A lot of people confuse tax avoidance and tax evasion. It can be a dangerous mistake to make.
As the former British Chancellor of the Exchequer Denis Healey once said:
“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.
That was why in the original published version of this article I stated:
- Tax avoidance means using whatever legal means you choose to reduce your current or future tax liabilities.
- Tax evasion means doing illegal things to avoid paying taxes. It’s the Al Capone path to financial freedom.
However the authorities have taken an increasingly tough line in recent years.
Now the phrase ‘tax avoidance’ may imply something much more questionable, as opposed to simply filling an ISA.
Tax avoidance might not be legal. Depending.
In particular, a General Anti-Abuse Rule (GAAR) was contained within the Finance Act 2013. This sought to counter ‘tax advantages arising from tax arrangements that are abusive’.
You should definitely delve into detailed guidance on GAAR if you’re contemplating doing anything out of the ordinary.
But the most relevant point for our discussion of evasion versus avoidance is that according to the tax planning resource RossMartin.co.uk:
In addition to the legislation, HMRC published guidance in April 2013 which expressly states that the GAAR is an intended departure from the previous situation where routinely cited court decisions such as the judgment of Lord Clyde, ‘every man is entitled if he can to order his affairs so that the tax attracted under the appropriate act is less than it otherwise would be’ are now rejected.
The guidance sets out the Parliamentary intention that the statutory limit on reducing tax liabilities is reached when arrangements are put in place which go ‘beyond anything which could reasonably be regarded as a reasonable course of action’.
And here’s what the Tax Justice Network says about the difference between avoidance and evasion:
Tax avoidance cannot be called ‘legal’ because a lot of what gets called ‘tax avoidance’ falls in a legal grey area. ‘Tax avoidance’ is often incorrectly assumed to refer to ‘legal’ means of underpaying tax (such as using loopholes), while ‘tax evasion’ is understood to refer to illegal means.
In the real world, however, this legal-illegal distinction often falls apart.
Whether an activity is legal or not often does not become clear until it has been challenged in court, and much of what gets called ‘avoidance’ turns out to be more like evasion.
As a result the Tax Justice Network – a lobbying group that focusses on states’ getting their due share of tax receipts – now favours the phrase ‘tax abuse’.
Tax avoidance may not be a criminal act then – depending. But if you’re hit with a big bill and penalties because what you did was deemed by a court to be the unacceptable face of paying less tax – ‘unreasonable’, in other words – then you may wonder if there’s a difference.
Please note I am NOT a tax expert and this article is not tax advice. It is simply the musings of a private investor trying to do the right thing with my own affairs. Consult a specialist and/or HMRC to know exactly where the law and you stand in respect to your taxes.
Tax avoidance out. Tax mitigation in.
For any criminals who Googled ‘tax evasion’, I’m not about to give you a masterclass in laundering cash or doctoring a passport.
I’ve never evaded taxes. I don’t condone it, and I couldn’t tell you how it’s done.
But tax avoidance mitigation – as we should now call it – is another matter.
The previous version of this piece already predicted taxes would rise in the UK over the next few decades. Higher pension costs, public debt, and the ever-rising bill for funding public services made that nailed-on.
Since then though we’ve seen public sector borrowing soar due to the pandemic, pulling forward this pressure. The overall level of taxes is now forecast to hit the highest level since the Second World War:
Our stagnant post-Brexit economy means it’s unlikely faster economic growth will bail us out anytime soon. Living standards will remain moribund, regardless of what party in power.
Meanwhile politicians increasingly talk about closing tax loopholes. In some cases – such as the carried interest enjoyed by private equity that’s now in the crosshairs of shadow chancellor Rachel Reeves – these are not improper, just disagreeable to a State with an insatiable appetite for more revenue.
Against this backdrop, it makes sense for investors to legally do what we reasonably can to reduce our tax burden – without overly compromising on other aspects of our lives, I’d suggest. (As opposed to be following the example of 1970s tax exiles…)
In doing so, we need to be extra careful today to follow the spirit as well as the letter of the law.
Examples of legitimate tax mitigation steps
There’s plenty you can do to reduce your taxes without risking fines or jail time.
ISAs and pensions
Most people can do all their investing entirely within tax shelters such as ISAs and SIPPs. They will not have to worry about further tax mitigation with respect to their investment returns.
