Aggressive Tax Avoidance is Morally Wrong
With all the news today about the aggressive Liberty tax avoidance scheme that was being used not just by celebrities, pop stars and sports stars to avoid tax but also by businessmen, doctors, lawyers and many others, you could be forgiven for thinking that all these people had committed a criminal offence. But, of course, tax avoidance is not illegal; tax evasion on the other hand is where someone deliberately seeks to not pay tax that is due.
But what is the difference between tax avoidance and tax evasion? It can seem like there is a fine line between the two, especially when there has been so much criticism of aggressive tax avoidance schemes in the news recently with the view that they are morally wrong if not actually illegal.
HM Revenue & Customs is clamping down on aggressive tax avoidance strategies and the Liberty scheme has been under investigation by HMRC for a decade and will be challenged in court in 2015. In the meantime investors in the Liberty scheme will have to pay back the disputed amounts of tax.
Tax avoidance is estimated to cost the UK economy £4 billion per year, according to HMRC, but some forms of tax avoidance are perfectly legitimate and morally acceptable such as ISAs, for instance, or pension schemes and charity donations via Gift Aid. It is the artificial investments and transactions whose sole purpose is to avoid tax that are viewed as unacceptable, especially where businesses are set up with the sole purpose of making a loss.
The HMRC website highlights particular schemes to watch out for.
Here is a list of tax planning strategies that HMRC advise people to be wary of as possible aggressive tax avoidance schemes:
- It sounds too good to be true.
- Artificial or contrived arrangements are involved.
- It seems very complex given what you want to do.
- There are guaranteed returns with apparently no risk.
- There are secrecy or confidentiality agreements.
- Upfront fees are payable or the arrangement is on a no win/no fee basis.
- The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
- The scheme is said to be approved by HMRC (it does not follow that this is true).
- Taxation of income is delayed or tax deductions accelerated.
- Tax benefits are disproportionate to the commercial activity.
- Offshore companies or trusts are involved for no sound commercial reason.
- The involvement of professional trustees is claimed to guarantee that the arrangements succeed.
- A tax haven or banking secrecy country is involved without any sound commercial reason.
- Tax exempt entities, such as pension funds, are involved inappropriately.
- It contains exit arrangements designed to sidestep tax consequences.
- It involves money going in a circle back to where it started.
- Low risk loans to be paid off by future earnings are involved.
- The scheme promoter lends the funding needed.
- There is a requirement to take out insurance against the failure of the tax planning to deliver the tax benefits.