I imagine that some accountants are concerned that clients may have complaints in the light of the latest media stories about tax avoidance schemes. Such complaints will rarely be justified and would only arise due to some of the misleading reports of the way that Jimmy Carr, Take That and other celebrities have used the K2 and icebreaker tax schemes to avoid tax.

This blog post is intended to clarify two distinct issues.

Firstly if these schemes are legal why haven’t all decent accountants recommended them to their clients?  And secondly, if these legal schemes are abusive, why have they not been blocked by HMRC or by the Government?

Why weren’t all accountants encouraging clients into such schemes?

Contrary to the mystique that the promoters of such schemes like to create, these schemes are not as simple or as straightforward as media reports imply. The schemes are sophisticated and complicated. The promoters of the schemes promised their clients that the arrangements are legal. This is VERY DIFFERENT TO PROMISING THAT THE SCHEME IS EFFECTIVE.

The key issue is that as long as the scheme is legal no one can ever justifiably criticise the client for EVADING tax. All they have done is to AVOID tax as the scheme relies on a justifiable interpretation of the relevant tax laws. This is often not the only interpretation however (see below) and it may well be both artificial and contrived. When clients understand the consequences, risks and downsides of schemes like this they typically decide it’s not something they want to do.

Jimmy Carr explained: “I met with a financial advisor and he said to me: “Do you want to pay less tax? It’s totally legal.” I said: “Yes.”  Many people have intimated that they would have done the same thing and that’s perfectly natural. But there’s more to it that that as such decisions have consequences that need to be understood too.

If someone tells you that there is a legal way you could reduce your tax from 40% to 5%, would you jump through all of the hoops of a tax avoidance scheme? If it were that simple then of course most accountants would encourage their clients to do so. No one wants to pay more tax than is absolutely necessary.

The question is whether Jimmy and other investors in the scheme were provided with sufficient information to make an INFORMED decision. Many accountants know that clients in possession of the full facts rarely decide to proceed with such schemes. I know not whether Jimmy later changed his mind or if he invested without being provided with sufficient advice as to the nature of the scheme. I have however repeatedly explained on my TaxBuzz blog (see below) that these schemes are risky and carry various downsides. The list of these now needs to be supplemented by reputational risk if the media find out!

I have long maintained that accountants should NEVER encourage clients into sophisticated tax avoidance schemes unless they are able to explain all of the risks and downsides to the client. When this is done properly only a tiny percentage of taxpayers decide to proceed with the scheme. And because of this, very few accountants, these days, spend much time trying to keep up with the ever dwindling number of tax avoidance schemes that are being promoted. And, as I have explained ad nauseum on the TaxBuzz blog this is a perfectly rationale approach to adopt. It is also professional, credible, independent and commercial.

Let’s also remember that the upfront cash costs of entering into such schemes often mean they are only even worth considering for the wealthiest of clients who are prepared to gamble the sums involved. Then there’s the time it can take to determine whether or not the client wants to jump through all the hoops. And so on.

Why haven’t these legal but abusive tax schemes been blocked or stopped?

Readers will recall that the Chancellor, in his Budget speech, spoke of his disdain for tax evasion and aggressive tax avoidance, describing both as “morally repugnant”. David Cameron and Nick Clegg have made similar observations more recently. So why don’t they do something to stop these schemes?

Quite simply the media reports of how ‘selebs’ are avoiding tax through LEGAL tax avoidance schemes do not tell the full story. The ‘selebs’ may THINK they have avoided tax. The promoters of the scheme may CLAIM they have avoided tax BUT until HMRC conclude their enquiries the REAL outcome is not known.  Of course, as long as Tax Counsel has confirmed the scheme was LEGAL the taxpayer will not be prosecuted for tax evasion.

All of the schemes referenced in recent media reports are already or will now be challenged by HMRC. Media reports of HMRC investigating the K2 scheme and the Icebreaker scheme insinuate that this is only happening due to the media attention. What rot!

Our tax system has inbuilt delays in it when it comes to challenging someone’s tax position. Take That, for example are reported to have invested in the Icebreaker tax shelter in 2010. This would have been in the tax year 2010/11. HMRC enquiries into those tax returns didn’t start until they were filed (probably in January 2012). HMRC often highlight their concerns re schemes like these on the Spotlights page of their website. But until the Courts confirm HMRC’s view, as distinct from that of the promoter’s of the scheme HMRC cannot do much more. They often hold back from adding further complexity to our tax system unless they genuinely fear that the scheme works. In such cases they may recommend that new tax rules be introduced immediately to block such schemes. However HMRC often still challenge them in case all the steps and paperwork were not properly completed. This is another of the risks that taxpayers run. The scheme works in theory but only if all necessary steps are taken in precisely the right order, adequately evidenced and truthfully represent the underlying transactions. Often this is not the case and the hoped for ‘legal’ tax savings have to be repaid.

The interpretation of tax law on which a scheme depends for it’s success and legality will often be the subject of lengthy debate and legal hearings.  These challenges often drag on and on.There are some promoters of schemes who claim to have never lost a case in the courts. However when they make such claims it is rarely clear whether all avenues of challenge by HMRC  have yet started, let alone been exhausted.  Regardless of what the promoters assert, there are always risks of failure and of the hoped for tax savings being denied even when a scheme is LEGAL. And many years may pass before we learn whether or not the scheme was EFFECTIVE and the tax savings were permanent. So, the alleged tax savings enjoyed by Jimmy Carr and Take That may yet need to be repaid to HMRC.

EDIT 20 July 2012: We now have contemporaneous evidence in support of the above explanation. The Court of Appeal has just pronounced on a tax scheme promoted by PwC ten years ago. The case, Howard Schofield v HMRC, has already been through the first tier and upper tier tribunals and this is the 3rd time HMRC have won. This case alone involved potential losses to the Exchequer of about £11m. It seems likely that around 200 other taxpayers who entered into the same scheme (being advised by PwC that it was LEGAL) will also be affected. The tax they all thought they had saved will now become payable plus interest. Whether they will be able to recover the fees they paid to PwC for the decade old advice remains to be seen.

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