VCTs and EIS schemes
These are riskier and (worse) more expensive ways to invest. But they can have a role for wealthy investors who’ve filled their tax shelters and can afford to chance lousy returns. Especially if they particularly enjoy backing new companies.
Think about who owns your assets
If you’re a married high-earner, it may make sense for your lower-earning and more lightly-taxed spouse to own certain assets and book the returns. Make the best of your family’s various personal allowances, but maybe take advice if you feel you’re contemplating anything unusual.
Consider salary sacrifice and other steps to lower income tax
The aim is to defer paying taxes until you’re earning less in retirement, and thus will be taxed at a lower rate.
Taxing taxes
I’m confident those tax mitigation methods are fully within the spirit of the law. That’s because when you invest in an ISA, say, you are doing exactly what the legislation intended – enjoying a tax break given as an incentive to invest for your future wealth.
But once you – or your advisors – start to get creative, you roll the dice.
When I first wrote about tax avoidance versus tax evasion in 2009, it seemed like a less contentious subject.
Of course, nobody liked a tax evader, then or now.
But over the past decade or so – perhaps spurred by the popular backlash that followed the financial crisis, and boosted by the cost of living crisis more recently – politicians, the media, and the public have cast a harsher eye on even seemingly legitimate tax avoidance, too.
This has made the distinction between evasion and avoidance blurrier than it was.
Yet this is not really a new issue. Writing in the Financial Times in the wake of a controversial craze for tax inversions by US companies, John Kay noted:
It is conventional to distinguish legal tax avoidance from illegal tax evasion. But the reality is that there is a spectrum.
The person who avoids the heavy taxation on cigarettes by giving them up wins our approval; the gangmaster who employs illegal workers off the radar screen of government authorities goes to prison when detected. But most cases lie in-between.
The UK’s HM Revenue & Customs has issued big payments claims to people who invested in highly artificial film finance schemes that did not qualify for the allowances they claimed.
Were they avoiders or evaders? The line between avoidance and evasion would be clear only if the law were clear, and it is not.
Tax law is complex and the legality of particular actions can be firmly established only if there is a decision by a court on the facts of a particular case.
A tax avoidance horror story
The fate of the film financing schemes in the courts since Kay wrote his piece has had as many plot twists as any movie. Like most people not directly involved, I lost track.
I do know though that a Supreme Court ruling in 2017 ultimately found for HMRC – potentially recouping £1 billion for the nation’s coffers, albeit at potential ruin for users of the schemes. Some of them reportedly faced tax bills several times larger than their original investment.
An HMRC spokesperson was quoted as saying:
Avoidance schemes are often highly contrived and almost invariably fall flat when trying to deliver a tax advantage never intended by Parliament.
The fact is the majority of schemes simply don’t work and can put avoidance users in a significantly worse financial position than if they had never used the scheme in the first place.
Even MPs got involved in the drama, pushing back against court rulings – or at least on the penalties imposed.
In a letter to then-chancellor Philip Hammond, Andrew Tyrie, chairman of the Treasury committee, agreed the original film industry tax breaks were arguably “too generous and ill-defined.”
But with respect to rulings against the schemes designed to exploit those breaks, Tyrie added:
An increasing number of representations have been made to me expressing concern that the outcomes are not always fair nor what anyone could have expected.
This has resulted in financial calamity for some of those involved and considerable difficulties for HMRC in bringing a large number of schemes to a close.
The affair was still rumbling through the courts as late as May 2023.
Better know better
These film financing vehicles were marketed some 20 years ago. But the saga illustrates very well that what may seem a clever wheeze one moment can levy a heavy price in time.
Most Monevator readers will have little sympathy with multi-millionaire celebrities apparently going out of their way to avoid paying more taxes to fund schools and hospitals and the rest of the laundry list.
And I am certainly not saying the film schemes were legitimate. The courts have found they were not.
However there’s a bit of going somewhere but for the grace of God about it all.
Those celebrity investors were presumably mostly advised by specialists. I suppose that many just assumed the schemes were above-board.
After all, it took a very long-running court case to prove they weren’t. How was a footballer or a pop star supposed to be able to assess that, when presented with the scheme by a professional person in a suit?
Compensating factors
Consider, by way of comparison, the Payment Protection Insurance mis-selling scandal. By the end the banks had paid out nearly £40 billion in compensation to customers deemed to have been mis-sold PPI.
