Tax: a comedy of errors…?

I have written a bit about taxation before, so it probably won’t surprise you that I have found the ongoing “controversy” about Jimmy Carr’s tax affairs and the political pronouncements by both Labour and Tories (not least David Cameron) pretty irritating.

Let me put my cards on the table. I avoid paying tax! Most people do, I would expect. I am quite happy to whatever tax is due, but frankly I would not want to pay more than I need to, and I take steps to reduce the amount I pay.

All, I hasten to add, perfectly legally. And, whilst the methods I use are a little more mainstream than Mr Carr’s (for instance, using my annual ISA allowance, paying into a personal pension plan, and, in the past, using a limited company to manage my freelance work), they are frankly no different. The government has decided to allow me to save tax in a variety of ways, and I chose to do so; similarly, Mr Carr took advantage of sophisticated but government-sanctioned ways to reduce his tax bill. Indeed, since it is fair to assume that every UK taxpayer at the very least makes the most of their personal allowance (currently £8105 pa) – if only because it is taken into account automatically by HMRC), so to a small extent we all avoid tax.

I might not think it is “fair” that Carr pays so little tax, but it seems odd to berate him for doing what others do, just because he is a public figure. (There may be a bit of hypocrisy if his stage act focuses on others wrongdoing – I am not a fan, and I don’t know his act – but that certainly isn’t “a moral issue”.)

In fact, the most hypocritical person here seems to be David Cameron. He is in the perfect position to change the tax legislation – to simplify the UK tax code, for instance, and remove loopholes that result lawyers and accountants thinking up whizzy (if legal) schemes to reduce their clients’ tax bills.

Instead, he and his chancellor reduced the top rate of tax payable by the highly paid in the last budget. Now, I’d say that IS a moral issue.

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4 thoughts on “Tax: a comedy of errors…?

  1. Liadnan

    Why on earth do you think that HMG has sanctioned Carr & co’s scheme? So far as I am aware they have done nothing of the sort and indeed the Revenue has said it was already investigating it. And what does this common phrase “perfectly legal” I read so often actually mean? Can things be imperfectly legal? Does it mean “is/is not a criminal offence” (which is entirely irrelevant) or “has/has not when properly examined the effect of diminishing liability to tax”?

    Unless something has changed recently all that has happened is that Carr and those in the scheme with him filled in their tax returns on the basis that they had very little taxable income (schemes of this sort usually try and set income at around minimum wage). As required by law for the last several years they told the Revenue they had filled in the tax return on that basis because they were party to this particular scheme. There’s also an obligation on the promoters to disclose it.

    This is not sanctioning the scheme: it means nothing save that those involved in the scheme have not committed a separate regulatory offence of failing to disclose participation in a notifiable avoidance scheme in accordance with Part VII of Finance Act 2004 (sections 306-319 including several sections inserted by FA 2007) thus they have not incurred a financial penalty under s.315 (amending Taxes Management Act 1970 s98C).

    That is the start of the process whereby the Revenue decides whether to attack it – ie seek a declaration that it doesn’t *work* to avoid tax, and/or raise assessments, and if it does so decide, brings proceedings. As far as I know that process is ongoing, they certainly said it was when the story broke.

    I would have been surprised if they weren’t, and will be fairly surprised if they don’t in due course bring a case. They have a good track record of doing so, successfully more often than not. (eg. If they do and it is successful do we think it will hit the headlines?

    Schemes depending on disguising remuneration as a soft loan from an offshore trust or company, which is what this appears to be, very rarely do work when challenged, and the Revenue attacks them all the time (they’ve been fairly bullish about the point in respect of the K2 scheme, saying in terms that if it is based on nominal loans it will not work). There’s a reason why the Bar Mutual have recently asked those of us who report a certain amount of tax work on our insurance forms to specify whether or not we’re in the business of writing opinions that say “this scheme works”: the risk is high and the liability is staggering. Almost any tax avoidance scheme will have a silk’s opinion saying it works, doesn’t guarantee it does (if it doesn’t have such an opinion it’s even worse).

    Far be it from anyone to go so far as to say schemes based on disguising remuneration as a soft loan look like shams and frauds on the revenue (nb both those are technical terms), or wondering what the chances of a loan being called in are. So far. But that doesn’t mean they work (at least unless and until the loan is called in, which never happens since it would render the exercise pointless). Nor would a finding that a scheme doesn’t work amount to tax evasion, doing something you think works which turns out not to is not the same as criminal intent to defraud the revenue.

    Whether or not they work to avoid tax, comparison of such schemes with ISAs and pensions is to my mind simply nonsense. Avoidance schemes of this kind depend on trying to find a way to structure your affairs such that the provisions of the taxing statutes do not bite on the funds that are paid to you or to someone on your behalf. By contrast ISAs and pensions depend on bringing the funds you receive within express provisions of the taxing statutes where successive governments have explicitly decided to give an allowance or an exemption to promote a particular social end – encouraging people to provide for their old age, encouraging people to build up capital and become investors in a small way. Or to pick more obviously contentious examples, specific exemptions relating to the income tax status of those who are habitually resident but declare themselves non-domiciled, or film schemes (the main result of which has been an awful lot of crap schemes).

    It’s the difference between saying “this express provision (eg ss3, 4 Income Tax Act 2007 and the other sections referred to there) does not apply to this money because I gave it to someone in Jersey and then they lent it back to me except apparently I won’t ever have to pay it back” (ok, loan based avoidance schemes are slightly more complicated than that but it’s what they come down to) and saying “this express provision (eg sections 694ff of Income Tax (Trading and Other Income) Act 2005 – exemptions for certain individual investment plans – does apply to this money because it is income on a individual investment scheme falling within the applicable regulations which is reinvested in the scheme”.

    Tax law could certainly do with a great deal of simplification and the removal of many exemptions (I’m not even sure I’d keep ISAs). But that is not going to stop people trying to find a way around it. Historically the approach has been more and more detailed fiddling with the statutes, which seems to me exactly the wrong approach: instead what is needed is more general provisions and a greater willingness and ability on the part of HMRC to litigate or raise assessments and application of the Ramsay doctrine (complicated itself but broadly it allows the revenue and the courts to look through wholly artificial steps in transactions)

    Reply
    1. patrickhadfield Post author

      I thought advisers had to have avoidance schemes signed of by HMRC before along them – I thought there had been a case involving Barclays a couple of years ago where they had failed to do so. I stand corrected!

      Reply
        1. Liadnan

          … as they say in terms here

          “The schemes featured in Spotlights are generally those which HMRC consider have the widest implications and about which there is the greatest need to warn potential users. They will often be schemes that have been disclosed to HMRC and have been given a Scheme Reference Number (SRN). Please note that the issue of a SRN does not mean either that HMRC ‘approves’ the scheme or that HMRC accept that the scheme achieves its intended tax advantage. These articles are limited exceptions to the usual rule that HMRC do not comment on tax avoidance. No further comment will be made. Only a minority of schemes will appear in Spotlights. In particular, HMRC will not include schemes aimed at very specialised areas, with a limited scope or where HMRC estimate not much tax loss is involved. A scheme that has not featured in Spotlights may still be challenged. You may wish to consider it in the light of the advice above on ‘tax planning to be wary of’ and consult a reputable tax adviser.”

          Reply

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