Insights

Since the current 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 Tories have historically been associated with paying less tax, yet under the current coalition government the UK’s tax laws and approach to tax avoidance have become tighter, with tax saving opportunities which previously existed slowly disappearing.

Clearly, this government wants to distance itself from the perception that they are ‘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. But at the same time, it is 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.

To a large extent this ‘morality campaign’ has been effective – the message has become commonplace within the press and attitudes are slowly changing. That’s good; everyone has a responsibility to pay their fair share of taxes and without this source of revenue, social and public care systems as we know them would be unsustainable. However, one less positive outcome of the morality message has been a definite blurring of the lines between the legitimate use of tax saving opportunities and what HMRC classes as unacceptable tax avoidance. This creates a lot of uncertainty.

In trying to understand what is acceptable and what isn’t, it helps to view tax planning approaches on sliding scale of acceptability:

1. Acceptable tax planning – 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 message along the lines of ‘shouldn’t you be paying more’? Examples of this would be a) ‘flipping’ property – at one end of the scale this is perfectly within the legislation, but depending on the circumstances can become aggressive – as a result, there is often an assumption that any ‘flipping’ of property is aggressive; b) offsetting trading losses (and the cost of lending money to your own business) against other income to reduce your tax liability – this type of relief has been available for many years but has now been limited because it is costing the government too much in tax-take; c)re-arranging your affairs to minimise tax liabilities, such as salary/dividend planning for owner managed companies - reducing tax liabilities appears to be acceptable if it is a by-product of commercially driven actions, and provided all the necessary paperwork is in place to back-up the legality of it, but not if it is the prime reason behind your actions;

3. Unacceptable tax avoidance – this term is generally used to describe schemes which have been designed to exploit loopholes in the legislation. For example film partnership schemes – where the relief was introduced by the government but later exploited by schemes which used loopholes in the legislation. It is quite common for items listed in 1 above to move into this area because the reliefs available are being increased in value in ways that were not intended or envisaged by the legislation;

4. Tax evasion – fraudulent and illegal – the saving of tax largely by omission or non-declaration of income.

Whilst this has always been broadly 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 purely in the view of HMRC in specific circumstances.

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

As a result of these grey areas, it would seem the underlying question to consider is ‘when does using the legislation to your advantage become unacceptable?’ Investing in a cash ISA for example is clearly not tax avoidance, nor is it tax avoidance if you invest on behalf of each family member. However what if those family members repay the cash value to you in (say) 5 years’ time? Have you strayed into tax avoidance? And at what stage?

In HMRC’s words, tax avoidance is “bending the rules of the tax system to gain an advantage that Parliament never intended.”

Whilst genuine tax planning is perfectly legitimate, in order for it to remain so, it is obviously important to be careful that you don’t stray too far from what government intended. In addition, you should have a clear and valid reason for pursuing a particular strategy, and tax saving should not be that only or main reason.

If you would like advice on tax planning or your eligibility for specific tax reliefs, please contact Lesley Stalker by emailing las@rjp.co.uk.