For these PPI ‘victims’, caveat emptor did not apply. They eventually got their money back.
But for the would-be tax-avoiding film financiers, caveat emptor has bitten them on the bottom line.
How would we feel, if formerly commonplace practices such as pension recycling or bed and ISA-ing were suddenly deemed too aggressive?
And we were then hit with a retrospective tax bill?
Exactly.
I’m just thinking aloud. Again, I’m far from an expert on tax matters. We never give personal advice on Monevator, for both practical and regulatory reasons. But I’m always extra wary when it comes to tax.
The fact is that tax matters are often very complicated. And often dependent on your personal situation.
The letter of the law
Interestingly, in the original version of this article posted in 2009, I quoted evidence of an emerging debate about the terminology as then covered on Wikipedia.
At the time the phrase ‘tax avoidance’ was apparently in dispute in the UK, with ‘tax mitigation’ being suggested as a better term for legal tax reduction.
The Wikipedia article noted, in paragraphs since removed, that:
The United Kingdom and jurisdictions following the UK approach (such as New Zealand) have recently adopted the evasion/avoidance terminology as used in the United States: evasion is a criminal attempt to avoid paying tax owed while avoidance is an attempt to use the law to reduce taxes owed.
There is, however, a further distinction drawn between tax avoidance and tax mitigation.
Tax avoidance is a course of action designed to conflict with or defeat the evident intention of Parliament.
Tax mitigation is conduct which reduces tax liabilities without “tax avoidance” (not contrary to the intention of Parliament), for instance, by gifts to charity or investments in certain assets which qualify for tax relief. This is important for tax provisions which apply in cases of “avoidance”: they are held not to apply in cases of mitigation.
I wrote at the time that: “I suspect this is largely a courtroom debate, caused by the Revenue looking to close down schemes of dubious legality created by planners for wealthy individuals.”
And indeed, that does seem to have been the direction of travel in this area, given that later ruling in the 2013 Finance Act.
Avoid being deemed an overt avoider
So where does this leave us?
As I say I’m no legal expert nor a tax planner. I’m just an everyday bloke who enjoys investing.
So to be absolutely clear, whenever I’m talking about reducing taxes on your investments, I mean by using legal and strictly above board means. Never the dodgy stuff.
But perhaps this isn’t enough anymore? Maybe we should apply the ‘seen on the front of the local newspaper’ test to any decisions we make when reducing our taxes?
In other words, how would you feel if whatever tax mitigation decision you made was splashed on the cover of your local newspaper? For all your friends and neighbours to read?
Saving into a pension? Putting money in an ISA? Making use of capital losses by setting them against capital gains to reduce your total taxable gain?
All very safe.
What about defusing capital gains over the years by making sure you use your capital gains allowance? Or incorporating your business to reduce your income tax bill and national insurance liabilities?
Already in the current climate we can see they seem a bit less safe. I think though they are still firmly on the right side of the spirit and reality of the law, if not always the court of public opinion.
What about offshore vehicles? Or using complicated company structures or loans to avoid payroll taxes or to disguise renumeration?
Hmm. I wouldn’t and HMRC would agree.
And as barrister Patrick Cannon notes on his website:
…if HMRC investigate and find evidence of dishonesty or cheating then you may be looking at a criminal investigation for tax fraud and prosecution, leading to a prison sentence and a fine.
The sort of behaviour that this might cover includes claiming that genuine loans were made as part of the scheme when they were not genuine; or the writing of fake work diaries showing the taxpayer having spent time in the business when they were elsewhere. In my experience, these fake diaries are often produced by the scheme promoters and sent to the users for signature.
Avoid getting involved in anything dodgy or complicated like the plague. Jail sucks.
In fact, I personally draw the line at the vanilla tax mitigation I mentioned above. Beyond those straightforward measures, pay up and be happy you have the means to do so.
How to spot avoidance in action
In any event, it seems ‘avoidance’ has become a dirty word – at least when applied to contrived arrangements designed simply to reduce your tax bill.
More official advice from HMRC:
How to identify tax avoidance schemes
Here are some of the warning signs that you might be in a tax avoidance scheme or you are being offered to join one.
It sounds too good to be true
It almost certainly is. Some schemes promise to lower your tax bill for little or no real cost, and suggest you do not have to do much more than pay the scheme promoter their fees and sign some papers.
