In his latest Finance on Friday column for Altrincham Today, Joel Adams from LIFT-Financial on the fine line between tax planning and tax avoidance.
I have always felt that the tax burden we all suffer in the UK is far too onerous. We pay income tax at up to 47% (including national insurance) on money we earn, capital gains tax at up to 28% on investments we make, VAT at 20% on everything we buy and, if we have anything left, inheritance tax at up to 40% on the value of our estates.
We also pay, literally, hundreds of other taxes. Fuel duty, road tax, council tax and stamp duty being just a few examples.
Given the tax burden and the complexity of the system it is no surprise that many people have, and still do, arrange their affairs so as to reduce the amount of tax they pay. This can be done in many ways – from the sublime to the ridiculous – and there is no longer a clear line between what is and isn’t morally and legally acceptable tax planning.
In a landmark legal case which set a precedent for tax planing in the UK, Lord Clyde made a now famous quote in his summing-up:
[blockquote]No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.[/blockquote]
It is fair to say, however, that the game has changed. We have all read stories about celebrities such as Gary Barlow and Jimmy Carr avoiding tax and many of them have almost been treated as criminals for, in many cases, simply planning their affairs in exactly the way that Lord Clyde outlined.
What has changed is the approach that HMRC takes with those seeking to reduce the amount of tax they pay. Aggressive tax planning is now almost always caught by HMRC’s “General Anti-Avoidance Rule”, but HMRC also look, in many cases, to apply their current practices retrospectively.
All of this has contrived to make most of us extremely cautious about tax planning.
But how far do we take that caution? Should we be worried about using our ISA allowances for fear of being labelled a tax avoider by trying to reduce the tax we pay on our investments? Obviously we shouldn’t be worried about that example and indeed there are many other “statutory” tax allowances we can all use to reduce the amount of tax we pay. We’ll look at some of them next week.