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Evasion, avoidance or planning?

Some bloke doing stand-up at the Conservative Spring conference

Up until this week I have been able to pursue a very effective Jimmy Carr avoidance strategy. My scheme, which I call AA2, is entirely legal. It’s also moral and cheap. With constant vigilance plus just one remote control and two AA batteries I have almost completely sheltered many hours of hard earned leisure time from any exposure to Jimmy Carr. And then all of a sudden he’s everywhere, invading the safe backwaters of tax twitter feeds, and no doubt being lined up for a guest appearance on the cover of Private Eye.

What I particularly dislike about him is that he reminds me so much of George Osborne. There’s a slight similarity in looks and they’re both Oxbridge graduates (although I should confess I am too), and of course neither of them is particularly funny. But on top of all that there’s a delivery style that just unattractively reeks of “ooh, aren’t I a clever boy” syndrome. And now we all know they share a serious lack of judgement when it comes to managing tax. One undone by a too clever by half tax wheeze and the other by a cack-handed attempt to tax pasties.

So, what has any of this to do with the taxation of escorts? Frankly not a lot. The promoters of these schemes typically charge around 20% so unless you stand to save higher rate 40% or 50% tax they are not even worth considering. The K2 scheme used by Jimmy Carr allegedly involved him diverting £3.3M a year into a Jersey Trust which then ‘loaned’ the money back to him, tax free. One of the shocking features of this case is that he was able to earn over £3M a year in the first place, and although he has now pulled out of the scheme it could be that the adverse publicity will make such a huge dent in his future earnings as to make tax avoidance not worth the risk. So here’s a modest proposal. Anyone making use of a scheme already has to notify HMRC, so maybe instead of expending effort on defeating the schemes HMRC should just publish the names of people using them, and let shame and the popular press do their work?

Jimmy Carr has protested that he has not broken the law, and if as he says the scheme has been disclosed to HMRC he’s almost certainly right. But that doesn’t mean the scheme works. The promoters say it does, HMRC and some accountants say it doesn’t. It is likely to take years before Jimmy Carr can be certain whether he has saved any tax; years of expensive professional advisers arguing with the Revenue, and potentially tribunal and (civil) court hearings to decide the issue.

But, back to the real world. I thought it would be helpful to set out the differences between tax evasion, tax avoidance and tax planning. Opinions among politicians, tax officials and even among accountants, will vary about where the line between legitimate planning and morally dubious avoidance should be drawn, but here, with some examples is my take.

But first a few quotes.

The first is from Lord Clyde giving the court’s decision in Ayrshire Pullman Motor Services v Inland Revenue [1929].

No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.

And the second is from Nick Clegg complaining on the Andrew Marr show about the last Labour government’s failure to clamp down on tax loopholes, which are …

… perfectly legal but morally questionable.

And finally a thought from the tax guru Robert Maas who has pointed out that tax planning is something all of us do, probably without realising, every day.

… am I avoiding VAT when I buy my zero-rated lamb chop my zero-rated cauliflower and my zero-rated carrots and cook them at home paying only 5% VAT on my gas usage, whereas if I had chosen to eat out I would have had to pay 20% VAT on the entire cost of my meal? If so, I am one of those hated tax avoiders, because I eat in a lot more than I eat out.

So with those wise words in mind:

 Tax PlanningTax AvoidanceTax Evasion
CharacterUsing available reliefs entirely honestly and in the way there were intended.Perfectly legal but morally questionable.Illegal - typically involves dishonesty and concealment.
ConsequencesYou get tax reliefIt might work - it might notInterest, penalties & possible criminal record
Tax enquiry unlikelyInevitable tax enquiryTax enquiry when caught
Tax affairs settled quicklyYears to find out if it has workedSeveral years to settle
ExamplesUsing your annual ISA allowanceDiverting income through an offshore trust.Failing to register
Incurring business expenses before the year end rather than afterUsing investment vehicles to create artificial lossesUnder-reporting income
Taking 2 weeks off to avoid going over the VAT thresholdArtificially transferring income to tax havensFraudulent VAT claims

By the way. Isn’t it odd that you never see George Osborne and Jimmy Carr in the same room together.

 

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