Pay in the form of loans or other untaxed payments
Some schemes designed for contractors, agency workers and other temporary workers or small and medium sized employers, involve giving workers some or all of their payment either as a loan or other payment that they’re not expected to pay back.
The payment may be diverted through a chain of companies, trusts or partnerships often based offshore and received from a third party. Sometimes the payment is received directly from an employer.
Other ways in which these untaxed payments may be described include:
- grants
- salary advances
- capital payments
- credit facilities
- annuities
- shares and bonuses
- fiduciary receipts
In all cases the schemes promise to put money in a workers pocket without having to pay tax on it. These schemes are often sold by non-compliant umbrella companies.
Huge benefits
The benefits of the scheme seem out of proportion to the money being generated or the cost of the scheme to you. The scheme promoter will claim there’s very little risk to your investment.
Round in circles or artificial arrangements
The scheme involves money going around in a circle back to where it started, or some similar artificial arrangement where transactions are entered into which have no apparent commercial purpose.
Misleading claims
The scheme is advertised using misleading claims. These may include claims suggesting a scheme is endorsed or approved by HMRC or that a scheme can increase your take home pay. For example:
- ‘HMRC approved’
- ‘Retain more of your earnings after tax’
- ‘We ensure you get the highest take home pay’
- ‘Compliant tax efficient pay’
These statements are likely to be misleading. HMRC does not approve tax avoidance schemes.
HMRC has given it a scheme reference number (SRN)
If HMRC has identified an arrangement as having the hallmarks of tax avoidance and are investigating it, you will receive an SRN by your promoter and you should include this on your tax return.
If an arrangement has an SRN, this does not mean that HMRC has ‘approved’ the scheme. HMRC does not approve any tax avoidance schemes.
If an arrangement does not have an SRN, this does not mean that the arrangement is not tax avoidance and could still be investigated.
Non-compliant umbrella companies
Many umbrella companies operate within the tax rules, however, some umbrella companies promote tax avoidance schemes. These schemes claim to be a ‘legitimate’ or a ‘tax efficient’ way of keeping more of your income by reducing tax liability.
Find out what to do if an umbrella company offers to reduce your tax liability and increase your take home pay in Spotlight 45.
Schemes HMRC has concerns about
You can find examples of tax avoidance schemes HMRC is looking at closely. Even if a scheme is not mentioned, it may still be challenged by HMRC.
You might also find HMRC’s report on the use of marketed tax avoidance schemes worth reading if you have reason to want to know more.
If in doubt, pay the tax
Well, there you have it. I know I haven’t done anything dodgy – my affairs are far too boring, and after years of defusing capital gains, nearly all my investments are these days in tax shelters or else qualify for EIS exemption.
I hope you haven’t strayed either. But the woeful fate of the film financing schemes shows how even wealthy and professionally advised investors need to be careful and remain vigilant.
Thoughts and corrections welcome in the comments, especially from experts.
Let’s be careful out there.
Given that some newspapers actually did try to make a scandal out of Trump’s use of capital losses, I think a “front of the newspaper” test might be a bit tough.
Al Capone didn’t do any special illegal things to evade paying tax, he just didn’t pay tax on his illegal earnings. He even tried negotiate a tax settlement, which was used against him at trial.
This sort of stand-over tactic by the tax man is unconscionable. Pay it and the big scary lawyers go away.
The way I see it, the main downside of tax avoidance schemes is that their use has to be declared, which automatically puts you on HMRC’s “watch list”. Then all your tax affairs come under scrutiny – not only the use of the scheme – e.g. tax deductions on BTL, a perfectly legit utilisation of CGT allowance and such. That can’t be very much fun.
@monevator
I don’t think I’ve seen any articles in the press condemning ‘defusing capital gains over the years by making sure you use your capital gains allowance’. Rather the reverse, with all the recent articles about how to ‘bed & ISA’ over the next 2 years to avoid the reduced dividend allowance. Did you have anything specific in mind?
I did invest into a film scheme and I’ve had to repay the tax. Fortunately I only invested an amount that I was prepared to loose – just like any other risky investment.
I think that the major changes in HMRC approach since your original article are adopting retrospective tax legislation and ‘trial by tabloid’.
You might think that you are squeaky clean now, but how many of us have invested in Irish resident ETF’s, and thereby avoided UK stamp duty?
