What is tax avoidance? Navigating the tax planning landscape

If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

This well-known example of inductive reasoning perfectly characterises current public attitudes to tax avoidance. We all know what tax avoidance is and it is clearly wrong that the rich and powerful are able to avoid paying ‘their dues’ while the rest of us have no choice.

But herein lies the problem. One man’s avoidance is another’s legitimate tax planning. So is it good enough for successive governments to rely on a taxpayer’s judgement and sense of morality to determine tax liabilities? The simple answer is no.

Nonetheless, this is where we are today and this is the climate in which professional advisers have to operate. The old system of legislation and case law being used to establish tax liabilities has been swept away in the face of a tsunami of moral indignation in the press, combined with a series of bizarre tribunal decisions seemingly based more on what it is considered the taxpayer ought to pay, rather than what he or she is obliged to pay under the law.

The catalyst for this climate has been various wholly artificial tax-avoidance schemes, which have been peddled by promoters eager for a fast (and very substantial) buck. Whereas reputable professional advisers will listen to a client’s issues and develop solutions to address them, the more unscrupulous product providers have turned the process on its head by developing solutions and then seeking out customers to whom they can be sold.

So what can we now tell our clients? What is legitimate in the spectrum of advice, from planning to avoidance, to abuse and evasion? How do we make sure that we carry out our contractual responsibilities to our clients to maximise tax efficiency, while ensuring that they are protected from attack by HMRC? And how do we ensure our professional indemnity insurers do not have to write out a series of large cheques?

Are ‘schemes’ dead?

There is no doubt that the government’s approach to the perceived problem of tax avoidance on an industrial scale has worked. From DOTAS to GAAR, from a public morality debate to accelerated payment notices and the threat to raid bank accounts, the government’s carefully calibrated, gloves-off approach has completely changed the mood.

It was not so long ago that clients would tell of conversations with the ‘bloke in the pub’ who had suggested one tax scheme or another and asked why they couldn’t do the same. The appetite was seemingly endless for what might be called ‘packaged tax avoidance’ and the promoters were making fortunes.

Professionals used to deal with this in different ways. Some were enthusiastic participants, while others were more cautious in their approach, ranging from offering various ‘health warnings’ to complete refusal to get involved (even though this may not have been in their clients’ best interests).

To say the mood has changed hardly begins to describe the transformation in attitudes we have witnessed in recent months.

Many of the promoters have closed their doors to new business, or closed their doors completely. Some remain open to offer the defence support promised on existing schemes, although the sound of goalpost-moving in an attempt to minimise financial obligations no longer supported by new sales is deafening.

Others appear to be living in a parallel universe where disguised remuneration legislation has not even been thought of, let alone enacted, and continue to promote EBT-type schemes which simply do not work.

And a third category continues to offer ‘solutions’ that are robust and seemingly attack-proof, yet the prevailing mood remains one of uncertainty.

Professional advice

So, what should the professional adviser do? What advice can be offered to clients who wish to minimise their tax liabilities legally without overstepping the mark?

Legitimate planning is still, of course, acceptable. Simple techniques such as operating a genuine business through a limited company rather than as a sole trader in order to minimise headline tax rates is fine.

Similarly, taking advantage of a tax relief designed to encourage a certain type of behaviour by adopting that precise behaviour is also unobjectionable. Not even the most ardent member of UK Uncut would deny the taxpayer the right to claim tax relief on a vanilla pension contribution, or to receive tax-free returns from an ISA.

Moving further along the scale, adopting techniques contemplated by HMRC in their own publications should also be acceptable (although Robert Gaines-Cooper may have something to say about relying on HMRC literature). However, even this can lead to surprising conclusions. HMRC’s own internal manuals illustrate how main residences can be ‘flipped’, producing multiple tax reliefs not contemplated by the original legislation.

Any planning that requires HMRC clearance should also be acceptable, providing of course that the clearance application gives a full and honest account of the transactions contemplated and the motivation for them.

Beyond that, most advisers still feel that tax-efficient structures, particularly where there is an underlying commercial motive, are not only within the letter of the law but also within the spirit. Owning a property outside the corporate environment or gearing the acquisition of an investment should not ruffle HMRC feathers.

But then it starts to get murky.

Any planning that relies on non-universal interpretation of a tax provision is potentially now at risk from attack. That is not to say that it is illegal (as some of the more lurid press reports would have it), or even that advisers should refrain from recommending it. On the contrary, this would probably be an abrogation of responsibility and could even leave the adviser open to action from the client along the lines
of Harben Barker’s recent difficulties with Mr Mehjoo.

