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FEATURE:Tax avoidance – good, bad and ugly

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Paul Panyani explains how tax avoidance falls into three camps: acceptable, borderline and morally repugnant

In Chancellor George Osborne’s 2012 budget speech, he described aggressive tax avoidance as “morally repugnant”. This clearly delineates the position for UK taxpayers when planning their tax affairs. Indeed it was the first time I can recall a Chancellor state unequivocally that he would have no hesitation in passing retrospective tax legislation, specifically in reference to Stamp Duty Land Tax (SDLT) avoidance schemes.

There are any number of legal precedents and cases establishing the principle that an individual can arrange his or her affairs in order to reduce the amount of tax paid. This can be as simple as placing bank savings in the name of a non-working spouse, or as complex as certain schemes, which could lead to an arrest at your place of work, as in the recent case of several bankers charged with tax evasion.

Red, amber, green

If we use the traffic light of risk, in terms of tax planning, green light planning is fairly straightforward and should occur without issue from HMRC – for example, investing in Individual Savings Accounts (ISAs) and pension contributions.

While ISAs do not attract initial tax relief they do provide the prospect of tax-free growth and tax-free income in future years. We have several clients who are now ISA “millionaires”, who have steadfastly been able to fund both spouses’ annual allowance to the maximum, including the forerunner Personal Equity Plans (PEPs).

If you are able to make use of the carry forward provisions in pensions it is possible to invest up to £200,000 into a pension and obtain full tax relief. Thus if you are a 50 per cent tax payer it would in effect only cost £100,000 for a £200,000 investment. However, we have seen HMRC delay refunds even for pension contributions citing added security checks as the reason – some of which have taken several months to complete.A cynic may say HMRC want to hang on to the money for as long as possible in these austere times.

Proceed with caution

If we stick with the same theme, firmly in the amber category of tax planning would be investments that fall under the remit of specific legislation. In this category would be Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS), Enterprise Zones (EZ) and Business Property Relief (BPR) schemes.It is important to view these types of tax planning opportunities as a three legged stool. If one leg is unequal then it will fall over.

On one side the Government passes legislation giving tax incentives to individual investors. This is to encourage inward investment into a particular area or businesses within the UK which in turn will hopefully create jobs, stimulate growth, increase tax revenue and perhaps reduce unemployment benefit. Potential investors are offered initial tax reliefs for investing with the prospect of attractive future returns.

Finally sponsors of such schemes put them all together in line with the HMRC guidelines, and then market them through accountants and financial advisors with a view to running the investments and making a profit. What could go wrong? It’s a clear win, win, win scenario.

Historically, in most cases, outcomes generally go as planned, however, such investments’ have a higher degree of complexity and therefore risk.

There is also an onus on the scheme sponsors to adhere to the respective HMRC rules, in order to qualify for tax relief. Furthermore in some instances the rules have to be applied, in some cases, up to seven years beyond the investment date, to avoid tax relief claw back.

High risk, high return?

Several clients of ours have just received cheques from the proceeds of an “amber” tax planning scheme they invested into in 2004. The underlying investment was a building – housing a data centre, based in the North East of England. Investors received generous tax reliefs, in the form of capital allowances, for their participation. In net cash terms (after allowing for the initial tax relief) the return was the equivalent of 32 per cent per year over a period of eight years – which is staggeringly impressive against the current economic backdrop. Invest £10,000 after tax relief and receive £81,000 some eight years later.

However the initial tax relief received, distorts the real picture, as the underlying value of the property actually fell in value by 60 per cent in the last eight years. In simple terms if for any reason the initial tax relief was not forthcoming, then the clients would have lost 60 per cent of their original investment.

This is highlighted by the work we are doing on behalf of a syndicate of clients who invested into a structure that also had initial tax relief available in 2007. But their story is somewhat different; they have yet to receive their tax relief from 2007, one of the clients has also subsequently died in the interim.

A court case scheduled for the end of 2012 will eventually confirm the outcome. The clients’ high powered legal team are confident of success with one of them comparing it to a rugby scrum saying “…they (HMRC) know we’re going to push them over the line and drop down on the ball and score as do we, but they are not giving us an inch”. In the interim the underlying investments have been largely unsuccessful and produced very modest returns.

What is clear from the tone taken by the Chancellor in the budget and also by HMRC is they are looking at all tax avoidance schemes and taking a robust approach. However, there is a delicate balancing act to ensure there are enough opportunities for individuals to direct their tax planning into the right areas to stimulate growth in UK plc.

At the same time, investors need to have the confidence that they will receive what is on offer in terms of tax relief and not be subject to long and expensive HMRC enquiries. If and when the higher rate of income tax falls back to 40 per cent many higher rate taxpayers may decide it is not worth all the effort to seek out more “red light” or aggressive tax planning schemes.

Red light district

Many of these schemes may comply with the letter of the law, but recently HMRC have established that if it does not also fall within the spirit of the legislation it will be challenged. One client lamented after a long drawn out HMRC enquiry which ended in him receiving his long overdue tax relief, “I probably would have been better off paying the tax and investing the net proceeds”.

Ironically the Chancellor’s greatest weapon may prove to be the personal statements soon to be received by all taxpayers. These will show where the tax paid by that particular individual has actually been spent. The numbers are already in the public domain but seem abstract to most, as they are generally detailed in the billions.

To see a statement showing how much of your tax paid has gone to the NHS, or Education will personalise the whole issue of tax and make tax more palatable. There seems to be a disconnect in the UK about where and how tax money is spent and raised. Although I suspect the Swedish model, of publishing all the income and tax paid by every citizen, may be a step too far the UK.


Paul Panyani is the CEO of Optimus

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