In the run up to the end of the 2014 tax year, we will be running a series of articles considering tax planning and what is deemed to be acceptable by HMRC. Last July, the Government introduced new legislation; the GAAR (General Anti-Avoidance Rule), designed to give HMRC additional powers to uncover instances of excessive tax avoidance. Many commonly used tax planning strategies have now been limited but tax-planning opportunities still remain.
In HMRC’s own words, this is their view of tax planning and avoidance.
“You are entitled to plan your tax affairs in a way that makes sure you do not pay more tax than you have to. There are many legitimate ways in which you can save tax, for example by saving in a tax-free ISA (Individual Savings Account), making donations to charity through Gift Aid, claiming capital allowances on assets used in your business or paying into a pension scheme. But there is a big difference between using tax reliefs and allowances in the way in which they are intended to be used, and trying to bend the rules to avoid tax.”
As tax advisers, we try to strike a comfortable balance between helping clients to reduce their tax liabilities in ways that will not be construed as aggressive by HMRC. Although the more aggressive approaches may save you money in the short term, in the long run, as HMRC themselves become more and more aggressive in targeting ‘schemes’ these schemes become inefficient and lead to enquiries, and usually additional tax liabilities, interest and penalties. As HMRC say: “Using a tax avoidance scheme will mark you out as a high-risk taxpayer. This means that HMRC will subject your entire tax affairs to particularly close scrutiny, not just your participation in the particular tax avoidance scheme.”
What is not advisable tax planning?
The following strategies are likely to either give rise to negative attention or cause long term financial problems:
- Organised tax avoidance schemes
Historically tax ‘avoidance’ was differentiated from tax ‘evasion’; ‘avoidance’ was considered to be acceptable and ‘evasion’ was considered to be illegal. Over a period of time, with sustained messages, both the Government and HMRC have blurred the distinction between the two so that, whilst not technically illegal, it is clear that tax avoidance will arouse the attentions of HMRC. Jimmy Carr had first hand experience of this when his involvement in the K2 scheme was uncovered. This was an offshore investment scheme, which used complex administrative structures to legitimately reduce the tax payable by investors.
There are lots of these types of tax avoidance schemes in operation and in view of HMRC’s stance they are not to be recommend. Although they are not illegal, if you do use structured tax planning schemes, they must be reported on your self assessment in order to alert HMRC to your involvement which in itself will mean you are more likely to be targeted for a tax enquiry.
- Employing family members to reduce tax
We are asked about this quite frequently and unless there is a clear business reason why a family member should be employed, it is not recommended. The fact that the employment relates to a family member does not bypass any tax rules or employment laws; any employment must involve actual work undertaken which is remunerated at a commercial rate, paid to the employee concerned, and subjected to PAYE. Of course, if you need to employ additional resources and your family members are genuinely able to satisfy your requirements, this is perfectly acceptable.
- Splitting rental property ownership to reduce tax
If a husband and wife pay different rates of tax, it is attractive to weight investment income in favour of the spouse paying the lower rate of tax. This is perfectly acceptable in terms arranging the ownership of income producing assets such as bank accounts, shares and rental properties.
It becomes unacceptable however when the attempt to allocate income is artificial and does not reflect actual ownership percentages. An example of artificial tax planning would be to report that a wife is fully entitled to rental income on a property, because she pays income tax at 20% whereas her husband pays income tax at 45%, but on a disposal of the property, to report the allocation of the capital gain equally between the two in order to take advantage of both capital gains tax exemptions.
In our next article, we will consider tax planning that should be considered in the run up to 5 April; in the meantime for more information about HMRC’s stance on tax avoidance visit their website:
If you would like to discuss any matters relating to tax planning, please contact Lesley Stalker by emailing las@rjp.co.uk.