Thursday, 8 March 2012

Hypocrisy and unreasonable expectations of tax reduction

Or a cat in the West Indies
I have been writing recently about tax avoidance schemes and the Sirens who lure unsuspecting business owners and higher paid employees towards their rocky outcrops.

Please don't misunderstand me. I am certainly not against people managing their affairs to pay less tax, and it can be done without worry. It is just that there are so many offers from tax avoidance specialists which claim to reduce tax on business profits to very little in the hands of the business owners extracting it as income. The appeal is both to the greedy and to those who resent paying so much of their hard-earned cash in tax when they are making such a contribution to the economy by employing people. I have some sympathy with the second category.

When I was in the tax avoidance “industry” I saw both categories. I guess that in these moralistic times post-banking crisis it is hard to sympathise with the greedy but maybe it always was. I had a certain distaste for some of the clients I saw way back; those who wanted the yacht in Gibraltar and the house in Barbados mostly paid for by the Treasury. Those others who were less selfish but wanted more control over their money were easier do deal with. Yet both groups had to be apprised of the risks.

The world has changed. The climate has changed. Legal tax avoidance is second only to illegal tax evasion on HMRC's hit list. It is a hard thing to do with a scheme these days.

I am all for helping people save money by paying less tax. It is a significant part of my business. Sometimes though I get frustrated both by the clients' unreasonable expectations and the double standards on behalf of Government, by which I mean the machinery of the Civil Service and the environment which came about under the previous administration where there was (is) one rule for some working with Government organisations and another for others who don't.

We have seen a recent row about the head of the Student Loans quango working through his service company. We in the tax profession all know that the arrangement has nothing to do with saving him tax, but it is related to the Government avoiding its responsibilities as an employer re periods of notice, pension contributions and the like. And that is what happens throughout the Civil Service and the NHS where the “employer”, i.e. Government, prefers to pay contractors generally through an agency rather than having them as employees.

So all these contractors can save a load of tax either working through their company or using an “umbrella scheme” which for some reason HMRC often looks on benevolently.

I had a prospect come to me recently who wanted to have a service company to save him tax. He worked for one company, has done for eight years, and expects to do for a few more. I had to tell him that with the degree of control the firm and his agency had over him, he was a quasi employee and would be liable to the IR35 legislation which effectively would tax him as an employee. It wasn't on in his particular case. However, if he had been working ultimately for a Government or local Authority department my advice would probably have been different.

So we have overaggressive tax avoidance schemes which may not work. We have sensible tax mitigation which is the sort of work I do. In between, we have incredible hypocrisy in the Civil Service in how they engage many of their workers, and ignorance amongst Government Ministers who do not understand the culture of hypocrisy which has grown up over employment responsibilities and tax. That can't be right, can it?

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