To Avoid Tax, Or Not To Avoid Tax, That Is The Question

“Spotlights” is HM Revenue & Customs’ initiative to warn the public about what they perceive the be questionable tax planning arrangements that are available as tools to avoidance UK taxes.

Spotlights is published periodically by HMRC to assist the public in understanding and identifying the types of tax planning arrangements which HMRC are likely to challenge. HMRC do this both by providing taxpayers with some help to distinguish between what they perceive to be “artificial tax avoidance” arrangements and ordinary “sensible” tax planning. Usually HMRC describe specific tax planning arrangement they think the public should be wary of, with a brief description of the arrangement.

Set out below are a number of the tax planning arrangements that HMRC are currently warning taxpayers to be wary of. Lately HMRC have been increasingly vocal in their dislike of tax avoidance arrangements and warn that they will seek to challenge a taxpayer’s self assessment tax returns should they encounter these arrangements being used. However, this does not seem to be putting people off and nor should it. With fees charged for these schemes coming down dramatically more and more people are simply viewing this as an “option premium” and are quite happy to defer their tax bills on the basis of what can often boil down to a technical argument.

The main arrangements, involving income tax, that HMRC have been covering in their Spotlight announcements to date are set out below:

  • Investments to obtain trading loss reliefs (‘sideways loss relief’);
  • Gift Aid schemes involving a cash donation, followed by the cash donor receiving a benefit (generally shares) shortly after the initial cash gift;
  • Employer-Financed Retirement Benefits Scheme (‘EFRBS’);
  • Using trusts and/or similar entities to reward employees (thereby avoiding PAYE and National Insurance);
  • Employment liability arrangements;

In practice HMRC have their hands tied behind their back to some extent, as at present in the UK there is not a General Anti-Avoidance Rule (GAAR), which if it were to be enacted would potentially totally outlaw tax avoidance. Instead HMRC tend to legislate against individual tax avoidance arrangements as and when they are made aware of them. The outcome tends to be that every time a particular tax planning structure is blocked by HMRC issuing revised legislation a brand new avoidance arrangement springs up that is unaffected, only for HMRC to subsequently legislate against that a few months later, and so the cycle continues.

HMRC try to sound aggressive and proactive when it comes to tax avoidance, dressing it up as a “immoral” and an “anti-social activity”, in an half-hearted effort to dissuade taxpayers from mitigating their income tax liability. In reality tax avoidance is not illegal (tax evasion on the other hand is) and it goes on everyday in various forms. In fact, many of the MPs who purport to passionately dislike tax avoidance can (and probably do) take advantage of ISAs, Film Partnerships and other methods of legitimate tax avoidance to reduce their exposure to UK taxes.

We can only imagine that the new 50% higher tax rate coming into effect from 5 April 2010 will motivate many more taxpayers to seek ways to legally avoid paying their tax bills.

Tax Planning is good but is not for the fainthearted or those not properly advised. Through our professional relationships, the Tax Advisory Partnership can provide advice on tax planning, restructuring and tax avoidance – which schemes may work and which probably will not. These cover all taxes including income tax, capital gains tax, stamp duty land tax, inheritance tax etc.