Tax is an unavoidable matter for businesses large and small
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
> A Google search page on a laptop screen, as the internet giant’s controversial tax deal with HM Revenue & Customs continues to rankle