Tax is an un­avoid­able mat­ter for busi­nesses large and small

Western Mail - - BUSINESS IN WALES -

TAX avoid­ance is an is­sue which has be­come ex­tremely con­tentious in the news this week as a re­sult of the Par­adise Pa­pers’ re­lease.

How­ever, this has only served to high­light ex­treme mea­sures taken by the wealth­i­est sec­tion of so­ci­ety to pro­tect their fi­nances.

Tax avoid­ance can oc­cur in a mul­ti­tude of ways among smaller SMEs, busi­nesses, and in­di­vid­u­als – and doesn’t need to in­clude safe­guard­ing funds in the Cay­man Is­lands.

At times, tax avoid­ance can be in­ad­ver­tent, with busi­nesses be­liev­ing they are in­vest­ing in le­git­i­mate le­gal schemes, when in fact they are not. Or it could be that tax pay­ments are han­dled by a third party, and there­fore the busi­ness is un­aware that they are im­pli­cated in tax avoid­ance.

What­ever the cause, it is now more im­per­a­tive than ever that busi­nesses and SMEs en­sure they are pay­ing the cor­rect level of tax as HMRC clamps down on this.

Philip Wil­liams of Black­fords LLP of­fered his ad­vice to busi­nesses on how to iden­tify tax avoid­ance, why it oc­curs and how it can be avoided.

Tax avoid­ance isn’t sim­ply mov­ing funds into an off­shore ac­count in a bid to avoid pay­ing a higher level of tax. There are many types of avoid­ance. Tax avoid­ance is de­fined as the min­imi­sa­tion of tax li­a­bil­ity through le­gal meth­ods. This means that a per­son or busi­ness will fol­low the lit­eral in­ter­pre­ta­tion of the law, but not the spirit in which it was in­tended.

For ex­am­ple, they may in­vest funds into a scheme aimed at low­er­ing tax con­tri­bu­tions, so while pay­ments are still made, they are at a far re­duced level.

While many schemes are not considered il­le­gal, tax avoid­ance is es­ti­mated to have cost the UK econ­omy around £12.8bn over the past five years.

As a re­sult, HMRC has taken a harsher stance against any­thing not considered to be “in the spirit of the law”, with an ad­di­tional £3.4bn in VAT un­der­pay­ments col­lected in 2016-17.

How­ever, some tax avoid­ance can come in some seem­ingly le­git­i­mate, and there­fore po­ten­tially more risky, guises.

Many peo­ple legally in­vest funds into sav­ings schemes – how­ever some may be skew­ing the line be­tween le­gal ex­ploita­tive.

With so many schemes in op­er­a­tion, the po­ten­tial to en­ter into an il­le­gal ini­tia­tive is vast, ac­cord­ing to Mr Wil­liams.

He said: “Cer­tain meth­ods of tax avoid­ance could oc­cur quite in­no­cently, due to the com­plex na­ture of pay­ing tax. As busi­nesses ex­pand, how they in­vest their money evolves and this could leave them in­ad­ver­tently vul­ner­a­ble to tax avoid­ance.

“Many may ex­plore dif­fer­ent in­vest­ment schemes, but if it seems too good to be true, there’s ev­ery chance it is.

“It is es­sen­tial that if there is any doubt about the le­gal­ity of tax pay­ments via an in­vest­ment scheme, that they seek ex­pert le­gal ad­vice straight away.”

High-pro­file tax avoid­ance schemes which have been un­cov­ered in re­cent years in­clude di­vert­ing wages via a third party, with the user then paid a min­i­mal per­cent­age of this, on which they are taxed, with the rest paid as a tax-free loan.

Oth­ers in­clude ex­ploit­ing le­git­i­mate and fi­nan­cially tax breaks for per­sonal gain. For ex­am­ple, you may in­vest in a com­pany which qual­i­fies for tax breaks, how­ever rather than the ex­emp­tion supporting the in­tended re­cip­i­ent, it ben­e­fits the in­vestor.

Cer­tain schemes also re­port ar­ti­fi­cial losses to en­sure users don’t face in­creased tax lev­els. Mr Wil­liams said: “Busi­nesses could eas­ily fall vic­tim to this type of seem­ingly le­git­i­mate scheme. We have seen many peo­ple en­ter into an agree­ment be­liev­ing it is le­gal, when in fact le­gal loop­holes are be­ing ex­ploited, which could leave them li­able to tax avoid­ance charges.”

HMRC is widen­ing its scope for what is considered a tax avoid­ance scheme. Users of such schemes are re­quired to in­form HMRC un­der guide­lines, or could face a penalty of up to £5,000 per of­fence if they are un­cov­ered. If a scheme pro­moter has legally in­formed HMRC of the ini­tia­tive, they will send the user an AAG6 form. If this has not been re­ceived it may leave the user vul­ner­a­ble to tax avoid­ance al­le­ga­tions.

Mr Wil­liams added: “Al­ways check the le­gal­ity of any scheme that you en­ter into, and make any queries be­fore sign­ing a con­tract, as any sub­se­quent chal­lenges could be­come more dif­fi­cult to ex­tract your­self from.” To en­sure busi­nesses get their tax right and don’t fall vic­tim to fraud­u­lent schemes which seem le­git­i­mate, Mr Wil­liams has of­fered some top tips to watch out for when in­vest­ing their money:

If it seems too good to be true, it prob­a­bly is – if a scheme of­fers to sig­nif­i­cantly re­duce your tax li­a­bil­ity for lit­tle or no cost, this is sus­pi­cious;

Com­plex ar­range­ments – if the level of de­tail in the ar­range­ments is highly com­pli­cated, given the sim­plis­tic na­ture of the task, this could be a warn­ing sign;

Off­shore tax havens – their in­volve­ment should al­ways spark scru­tiny, par­tic­u­larly if there is no com­mer­cial rea­son;

Se­crecy or con­fi­den­tial­ity – highly se­cre­tive ar­range­ments or agree­ments should raise sus­pi­cions. A con­tract is stan­dard prac­tice – how­ever, added se­crecy around the sign­ing or stor­ing of doc­u­ments can be a warn­ing sign;

Up­front fees – this is highly un­usual and any re­quest for fees of this na­ture should be treated with cau­tion;

In­flated ben­e­fits or re­turns – if the level of re­turns out­weighs the in­vest­ment or seems highly in­flated, this could be a warn­ing sign.

WHAT IS TAX AVOID­ANCE? TAX AVOID­ANCE SCHEMES

Philip Wil­liams is a con­sul­tant at the Cardiff of­fice of Black­fords LLP, a se­ri­ous fraud, crime and reg­u­la­tory law firm based in Cardiff and London.

TOP TIPS TO GET IT RIGHT

Yui Mok

> A Google search page on a lap­top screen, as the in­ter­net gi­ant’s con­tro­ver­sial tax deal with HM Rev­enue & Cus­toms con­tin­ues to ran­kle

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