And that’s the rub – back in 2006 a lot of us genuinely thought we were doing things above board to support the UK film industry.
Your front of the newspaper test is appropriate as HMRC plan to publish names of those it deems to be serial tax avoiders!
Once again these tax avoidance penalties, which will become more stringent on us plebs, will conveniently disappear for corporations operating in the UK like Amazon, Google etc. And PM May’s new bum-chum Pres. Trump has a long history of tax avoidance, if not evasion, in the US but she’ll turn a blind eye when his businesses want tax relief for operating in the UK.
A mate of mine who had had a windfall put the docs for a film partnership investment under my nose back in 2004 when they were doing the rounds and asked me what I thought. It was clear from the docs that a relief that was intended to fund very risky investments in films that might flop was now being used in a very convoluted arrangement that now had negligible economic risk (other than it failing to be deemed effective from a tax perspective years down the road). Even at that time, there were plenty of instances of HMRC targeting contrived arrangements, with mixed success but at least with a few successes. I said if you do go for it, don’t spend any of the benefits and be prepared to stump up in due course when it probably fails in the face of the almost certain HMRC challenge. My mate was contemplating early retirement and didn’t want that kind of thing hanging over him and so he steered clear. Neither of us are financial or investing whizzes but we have enough sense not to risk what we can’t afford to risk … and there were flashing lights all over these things.
P.s. PPI was at our expense and so we get restitution. These were at HMRC/the Treasury’s expense, which is why they get the restitution. For those poorly advised, they have recourse to their advisers but I doubt that will count for much as they’ll shelter or limit the comeback to their expert selves.
I know words change meaning over time, and even become their opposites, but the abuse of avoidance is a bug bear of my and often causes me to swear at the BBC. I will continue to avoid taxes, and being run over.
Hello, I’m a tax lawyer.
A few thoughts:
1. bed and breakfasting that stays on the right side of the modern rules is most certainly fine. So, for example, if you crystallise an £11k capital gain by selling one FTSE 100 index tracker, and immediately acquire a different FTSE 100 index tracker then you are, without question, fine as a technical matter. I say “as a technical matter” because if you are a public figure in some way then this could still be regarded as tax avoidance by the press/public. But if you are “normal” then I wouldn’t worry
2. incorporating a real business (as opposed to where you are really an employee) is fine
3. using the principal private residence exemption within the letter of the law and HMRC guidance is also fine
4. ISAs, VCTs, etc again fine
5. For tax, as with investing in general, anything that looks too good to be true probably is too good to be true. The film schemes where you invested £1k and got £10k of losses to set against your income were in that category.
Bob
I like how Martin Lewis categorises, calling the avoidance element the government want’s us to use as tax planning :-
Tax evasion. This is where through lying or deceit you pay less tax than you should. It is against the law and often punishable by a prison sentence.
Tax avoidance. This is where you manipulate the tax system in a way it wasn’t designed to be manipulated to find loopholes and techniques or move money abroad to pay less tax than you ordinarily would, and less than you’re supposed to – but within the law.
Tax planning. Here you organise your finances in such a way as to take advantage of state-encouraged schemes which are designed to reward you to act a certain way, with the incentive of paying less tax.
I’ll not shed too many tears over those people who entered into loan based payment schemes. Harsh that HMRC retrospectively declare such schemes as evasion and submit a big tax bill but getting paid via a loan you never pay back ? C’mon.
One problem with the film schemes was the leverage. It was just asking for trouble to leverage up within the partnership. £10k in for say £90k income tax relief due to a loan is always going to struggle to pass any smell test and that was what initially led to the scrutiny.
But is it that different in structure to remortgaging a house at a higher LTV and then using the cash windfall to subsidise living costs whilst you do a huge salary sacrifice to your pension? You can’t recycle pension money but remortgage a house to pension is fine (for now), or any other source of money such as an inheritance etc.
Cash out financing (releasing untaxed money from BTL property) was the mechanism used by many of the big BTL landlords to build the empires. They only pay CGT on disposal, or more likely they never do as it will just form part of their estate eventually on death. But then maybe that is OK as the money comes back to HMRC in increasing stamp duty receipts due to the house price inflation, when looked at in the round.
