Tax avoidance for the law-abiding middle classes
At present there is much noise and fury about fat cats and foreign corporates avoiding tax. The law in the UK is unusual in Europe as legislation defines what is illegal and any activity not mentioned specifically is, by default, legal.
Martin-Redman Partners writes:
For taxation, the situation is usually explained by quoting Lord Clyde:
“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.”
James Avon Clyde, Lord Clyde, Ayrshire Pullman Motor Services and Ritchie v. IRC (1929) 14 TC 754.
Or Kerry Packer:
“Now of course I am minimising my tax … and if anybody in this country doesn't minimise their tax, they want their heads read.”
Kerry Packer, Australian media tycoon. "Australia's Richest Man Fights Tax Man And Overstates Tax Bill, March 25, 2005.
The recent HMRC General Anti-Avoidance Rules seem to have supported that view that artificial, non-commercial arrangements were illegal and provided the tools, (via Disclosure Of Tax Avoidance Schemes, DOTAS), for HMRC to be advised of new schemes and seek legislation where the losses are seen as too great to permit.
Looking at the House of Commons briefing paper, “Tax Avoidance, a general anti-abuse rule”, (http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN06265), the most useful quote for our clients and potential clients I can find is from Exchequer Secretary to the Treasury, David Gauke MP on 23rd July 2013;
“For those not immersed in matters relating to tax, the debate on tax avoidance can be a confusing one, not least because the term ‘tax avoidance’ can be used somewhat loosely. Legitimate use of reliefs is not tax avoidance:
"Claiming capital reliefs on investment is not tax avoidance – when those reliefs were introduced precisely to encourage the investment in question.
"Claiming reliefs against double taxation is not tax avoidance – when the alternative would be taxpayers paying tax twice on the same income.
"Claiming back tax on legitimate charitable donations is not tax avoidance – any more than ticking the ‘gift aid’ box is.
"Not paying tax on your pension contributions is not tax avoidance. Taking out a tax free ISA is not tax avoidance.
"Clearly, the examples I have listed represent perfectly reasonable tax planning – making use of reliefs for the purpose they were intended, and ensuring one pays only what one is liable for. Now I would hope this would be obvious to anyone who understands the purpose of reliefs.
"Buying a house for personal use through a corporate entity to avoid SDLT is avoidance. Channeling money backwards and forwards through complex networks for no commercial reason but to minimise tax is avoidance. Paying loans in lieu of salaries through shell companies is avoidance. And using artificial ‘losses’ deliberately accrued to claim back tax is avoidance.
"These kinds of schemes are where we are focusing our efforts, and they are all, to borrow a phrase from the Chancellor, ‘morally repugnant’.”
The message for anyone looking to do some reliable, sustainable and legal tax planning is make sure you use up all of your income and capital gains allowances, income tax and inheritance tax nil rate bands, ISA allowances, pension allowances, the new dividend allowances, when they come in and if you are in a couple, get married, if you are not already!
So as a task list please consider:-
- Max out your pension and ISA allowances wherever possible.
- Try and generate a mix of income and capital gains to set off against the allowances.
- Make sure you charge the right expenses into the correct business environment. Remember capital allowances and professional dues, personal protective equipment, eye tests and apportion costs between private and business.
- As your principal private residence is exempt from capital gains tax, buy the worst house on the best street you can afford, live in it and do it up. Sell, and repeat the process until you find the house of your dreams.
- When pension planning, make sure that both of you in a couple have sufficient pension to use up the personal allowances in retirement. If one pension is likely to fall short, top up the premiums from the other’s taxable income and recover the tax paid.
- Look at EIS and VCT schemes if your attitude to risk and ability to absorb losses allows it.
- Avoid any more complex schemes, (DOTAS registered), until you have taken up all of the allowances available to you and be aware that if a scheme fails, the tax will still fall on you to pay.
- If you are offered a non-DOTAS scheme, avoid it like the Plague, as it will almost certainly be a scam.
Embrace paying some tax, as it is the easiest way of proving a specific level of income – most mortgage lenders are now insisting on seeing tax records before offering a mortgage.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at email@example.com or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.
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