But the mindset of the adviser needs to change and risk management should now be at the forefront at all times.

Here are a few tips:

• Warn the client of the possibility that HMRC could adopt a different interpretation of the tax effects of the transactions proposed.

• Discuss in detail the likely costs of dealing with any dispute.

• Advise them of the effect of accelerated payment notices (APNs) and the fact that these will not encourage HMRC to progress any litigation with alacrity. There is of course no empirical evidence as yet, but the Tribunals currently have a massive backlog of cases and if HMRC already has the money through the issue of an APN, it may not hurry to resolve the issue.

• Perhaps recommend fee protection insurance.

• Advise the client that the matter may drag on for months or years causing uncertainty and anxiety.

Many HMRC settlement offers have recently been accepted merely because the taxpayer concerned is fed up with the whole process and simply wishes to get on with life.

But has the chancellor missed the point? It is all very well saying that the UK is open for business and trying to attract foreign investment by legislating for low corporate tax rates, or allowing remittance of overseas income and gains for investment in UK business. But the business community is not just attracted by headline tax liabilities.

The businessman’s greatest foe is uncertainty and the climate that has been created around tax obligations is likely to do more to repel potential inward investment than any individual measure on tax rates themselves.

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Seven tax avoidance myths

1. All taxpayers are under a moral and legal obligation to pay the right amount of tax.

There is no such thing as the right amount of tax any more than there is the right price for electricity or any other supply. It is for parliament to decide on the way the tax system operates and it is the duty of all citizens to contribute in accordance with the law. It is not for taxpayers to set the amount of tax they pay – therein lies the path to anarchy. 

2. Tax avoidance is illegal. 

No, it’s not. In many cases, Liberty being one of them, the practice is not only not illegal, but may actually be strictly in accordance with the legislation. The Liberty scheme hasn’t come to court yet. What if the tribunal finds in favour of the taxpayers? Isn’t this equivalent to a headline that screams, “Famous celebrity caught for driving at 29mph ?in a 30 zone”?

3. There is no difference between tax avoidance and tax evasion.

Yes, there is. Tax evasion is illegal and rightly so. It can also lead to criminal prosecution. There is a world of difference between hiding a taxable receipt on the one hand and, on the other, telling HMRC all about the structure of a tax arrangement and explaining why it is not considered taxable. If the government doesn’t like the practice, then it has the right to legislate against it. That is completely different from allowing HMRC to interpret the law in a way not sanctioned by the courts. 

4. HMRC’s new powers to demand money from taxpayers who have undertaken (what may be perfectly legal) avoidance schemes pending resolution of the issue by the courts is needed to stop people exploiting the delay in bringing these cases before the tax tribunals. 

No, it isn’t. Taxpayers are not, for the most part, interested in the delay. On the contrary, they want certainty, which is why a number of them are now taking up settlement offers in order to get on with their lives. Furthermore, these new powers encourage HMRC to delay further. Why bother bringing the case to a tribunal if they already have the money?

5. Any transaction that is designed solely to avoid tax and has no other economic purpose is illegal.

By this rationale, authorised pension schemes, ISAs, Enterprise Investment Schemes, and VCTs should all be outlawed. The purpose of these tax-efficient structures is to encourage individuals to invest in areas where they might not otherwise do so. From the point of view of the investor, there is no reason to invest in, say, a pension, other than for the tax breaks, since it would be perfectly possible to make the same underlying investments outside of a tax shelter.

6. Undertaking a scheme with a DOTAS number means that the scheme is HMRC-approved.

The DOTAS scheme was introduced to facilitate HMRC investigations of packaged avoidance schemes. Allocating a reference number to a scheme merely means that the scheme falls into the category of those that have to be disclosed. It says absolutely nothing about the effectiveness of the scheme and any scheme promoters who claim that it does should be given a very wide berth.

7. HMRC now have the right to over-rule the courts when it comes to tax avoidance.

Well, we know this is not true. Or do we? HMRC’s press release after they lost the Rangers EBT case stated that: “These are avoidance schemes and we will continue to tackle those who do not pay up. It is not right that a small minority can avoid paying what they owe while the vast majority pay the right tax on their earnings.” The court found, actually, that this was not an avoidance scheme and that those who participated in it have not paid the tax because they don’t owe it.

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Andy White is a tax partner at accountancy firm Carter Backer Winter