What if I put all passive index trackers outside tax wrappers so I never have to crystallise – except to use the CGT allowance – and then do all the active trading in individual companies in the tax wrappers. That is a contrived structure as there is no reason to split it like that other than to reduce tax. Is that how parliament intended me to structure my portfolio? If not does HMRC come after me?
What about borrowing on 0% credit cards to turn a cashflow advantage to ensure you can fully utilise an ISA allowance before the end of the tax year.
And what does the experience of Cameron tell us. Uproar over Panama – which was nothing to do with tax avoidance/evasion, then no-one batting an eyelid at the 800k tax free cash withdrawal when mortgaging his place in Notting Hill. It really isn’t a million miles from the offshore loan that isn’t repaid – that mortgage might be interest only and a 25 year term and a current rate of 2% or so……
Bed and ISA and paired trades between ISA and SIPP. Are those good housekeeping or contrived. Was the only reason to gain a tax advantage or use an allowance. Will HMRC argue they are contrived as they only took place due to the tax element otherwise they wouldn’t have happened. Maybe we don’t sell anything in March or the first few days in April to make it ‘look better’.
My brother in law has just found out his Barclays final salary pension cash transfer value has doubled in the last two years. That transfer value is more than his entire gross lifetime earnings and zero tax has been paid on that money thus far as it is deductible from corporation tax, income tax and both employer and employee NI. Was that what parliament intended through all the pension legislation of the past 30 years?
If I pay out £5k (less any dividend income generated outside tax wrappers) from my Ltd company at the end of a tax year is that contrived? Especially if that only happens in the two years with the £5k dividend allowance.
The contriving is all part of the game. How many ultra high net worths who claim non-dom status would reside in the UK if they were taxed on worldwide income?
But the message is clear, the tax base is under threat through demographic change – just look at the difference in tax when someone takes 2/3rds of final salary in a pension. HMRC only get about 1/3rd of the tax. So not only is it ratio of working to retired but the fact that the further up the income scale you go, the more feasible early retirement should become.
The country needs the high earners to keep working past 55. However it is some high earners (and probably quite a lot now it has gone to DC pensions) who will retire early. Those further down the income scale will not have a choice.
Time for less tax on earnings and more tax on capital (and I say that as someone who has about 30 times gross earnings in tax wrappers).
@JonWB, you are so, so right, it’s a very complex game, where knowledge is therefore as huge an advantage as having been born already on the inside lane and it’ll only get harsher as meritocracy continues to atrophy.
Society is being driven by this regressive tax regime to polarise into the haves and have-nots, whereby only the former have choices. I see it as a none-too-subtle bribe to those who ‘get it’ to swing the vote for the elite who’re perpetuating the system: ”Keep us in power, then you can have a good life through the cake crumbs we’ll leave you and the masses will be gig-economy, serfs-for-life.”
It’s a slow-motion parallel to the socialising of the banks’ losses in the crash after they privatised the profits. (and still do, continuing to receive outrageous bonuses even at the nominally nationalised banks) ‘The nation’ (for which, read the unconnected masses) mostly pay the taxes but have their services endlessly cut in return, so effectively their progeny inherit a debt not of their own making. Those ‘in the know’ however, use their accumulated wealth to buy private services while paying as little tax as possible, so that their progeny only inherit assets. In this way, society divides increasingly via systemic inequality into master vs servant threads.
Timely article and agree that it is becoming increasingly difficult to judge where one stands.
One area I think that many would be surprised to find is open to challenge by HMRC is arrangement between husband and wife for CGT. Section 16a of CGTA (TAAR) provides wide ranging provision to disallow capital losses if they are part of an arrangement and are for the main purpose of avoiding tax.
The HMRC manual with lots of examples which might surprise you is here https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg-app9
For example, (number 4 in the link) husband sells shares in X at a loss and arranges for wife to buy shares in X the same day which she then transfers back to husband. Husband uses loss to set against gains in the year. A form of Bed and Spousing, Not allowed – falls within TAAR Section 16a. If the number of share are different or if there is a time period between transferring them back then this may change HMRCs view but it is not clear what is needed to be on the right side of the law. Amusingly HMRC say it is “OK” if the wife buys the shares “unbeknowenst” to the husband! Right…
Indeed that is the problem the law is so subjective. Many have argued that HMRC interpretation of TAAR is legally incorrect and that Section 16a is actually much stricter e.g. selling shares to create a loss for the sole purpose of offsetting a gain i.e. loss harvesting, should be caught. See for example https://www.taxation.co.uk/Articles/2007/08/30/199911/humpty-dumpty-tax .
