It happens with almost monotonous regularity another very wealthy celebrity ’outed’ as owing the taxman several million pounds because some exotic ’tax-saving’ scheme for which they’d signed up has been declared illegal.
It’s been going on for years, and as sure as night follows day, there’ll be another one soon. Apparently HMRC has thousands of cases waiting to go through the courts. Of course, the celeb can stand up and claim that they were only following the (very expensive) advice of their ’tax specialist’ accountants and lawyers, and it was all presented to them as being an investment that just happened to have some tax benefits. Tax evasion was the last thing on their mind; they just signed some papers.
Most people don’t have the problem of trying to keep millions out of the hands of the taxman.
To be in that position, you’d need income or assets of tens or hundreds of millions to start with.
Those who find themselves in that fortunate position are often more interested in avoiding inheritance or capital gains taxes rather than straightforward income tax, and there are plenty of legitimate ways of doing so already.
Hence you find the mega-rich putting their wealth into complex family trusts, often located in places like Lichtenstein.
On paper these very wealthy individuals appear to personally ’own’ very little, and what earnings they do admit to having are conveniently taxed at some minimal rate via a sunny island in the Caribbean (or one of the slightly less sunny ones in the English Channel or Irish Sea).
legal and safe
For the rest of us, particularly those running their own businesses, there are indeed legal, safe and long-established ways of minimising tax liabilities. These are well known to accountants, follow well-established accounting and tax rules, and hence usually don’t need to involve lawyers. Some are obvious: pension contributions are perhaps the best-known; but simply making sure that you claim all the expenses and allowances that are available can go a long way to keeping your tax bills down. At a more advanced level, particularly if you intend either expanding your business or indeed selling up and retiring, then some advance planning as to how you structure your ’new’ business or how you withdraw funds and sell your existing one can result in very large tax savings in the long run. The key to all of this tax planning is to sit down with your accountant and discuss with them what you really want to do, and over what sort of period you’re thinking of doing it. Some of the plans (particularly if they relate to exiting from your business) may need to be put in place several years ahead to be most effective for you.
Unfortunately every now and again we still find that business owners receive seductive offers of ’tax planning’ or ’tax management’ that claim to reduce their tax liabilities to virtually nil however much they’re earning, and for however long they stay in business.
Often the sales pitch and let’s be clear, that’s what it is, someone selling you their special service or financial product will include words like ’intense’ or ’creative’ to describe their way of doing things. That really ought to be a warning in itself, but if it isn’t, then perhaps your bullshit detector should start to flash and make loud alarm noises if you’re asked to sign pages of documents prepared by their legal team. And, if they suggest moving your savings to some offshore investment account, it really might be time to walk away quickly.
Time for a reality check. To any normal human being (and generations of accounting students), the UK’s accounting and tax rules may seem labyrinthine, designed to confuse everyone and offer thousands of loopholes in which to be ’creative’.
In fact what has happened over the past few decades has been that successive governments have simplified the tax system quite radically, and they’ve tried to close as many loopholes as they can find.
Yes, there are still plenty of rules which could be interpreted in different ways, but you don’t really want to be the tax payer that HMRC chooses to test any particular rule in court. So what we actually have are a set of rules and legally-tested precedents within which both the mainstream accounting profession and HMRC work. The rules are comprehensive and generally intended to be fair to both tax payer and tax collector.
As long as the accountant/tax advisor stays up to date with the regular stream of changes (such as those following each Budget) then the calculation of potential tax liabilities, and the best ways of minimising them within the law, are well defined. Of course, it helps if your accountant has specialist knowledge of the business sector or industry in which you operate.
This applies to taxation of individuals, companies or partnerships. It may not sound very exciting or original, but then few things in accounting do. It doesn’t mean that the tax people won’t ever query anything but if they do, it’ll probably be only over the values or eligibility of certain items, rather than questioning the legality of the entire scheme. Oh, and you’ll probably find that asking your accountant to spend a bit of extra time doing some detailed tax planning with you will be rather less expensive in professional fees than signing up for a ’creative’ tax ’adventure’ and that’ll certainly be the case if the exotic scheme ends up being tested in court.
What really matters in tax planning isn’t ’creativity’ or ’adventure’ or ’aggression’; what matters is the planning. As mentioned already, to get the best tax advice from your accountant you need to let them know what you’d like to do with your finances in the medium-to-long term, and let them come back with how to achieve that. No fuss, no drama, no dodgy ’investment’ advice or finding that your life savings have disappeared into some untraceable offshore fund.