Tax Avoidance Schemes – if it looks too good to be true – it probably is too good to be true.
At a recent Ernst & Young Accountancy event which one of our FW Accounting representatives attended, HMRC touched on the recent media cover relating to offshore Tax Avoidance schemes, and urged Accountants to ensure that their client’s avoid these like the plague.
They stated ‘if it looks too good to be true – it usually is’
Recent high profile cases include Jimmy Carr who was one of the thousands of wealthy individuals who had utilised the offshore tax avoidance scheme known as ‘K2’ to avoid paying higher taxes. As said in his collection of tweets at the time (sourced from themirror.co.uk) “I met with a financial advisor and he said to me “Do you want to pay less tax? It’s totally legal”. I said “Yes””
Schemes like K2 have been in existence for many years, with many of our clients enquiring about these and the legality and risk involved with them.
Worth noting here that though Tax evasion (i.e. just not paying your taxes) is illegal, Tax avoidance, is not actually illegal. At FW Accounting we specialise in explaining tax efficiency to our clients. Common examples of tax efficiencies that people utilise include:
- People may invest into a pension.
- Many Limited Company directors will employ their husband or wife, and/or add them as a second shareholder, dividends can then be drawn equivalent to shareholding – a tax efficient way for a couple to distribute the company income.
- They may invest some of their income into Investment Schemes where their funds are spread amongst a number of group investments to minimise risk.
- Some people might wish to gift monies to charitable sources – this extends your basic rate tax band.
- Life insurance and income protection are common payments for anyone who wants to protect their livelihood and they can be classed as a valid business expense.
How the offshore Wealth Management scheme K2 worked was as follows:
1) A UK worker would quit their job, and would sign a new contract with an offshore company.
2) The offshore company would then outsource this worker to the UK, and take their earnings, and pays them a far lower salary – and then loans them the remainder.
3) These loans are considered ‘tax liabilities’ which then reduce the HMRC tax bill.
Are these schemes legal?
A stream of debates have ensued about whether this and similar schemes are illegal or not. Because of this, the Chancellor George Osborne has introduced the General Anti-Abuse Rule – blanket legislation enabling the tax man (HMRC) to tell between responsible tax planning, and abusive tax avoidance.
If you’d like to do some further reading on this HMRC document on lifting the lid on tax avoidance schemes: http://www.hmrc.gov.uk/avoidance/tax-avoidance-schemes.pdf
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