The concern is that HMRC is providing this more generous interpretation BY ITS OWN CONCESSION, a concession it could choose to withdraw at any time and challenge even very simple CGT mitigation which relies on creating losses.
Good comments all (and thanks for chiming in Bob!)
What I’m getting at with the (escalating) examples I made is that we can see there’s a sliding scale, and if there’s a perception or reality that the zero point on the axis of what’s ‘reasonable’ is shifting (the goal posts are moving!) then something that was once deemed acceptable may not be in the future.
Of course, for the likes of defusing via deliberately harvesting capital gains under your allowance, bed-and-ISA-ing, or even more so offsetting with capital losses (very hard to see that one in particular ever being deemed unacceptable) I think there’d be regulatory change, rather than such operations having been deemed ‘unreasonable’ retrospectively. So for most of us who have never taken part in exotic style schemes it may seem academic. But I think it’s worth being alert to how the wind is blowing.
I think most of us if asked to represent the ‘prosecution’ side in a pub debate could make a good fist of arguing that deliberately selling shares/funds that you clearly want to own (because you re-buy them in a tax wrapper) is on some level a contrived operation designed to improve your net worth at the expense of the State. I am NOT saying it opens us up to any problems currently. I am saying when I look at the way regulatory line seems to have moved on this, it makes me uneasy. The examples from @JonWB illustrate the perception aspect well.
While I’m reluctant to hold Donald Trump up as a martyr to make my point, have a look at how his tax losses have been discussed in the US media. Here’s an angle from The New York Times:
Though obviously it’s the scale of his losses (and nature, and, well, he’s Trump) that have provoked the attention.
Re: PPI, I wasn’t questioning where the redress went, or even if it was right or wrong. I was just pointing out how “ignorance” (not meant in a pejorative sense) can have a polar opposite outcome, depending on legal judgement. PPI compensation was payed to people who ignorantly bought it (despite numerous articles I read on mortgages in the 1990s for example saying don’t, it doesn’t protect you). Whereas in the case of the film financing affair, their ignorance is apparently going to ruin some of them.
Most tax advisers talk (at least amongst themselves) about “the smell test”. This is a way to refer to whether a tax arrangement seems unobjectionable or not. If your gut reaction is that it seems a bit whiffy, proceed with great care.
Another accepted “truism” amongst tax advisers is that tax avoidance is what other people do. Everyone thinks that what they themselves do is tax mitigation/planning. (It is a bit like one man’s terrorist is another man’s freedom-fighter.)
The B&B rules seem silly anyway. Why not just accept that people have a £11k allowance to use how they will, rather than forcing them out of the market for a mere month, to suffer .3% dividend lost and 2 trading tenners. Its an example of a tax rule that adds complication, but delivers no extra revenue, as I doubt anyone decides to pay CGT rather than be out of the market. It just means people feel the need to pay fees to tax lawyers (sorry Bob!)
I’ve just read through some of the examples given in helfordpirate’s link about sale of shares to defuse losses. For a lay person, it’s quite hard to understand any moral or even technical difference between the examples they give which they deem acceptable vs unacceptable. In fact I can’t see why bed and ISA would be considered acceptable, given some of the examples they quote, when clearly the main purpose of that arrangement is to secure tax advantage!
I am also slightly concerned about how they view arrangements between spouses. My CGT routine involves selling assets to use up the allowance each year, effectively by swapping them between myself and my spouse – i.e. Sell one tracker in my account, buy the same or similar in spouse’s, and vice versa, so as to keep the portfolio asset allocation the same. I don’t transfer assets directly (not consciously, although taxman might deem me to have done – I actually have no idea how I would practically do that? It’s a bit of an alien concept as in my mind I consider our assets to be a single portfolio jointly owned.)
Just completed ISA deposits for the 16/17 tax year and noticed that as part of the declaration you have to confirm that you’re investing your “own money”. How many couples with unequal earnings share their cash out so they can both benefit from the ISA allowances? Technically that’s somewhere towards the naughty end of the tax mitigation spectrum, apparently.
Spouses can make tax free transfers of assets between themselves, so that’s fine. What they are trying to prevent is “rent an ISA” where someone invests for a mate in return for a cut. With the dividend tax allowance having dwindled to close to zero, this is something many people (including myself!) would do if legal.
