This is most of a response I wrote in a private forum when amongst other absurd suggestions I saw it suggested that claiming expenses against business income was a form of tax avoidance. It may have been tongue in cheek but it did wrong-foot a couple of other posters in the forum.
Post the Jimmy Carr affair it is still worth repeating in addition to earlier posts here.
I think it is useful to say that tax avoidance is not:
- Claiming expenses against business income to determine taxable profit. That is what our tax returns require us to do.
- Using tax breaks given to us by our Treasury such as (in the UK) ISA investments and putting money into Enterprise Investment Schemes and Venture Capital Trusts, thus getting relief from income tax and capital gains tax.
- In the UK, paying out our company profit in dividends with
minimal salary to avoid paying Employers and Employees' National
Insurance Contributions. Despite the hue and cry over people
contracted through their companies to work for Government
departments and Quangos, the Treasury is quite aware that this is
common practice so again we must assume that it is “the will of
Parliament”. That is an important phrase, by the way.
What is generally accepted as “tax avoidance” in the world of tax professionals is using arrangements which have a degree of artificiality and that are without commercial reality; there would be no commercial reason for doing them other than to reduce or avoid tax.
The current furore is over Jimmy Carr. Apologists for more aggressive tax avoidance quote the words of Lord Tomlin in Inland Revenue Commissioners -v- Duke of Westminster; House of Lords 1936, when he said “Every man is entitled if he can to order his affairs so that the tax under a tax statute is less than it would otherwise be. Whatever the substance of the arrangements may have been, their fiscal effect had to be in accordance with the legal rights and obligations they created.”
However it is no longer 1936 and Lord Templeman told us back in 1986 that tax avoidance was reducing a tax liability by means within the law, which were not intended by Parliament. Tax mitigation is arranging our affairs and those of our clients to reduce our liabilities in a way that Parliament has considered. This followed from then recent history in tax litigation.
In 1982 the Inland Revenue, as it then was, had two major successes with cases known as Ramsay v. IRC and IRC v. Burmah Oil Co. Ltd. Basically it was determined that any arrangement which has pre-arranged artificial steps with no commercial purpose other than to reduce tax liabilities would effectively fail. This is a simplification, but the rulings established what has become known as the Ramsay Principle, which would mean that any wholly artificial scheme to reduce tax would fail. The General Ant-Avoidance Rule (GAAR) which the Government has decided to implement following an enquiry conducted by Graham Aaronson QC will seek to reinforce that principle, though I rather think we will see a great deal more work for the lawyers.
I worked on avoidance schemes myself. I enjoyed the intellectual challenge way back and I make no secret of it. Avoidance is something I have returned to in writing several times and also see here.
If tax avoidance is a moral issue it is a personal one as I say here, and apologies for all these links. I feel that there are certain things that need to be said for all professional tax practitioners, and I have an article along the same lines published in one of the professional newsletters.
My concern over many of the tax schemes being sold is that those who go into it often do not appreciate the risks any more than do the non-tax professional introducers and “financial advisers”. I use the term loosely. While the introducers are often to a degree covered by the insurance of providers, their professional reputations are at risk as many of these schemes will fail.
The individuals trying to avoid tax often do not understand that HMRC will dig into their tax affairs and those of their companies, and if their families are involved, their affairs too. Anyone using a scheme should have a strong stomach and a capacity to sleep at night whatever the stresses and strains of daily life. The tax relief, if it arrives, may be a long time coming, and it may be clawed back later.
Some schemes I would advise any client of mine not to touch with a bargepole knowing who is behind them. Because they have been “approved” by Counsel, a leading QC or whatever it says in the blurb is no sort of guarantee. Other Counsel may disagree and they might be appearing for HMRC in the future. What Counsel provide for a scheme is a protection for the providers in not getting sued, and you can always find a tame barrister to agree your arrangement will work. I should know because I have.
For one of the reasons above I would not be happy if my client chose the scheme I saw circulated this past week. However it would be my client's decision and we would declare the scheme in the tax return under the “Disclosure of tax avoidance schemes (DOTAS)” box unless it didn't have a scheme number. If it did not, I would write an essay for HMRC with every detail I knew, unless the client asked me not to. If she or he asked me not to disclose I would resign.
The professional bodies don't want their members involved in creating aggressive schemes anyway, so if I did work on an extreme one myself as a designer I might be subject to disciplinary action (not that I am an ICAEW member), even though I think it should be my call and not that of a professional body.