Tax planning is the legal process of arranging your affairs to minimise a tax liability. There is a wide range of reliefs and provisions that are available to legitimately reduce a tax liability without straying into the rather more challenging area known as tax avoidance.
Examples range from simply choosing a year-end date early in the tax year to maximise the period from earning profit to paying tax, to arrangements to shelter an appreciating asset from inheritance tax.
Tax evasion is different, it is illegally reducing your tax, such as falsifying figures or not disclosing income. This carries serious penalties which can include a criminal prosecution.
A problem arises when the law is unclear, so it is not obvious whether a tax planning scheme is within the law or not. For this reason, there have been several significant developments.
1. We have seen an ongoing approach to artificial tax avoidance which stands between avoidance and evasion. This was probably most accurately defined by one Paymaster General who said that: "Artificial avoidance schemes are those where they create economic distortions, provide commercial advantages over compliant taxpayers, redistribute tax revenues in an unfair or arbitrary manner, or represent an abuse that conflicts with or defeats the will of Parliament".
These must be disclosed and are closely examined to see if they are legal. Even if they are, it is likely they will be closed in the next Finance Act, sometimes with retrospective effect.
2. A list of 'hallmarks' of tax avoidance schemes has been published. If any of the following are found in a scheme, it is likely to be challenged as artificial tax avoidance:
- It sounds too good to be true
- Artificial or contrived arrangements are involved
- It seems very complex for what you want to do
- There are guaranteed returns for apparently no risk
- There are secrecy or confidentiality agreements
- Upfront fees are payable or the arrangement is on a no win/no fee basis
- The scheme is said to be verified by a top lawyer or accountant but no details of their opinion(s) are provided
- The scheme is said to be approved by HMRC (it does not follow that this is true)
- Tax benefits are disproportionate to the commercial activity
- Offshore companies or trusts are involved for no sound commercial reason
- A tax haven or banking secrecy country is involved without any sound commercial reason
- Tax exempt entities, such as pension funds, are involved inappropriately
- It contains exit arrangements designed to sidestep tax consequences
- It involves money going in a circle back to where it started
- Low risk loans to be paid off by future earnings are involved
- The scheme promoter lends the funding needed.
Businesses promoting schemes with these "hallmarks" must notify HMRC about the scheme and register it, obtaining a "DOTAS" number for the scheme. They must then notify those who have used the scheme at their suggestion, who must then disclose this on their tax return. There are some very onerous obligations on promoters of tax avoidance schemes, including providing HMRC with a regular list of their clients and customers.
3. There is a general anti-abuse rule (GAAR), which enables HMRC to take action to counter any abusive avoidance activities without making specific legislation to close the schemes down individually. Where HMRC wish to challenge an arrangement under the GAAR, the detail will be considered by a GAAR panel of tax professionals to advise whether the arrangements are abusive or not.
4. Where a taxpayer has participated in a scheme which reduces or defers their tax liability, once HMRC are notified of the scheme they will issue an accelerated payment notice. Essentially this undoes the cash effect of the scheme until the case goes to court which may be many years later, so the benefit of using the scheme is significantly delayed.
Please ensure that you seek our advice with regard to all aspects of tax planning.