Is Tax Avoidance Acceptable In Today's WorldNew Definition:
Noun - an internet search engine
Verb (1) to search for information on the internet using Google search engine; (2) to avoid tax by some artificial or complicated structural way, possibly using overseas entities, with intent to hide income from tax authorities.

I was recently meeting with a client to run through his company’s year-end financial statements, review the resultant profits for the year and advise on the tax position. On hearing the result, my client asked me if it were possible to ‘google’ the tax away – hence the definition above. English is a language that evolves, but I am not sure that I would be happy, if I owned Google, with this usage of my company’s name, from a reputational point of view.

Last month, we had the leak of the ‘Panama papers,’ so it is very easy to come to the conclusion that everyone is at it – even our Prime Minister, who felt forced to publish his tax returns in response to accusations that he had benefited from an overseas investment fund set up by his late father.

The discovery of these papers, taken from the Panamanian law firm Mossack Fonseca, is the largest leak of information about the offshore arrangements used by some of the world’s richest or politically exposed people. The leak dwarfs previously leaks from Liechtenstein, Wiki-leaks or other whistle-blowers and comprises some 11.5 million files going back nearly 40 years and revealing details of more than 200,000 offshore entities connected to people in 200 countries. The investigation has so far revealed over 30,000 offshore companies related to active UK citizens, making the UK the third-highest user of the arrangements after Hong Kong and Switzerland... and this time it’s personal. We aren’t just dealing with the multi-national corporations, such as Google and Starbucks. We are dealing with identified individuals in powerful positions. Tax authorities around the world are duty-bound to investigate and will want to bring people who are involved to book if criminality, money laundering or tax evasion is proved, for fear of being perceived as weak by their citizens. What the Panama leaks show is that ‘secrecy’ (and many such arrangements depend on secrecy, as opposed to full disclosure) has gone out of the window: Couple that with the instant judgement that comes from social media and reputations, and power and position are threatened immediately.

Despite all that, our government has done a great deal in recent years to counter unacceptable tax avoidance. A lot of the revelations are historic, and the activity demonstrated in the Mossack Fonseca files does seem to have peaked in 2005, with progressive reductions in the use of offshore arrangements since then. But before looking at what the government has done, it is worth  considering where the boundaries between acceptable and unacceptable planning and avoidance fall. HM Treasury clarifies the terminology as follows:

  • Tax Evasion: This is always illegal. When people or businesses deliberately do not declare their true incomes or conceal taxable sources of income.
  • Tax Planning: Perfectly legal use of tax reliefs for the purpose for which they were intended. Examples would be investing through ISAs, claims for allowances on capital investment, tax relief for pension premiums, and so on.
  • Tax Avoidance: Bending the rules of the tax system to gain a tax advantage that Parliament never intended. It involves contrived or artificial arrangements that serve no purpose other than to produce this advantage, or using tax reliefs excessively or aggressively in a manner way beyond the intention of Parliament.

And this is the rub. While outright tax evasion is relatively easy to understand, tax avoidance and Parliament’s intentions are not always clear. The boundary between this and acceptable planning is blurred. We continually discuss this in the profession, and one of my contemporaries recently commented, “You know, there is no such thing as tax avoidance; it is only tax planning that has been proved not to have worked.”There is a lot of truth in this. Most tax schemes that people have been encouraged to enter into are proved not to work when challenged by HM Revenue & Customs. People will find that they have paid more in fees and subsequent penalties and interest than the tax they sought to avoid. My own firm has sought to avoid such schemes.

So what has the government done in recent years to stem the tide of unacceptable avoidance?

To start with, way back in 2006, the government introduced the DOTAS (Disclosure of Tax Avoidance Schemes), requiring promoters of tax schemes to disclose them to HMRC so they could be reviewed. Over the years, these rules and the obligations on promoters of such schemes have been increased and expanded. Failure to comply comes with significant penalties.

We will soon start to see increased co-operation between governments in international tax transparency. Over 90 countries will, from 2017, share information on bank and other financial accounts. Internationally, the G20 group of countries are leading reform of international corporate tax rules through the Base Erosion and Profit Shifting (BEPS) project, to make it harder for companies to avoid tax by hiding profits abroad.

In the last few years, HMRC have given taxpayers the opportunity, through the UK Swiss Agreement and the Liechtenstein Disclosure Facility, to make declarations about offshore accounts and to clear up past wrongdoings. These arrangements have now come to an end.

A raft of anti-avoidance legislation has been enacted to deter aggressive tax avoidance. This includes a General Anti-Avoidance Rule (GAAR), to prevent artificial transactions with the sole purpose of bending the rules. We have also seen the Accelerated Payment arrangements, whereby taxpayers must now pay the liability immediately in relation to any tax avoidance HMRC identify, only getting recovery if they win their case, which may take many years.

HMRC are now pursuing more criminal cases with a five-fold increase in prosecutions for mass market investigations across trade sectors. Since 2010 there have been more than 2,650 criminal prosecutions, and we know the Public Accounts Committee would still feel this is not enough!

HMRC now publicise the names of defaulters in serious cases where income has been deliberately concealed and tax of at least
£25,000 has been evaded.

HMRC have established a High Net Worth Unit to specifically review the tax affairs of the UK’s 6,000 richest people, who each have a net worth of over £20 million. In addition, an Affluent Unit was formed in 2011 to review the affairs of wealthy people who may not be within the remit of the HNW Unit.

A whole host of specific tax changes has been enacted to prevent taxpayers using what the government considers ‘loopholes’
in the system. These are many and varied, and continue to be enacted. They include measures to:

  • target the use of Employee Benefit Trusts to avoid tax and NIC on income paid to employees and directors of companies
  • increase the tax charges on dividends to reduce the tax advantages of withdrawing income from a company in such a way compared with the tax due under PAYE
  • eliminate the tax advantages obtained by using companies in partnership to avoid higher rate tax liabilities that might otherwise arise.

New rules are also to be enacted shortly, requiring the disclosure of the beneficial ownership of all Companies in the UK.

The release of the Panama papers will inevitably result in a call for more powers to investigate defaulting taxpayers. David Cameron has announced the establishment of a task force to deal with the leaked papers and will demand that overseas territories provide details of the beneficial ownership of secretive offshore companies.

The ethics of tax planning have certainly changed, and what may have been acceptable 30 years ago is certainly not acceptable in today’s age of austerity. The numbers of people engaged in such planning is reduced significantly. Most of our clients want their tax affairs managed efficiently, and in a proper manner, taking advantage of the normal tax relief and allowances available under the law. They do not entertain contrived arrangements to reduce tax further, as they generally have a desire to ‘sleep at night,’ knowing their affairs are dealt with properly.

But I am concerned that this will lead to more oversight and regulation. If we join the ‘burn them all at the stake’ brigade, then be careful what you wish for: more legislation is likely, in my opinion, to affect the ordinary taxpayer and businesses more than the international tax dodger. In my view, a more targeted approach is required by our tax authorities, who have already been given all the powers they need to investigate tax dodgers. They just need to use them effectively.

But back to my client’s request to ‘google’ his company’s tax bill away. Yes – I was able to reduce the tax bill by offsetting losses incurred by other group companies within the spirit and letter of the law. Did I do wrong? I don’t think so. But as with all these things, proper, sober advice is always needed - not the quick fixes sold by ‘snake oil salesmen’ who peddle offshore tax arrangements to the rich and famous that may not work when they face scrutiny, yet which will inevitably lead to damaged reputations when discovered.

Click here to read the complete article in the Sussex magazine

Click here to read the complete article in the Surrey magazine