Jimmy Carr famously used a legitimate tax avoidance scheme
Tax avoidance has hit the headlines recently, highlighting the fact that some wealthy individuals have used legitimate reliefs to pay little or no tax, according to the Treasury. Other schemes have been seen as more contrived.
The way in which these high-income individuals have used the system has led to an argument about morality, but also what can be done to halt the avoidance. Accountants would argue that this is nothing new, as many of these schemes have been around for years.
So, what are the most common forms of legal tax avoidance?
Tax reliefs – Wealthy individuals have a lot of disposable income and this money can be invested in things that lead to a reduction in the amount of tax they have to pay. For example, this income can be pumped into an individual’s pension scheme, up to a certain limit, or into schemes that are aimed at start-up businesses.
The latter – known as Enterprise Investment Schemes – are designed to encourage wealthy people to invest in new businesses that appear to have good ideas, but could be risky investments. Banks may not be willing to take the risk these days, but wealthy people are encouraged to do so because they receive tax relief on the chunk of their own income that they put in and also pay little or no tax on any return they get out if the business is successful.
Another well-known ploy, available to anyone, is to insure their lives, and write this policy into a trust for their children, so the money passes straight to them without paying inheritance tax.
Employing a husband or wife – Many small businesses might survive only because the owner’s husband or wife is prepared to do a lot of work behind the scenes for little or no pay. However, some businessmen and women have employed their husbands or wives, who paid little or no tax previously.
This means that the couple divides its income tax bill, rather than one of them – who might be the boss of the company – receiving all of the income and so paying a larger amount in tax. The benefit from this arrangement arises because most people get a tax-free allowance (currently £8,105) to set against the first chunk of their income and could be worth up to £3,305.
George Osbourne, Chancellor of the Exchequer
If the business is a limited company, the couple can share ownership and pay themselves a dividend, rather than salary. The small company rate of corporation tax is currently 20% and no tax or NIC is paid on the dividend, providing the recipient is a basic rate taxpayer, which could save nearly £20,000 in tax and NIC for an individual.
Annual Investment Allowance – In this scheme, a business can spend up to £25,000 on capital expenditure and obtain a 100% write-off against its tax bill.
What is being done? – Chancellor George Osborne wants to strengthen existing rules against this and similar schemes by introducing a General Anti-Abuse Rule . This aims to act as blanket legislation to allow the taxman to differentiate between what counts as responsible tax planning and what is abusive tax avoidance. Consultation on the plans has now been published, with the government hoping to bring in the rule in 2013.
If you want to speak to an accountant with a deep knowledge of the UK tax system contact Morgan Jones & Company Accountants
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.