/Deutsche Bank v HMRC – the taxpayer tried to implement an artificial scheme whereby redeemable shares were issued to employees in lieu of bonuses in order to avoid Income Tax and National Insurance liabilities.
If the substance of the scheme had been to make employee’s longer term shareholders the plan may have worked, but the reality in this case was that the employer always intended that its employees would cash in the shares and inserted various steps into the arrangement to ensure that this would be the case.
On a strict reading of the letter of the law the scheme may have looked plausible, but the court decided to take a ‘purposive’ approach and ignored the artificial inserted steps taken, thereby ensuring the bonuses were taxed as normal income from employment.
Murray Group Holdings (MGH) v HMRC – MGH (the owners of Rangers football club) entered into a tax avoidance scheme which involved making payments to various trusts. The trusts then applied the funds it received for the benefit of specific MGH employees. The scheme was designed to avoid payment of income tax and NICs in respect of large sums of money paid to those employees.
The courts agreed with HMRC that the trust arrangements were artificial steps that had no real purposes other than the facilitation of tax avoidance. HMRC were therefore allowed to collect income tax & NI as if the payments to the trust had been payments made directly to the employees.
Please rest assured that we aren’t saying that you shouldn’t seek to reduce your tax bills; our whole reason for being in business is to help you do so, but you should beware of ‘consultants’ peddling expensive ‘avoidance schemes’.
You’ll sleep far better if you avoid provocative schemes and use a Chartered Tax Adviser, Chartered Accountant or STEP member to reduce your tax exposure. Call us now.
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