Tax Planning is an acceptable form of planning of one’s own tax affairs in accordance with the Law. Tax avoidance is the wilful or neglectful failure to pay or account for tax, with the purpose of not complying with the tax legislation.
An example of tax planning may be a pension plan, which provides for income to be diverted into a saving scheme set up for your future without having to currently account for tax on the current sums received or any gains hereafter until you have to draw down from the pot (some of which still remains tax free). An example of tax avoidance could be the failure to account for income received or trying to disguise it as something other than income.
These activities, aside from distinguishing between what is planning and what is avoidance (which is a moving feast with each new legal change) are not solely the territory of small companies. It has been much publicised in the press that very large companies are also guilty of base erosion and profit shifting, where profitable parts of the international business are located in low tax jurisdictions.
However, done carefully tax planning is an essential and legitimate part of a company’s legitimate objective to minimise costs and maximise profit (in accordance with the director’s duties to shareholders under the Companies Act 2006). However, it must always be remembered that the company and its directors, as with any other individual or corporation, are required to act in accordance with the law and not deliberately avoid tax.
In recent years there has been a lot of bad press provided in respect of tax planning schemes, many of which were drafted in accordance with the necessary legal requirements at the time with the purpose of disguising remuneration.
The various Finance Acts and Tax Regulations that exist in the UK provide a structure for how tax should be accounted for and, provided any planning is in accordance with such legal obligations, then the use and benefit of such schemes can be properly regarded as tax planning rather than tax avoidance.
A similar comparable could be the method by which owner-managers of companies are permitted to draw their income as dividends rather than as salary, with significantly less tax obligations, although again the use of service companies in replacement of employee relationships has led to a substantial amount of these companies being placed into liquidation as a result of IR35.
When does tax planning become tax avoidance?
Where the scheme or manner of your tax arrangement falls within the relevant legislative provision then your tax adviser should inform you of this.
This question can be more difficult where the tax law is not clear, as it is largely reactive in respect of specific types of scheme and as new schemes often exploit a “Tax Loophole”, then this may not be clear. However, there are general anti-abuse rules which set out the hallmarks of a prohibited tax scheme, which a tax adviser should be able to identify.
There are additionally disclosure requirements which are commonly used to enable a clear line of communication with HMRC, with the attempt by a tax payer to ensure s/he has “clean hands” and is not seen to be seeking to disguise their remuneration.
Liability for non-payment of tax
Generally, as with any tax, a failure to account for tax or pay taxes late can lead to interest, penalties and surcharges being added on top. These costs are incurred for being late in acting in accordance with your statutory duties, whether you are an individual or a company.
Further, the actual failure to account for such taxes on income received (often via a tax scheme) has led to legislation proactively targeting such schemes as described above and imposing higher charges (25%) on income drawn as director’s loans and loan charges on any schemes where income is disguised as loans.
Between 2009-2011 legislation was introduced to address the problem with these loan schemes, which were becoming increasingly prevalent as a form of avoiding the payment of income tax (mainly PAYE/NIC) to HMRC. Typical examples are employee benefit trusts and employer-financed retirement benefit schemes.
At Francis Wilks & Jones we are able to assist with any disputes arising in respect of your tax affairs and particularly with regard to claims out of insolvency or claims for breach of misconduct and a director’s fiduciary duties.
Please call any member of our tax disputes team for your consultation now. Never settle for second best. Contact the experts today. We have been helping directors, companies and individuals since 2002