Tax Avoidance Schemes and the Law

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As you may have read, in recent newspapers or in our own articles here, George Osborne has now become aware of the methods of Tax Avoidance and their results.

Despite Tax Avoidance being legal practice the Chancellor is looking to instate laws that will inhibit these avenues that are available to tax payers or staunch them entirely. There is a difference between Tax Avoidance and Tax Evasion, which is illegal, and that difference is the former works within the law.

With Chancellor Osborne’s research into the matter and possible changes to the law looming it helps for the tax payer to know what they are dealing with. There are several ways in which one can reduce their tax rates and there are a few changes in the law that Osborne wants to enact which will decrease their effectiveness and possibly trip up those who are new to tax planning.

A complex way for a business to statistically warrant smaller charges is by recording artificial losses.

The business makes superfluous, though relevant, transactions which show financial losses that are offset against income.

This is not illegal money laundering as the finances are not being distanced from a criminal financial source, but it is considered ‘creative accounting’ by some and it’s something that George Osborne really wants to crack down upon.

He is looking to formulate a General Anti-Avoidance Rule, GAAR, which will better define the line between responsible tax planning and abusive avoidance. This law will certainly move the goal posts.

The tax planner will want to know this new law very well to avoid being considered engaging in criminal activity.

Another method that could more directly be a part of a business structure utilizes the benefits of employing a family member, husband or wife. This logic is perfectly reasonable as a small business might only be making a profit due to the significant savings made on salaries this creates.

By splitting the income tax over two people the company will benefit from a greater tax-free allowance as well as the two more modest-looking salaries keeping them in a lower tax bracket. This currently only applies to individuals with a taxable income of less than £100,000, however.

Co-owning the company – and earning a dividend rather than a salary – also warrants less tax, though the government wants to change this too. This will most likely be a part of any reform that the Chancellor provides in the near future.

The most common and accessible method of reducing taxes is provided by the government itself in the form of tax reliefs.

Disposable income can be channeled into a pension scheme, for example, which the government recognizes as justification for a tax relief, though there are currently restrictions to this. There are also active schemes that promote the funding of businesses (Enterprise Investment Schemes) which reward the investor with tax relief on the investment as well as little or no tax on any return.

With preservation in mind, taking out a life insurance policy and writing it into a trust not only protects the money from taxation but in the event of the policy holder’s mortality it passes on without any inheritance tax either. And finally a more altruistic cause for tax relief is a recorded donation to charity. Unlike EIS’s there are no financial benefits from donations but the money donated is not taxed.

These are perfectly viable, and completely legal, methods of tax reduction though the government is going to limit tax payers’ use of them; in April 2013 there will be restrictions on tax relief. The figures currently quoted are caps of either 25% of income or £50,000 – whichever is greater.

For tax planners up-to-date knowledge of the law is vital. Appleton Richardson & Co has that knowledge and uses it to keep their clients ahead of the curve.

Kierran Jamieson

Appleton Richardson & Co

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