How Did Prudent Tax Planning Slide into Tax Avoidance?

& at what point did paying less tax become morally questionable?

Jimmy Carr

Since the current coalition government came to power, they have been issuing strong morality messages regarding what is appropriate when it comes to paying taxes.

As a party, the Conservatives have historically been associated with paying less tax, yet under the current coalition government the UK’s tax laws and approach to both tax avoidance and evasion have become tighter, with many of the tax saving opportunities which previously existed, slowly disappearing.

Clearly, this government wants to distance itself from the perception that they’re a party in favour of cutting taxes to benefit the wealthy, which may be a big factor behind their communications strategy to promote the wider morality of being a responsible taxpayer.

To a large extent this ‘morality campaign’ has been effective and attitudes are slowly changing, which in principle is good. We all know that we have a responsibility to pay our fair share of taxes as without this source of revenue, social and public care systems as we know them would not exist and anarchy would reign.

However, one less positive outcome of the morality message has been a blurring of the lines between the legitimate use of tax saving opportunities and what HMRC classes as unacceptable tax avoidance. It is also well established that taxpayers are entitled to arrange their affairs in order to pay the minimum amount of tax which they are legally required to pay.

This creates a lot of uncertainty and is starting to make my job of giving tax planning advice to clients a very grey area.

Different Tax Planning Approaches

To try and establish what is acceptable and what isn’t, I thought it might be helpful to categorise different tax planning approaches on a sliding scale of acceptability.

So here it is:
1. Acceptable tax planning: This is predominantly using reliefs which the government wants to actively encourage and using them in ways in which they want them to be used. Examples of these are research & development (R&D) tax relief, Entrepreneurs’ Relief (ER) Enterprise Management Incentives (EMI), Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS). Typically these offer tax rewards to those investing in and developing higher risk companies.

2. Tax planning which is within the legislation but which is often reported on with an underlying subtle moral message of ‘shouldn’t you be paying a bit more’ or ‘what you’re doing is technically correct but is it really morally correct’?

   

   David Cameron

   Examples of this would ‘flipping’ property. At one end of the scale this is perfectly within the legislation, but depending on the circumstances can become aggressive and as a result, there is often an assumption that any property ‘flipping’ is aggressive.

   A second example is offsetting trading losses against other income to reduce a client’s tax liability. This type of relief has been available for many years and is perfectly acceptable, but the government is now trying to limit this because they’re trying to increase the tax-take and the first blow has already been struck, by not allowing losses on renting out a second property against your main income.

   Thirdly is that broad area of arranging a client’s affairs to minimise tax liabilities, such as salary/dividend planning for owner managed companies. Under the new ‘morality code’, reducing tax liabilities appears to be acceptable if it is a by-product of commercially driven actions, provided of course that you have the necessary paperwork to back-up the legality of it, but not if saving tax & NIC is the primary reason motivating the actions.

3. Unacceptable tax avoidance: I generally use this term to describe schemes which have been designed to exploit loopholes in the legislation and which are artificial or contrived. For example film partnership schemes, where the relief was introduced by the government but later exploited by schemes which used loopholes in the legislation in ways that were not intended or envisaged by the legislation.

4. Tax evasion: This is defined as the saving of tax by deliberate omission or non-declaration of income.

Whilst broadly this has always been the sliding scale which applies, the differences between the types of tax planning have blurred, so that areas within 1 and 2 above can quite easily stray into 3, either by deliberate actions of the taxpayer, or by the revised interpretation of HMRC with their new harder approach.

In many cases, what was perfectly acceptable five or six years ago as routine tax planning is often now considered ‘morally repugnant’ and is increasingly being labelled ‘aggressive tax avoidance’. Obviously this is quite different from tax evasion; which is deliberate and fraudulent and has always been a criminal offence.

In HMRC’s own words, tax avoidance is “bending the rules of the tax system to gain an advantage that Parliament never intended.” So when I’m advising clients now, the underlying question for me to consider is, ‘at what point does using the legislation to your advantage become unacceptable?’

Up to now my attitude has generally been, ‘if the law doesn’t say you can’t, then you can’. I don’t really what to change my approach, but in future when I give tax avoidance advice; it will be with one eye looking over my shoulder for the Morality Police!

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