Is salary sacrifice a form of tax avoidance. You can earn 50k and put 40k in salary sacrifice schemes and claim tax credits with a 10k salary. Extra 500 pounds a month from government. Weird. Legal but will one get in trouble in the future law changes?
Abuse of marriage and divorce to save tax.
Get divorced so you can buy additional property without the 3% stamp duty extra.
Get divorced so you can split your pension and both pay only BR tax on draw downs.
Marry your cousin so you can pass assets down the generations without CGT, or double your IHT limit or whatever.
There must be others but I have never been married so I’m not an expert.
Slightly off topic, but someone who invested in the film tax schemes and went to prison has written an excellent book about his experience, which anyone in the UK should read to understand the state of our prison system:
https://www.waterstones.com/book/a-bit-of-a-stretch/chris-atkins/9781838950170
@Mark — Thanks for sharing, that book looks well worth a read. I’ll see if it’s an Audible, which is my preferred non-finance book consumption method nowadays.
He got five years in prison! Let that be a warning to anyone walking a fine line who reads this article with a complacent shrug.
How about that extraordinary deal Starmer had for his DB pension by virtue of being DPP? I gather the framework predated Starmer but was it compatible with the modern interpretation of “evasion”? Had anyone ever thought to check?
Regarding the filmmaker who was jailed, a link to the trial here. ( Book does sound interesting though)
https://amp.theguardian.com/uk-news/2016/jul/01/film-producers-jailed-for-audacious-22m-film-tax-scam
What do “reasonable” and “reasonably” even mean in Britain in 2024?
I was looking into employment law recently and the concept of reasonable in the law seems to mean that you need to test out your argument in front of a judge in court as they are the final arbiters of the definition of what is reasonable when two parties disagree. And that renders the law effectively useless to ordinary people in conflict with rich and powerful people and organisations.
As well as “reasonable” (which is what a judge deems it to be), what does “loophole” mean? Does it mean legislation implementation incompetence? To even know something is a loophole, you need to know the “justification” used to implement a certain tax in the manner it has been specified. Otherwise, how can one know the “intention”? Perhaps the intention of all tax is extreme financial inequality; some would say it certainly looks like it from where we are heading.
The only “loophole” I ever found was the question on the tax assessment about child benefit and was due to incompetent implementation. The question wording may have changed now but I had to actually lie on my tax assessment for at least a couple of years to avoid an obvious loophole. The question asked if you earned more than your spouse (with the intention to claw back the benefit from the highest earner if above £50k). Well, what if you both earned or even had taxable income of exactly the same amount (say, £90k each)? That’s a “no” from her and a “no” from him.
Of course the real way to evade tax is to move to the Isle of Man and then run a business where you help others to avoid paying tax as well – be sure to keep your cut and don’t answer the phone if the savvy evaders come ar you when the tax man deems your blatantly illegal scam to not be totally above board.
And don’t let the ethics or legality of your past schemes prevent you from accessing millions of pounds of fast-track Covid money for overpriced and underperforming PPE.
@PK #21 you can salary sacrifice down to minimum wage and everything can go into the pension.
That brings your earnings to qualify for benefits down to be eligible.
But under UC rules, if you have assets like cash savings, ISAs, LISAs, GIA etc… above a meagre amount, you are ineligible.
So yes, the loophole exists (and indeed there was a FIRE blog of some 40/50 years olds with kids who had a million in pensions but were UC poor enough to make the Salary Sacrifice return on investment truly eye-watering.
Something like, pay £40k into pension and avoid £15k in tax and NI, and get £25k in benefits.
I only found out about the loophole myself after amassing too much wealth to be classified as UC-eligible, which is a shame. (It could have saved me £60k on childcare fees alone over the last 6 years)
And it’s not really tax evasion if you are using the existing rules as they are intended to be used.
Can I like @cat793 ‘s post please – as so very true.
I assume that buying individual low coupon gilts (so that you get most of the yield as a capital gain rather than interest – in the knowledge that capital gains on individual gilts are not subject to any capital gains tax) falls into the legally-permitted tax mitigation bracket. The argument would be that the government chose to offer low coupon gilts and chose not to tax the capital gain, so don’t complain if people buy them. Any disagreements?