High profile cases of tax avoidance in the UK recently have proved one point, we may not like it but most tax avoidance is often perfectly within the law.
Tax has historically
always been a controversial subject. Who pays taxes and how much
they pay often being a sore or sensitive point. And when you hear
about tax avoidance, it can immediately provoke a hostile reaction,
with people immediately, and often erroneously, assuming some law has
been broken.
That tends to be the
common reaction, and in the UK, a number of high profile figures have
been pilloried in the press for their tax avoidance. But under
scrutiny, most such individuals may be the recipients of moral
outrage but rarely legal retribution.
The reason being is
that they are taking advantage of perfectly legal tax avoidance
schemes. One of the most common schemes utilised by high earning
individuals revolves around remuneration trusts. In the UK, they
represent perfectly legal tax mitigation schemes.
They operate by
allowing an individual or company to use an offshore company to
invoice for their services rather than paying them directly, which,
unsurprisingly, provides a whole host of tax benefits. The offshore
company can then, without breaking any UK tax law, transfer these
funds to a UK company to invest on its behalf. Because the money is
held on trust for the offshore company, there is no tax payable on
the UK company’s investment or the profits it then accrues from the
investment. Additionally, the offshore company can pay loans to
private individuals who receive these loans tax free.
Naturally, remuneration
trusts prove one of the more robust and legal tax avoidance
strategies, but they are only accessible to high earners, usually
companies, shareholders and individuals earning in excess of
£100.p.a. Such schemes have been accepted by HMRC in the UK since
1994, and have been scrutinised by legal opinion too. As such, they
remain perfectly legal, and serve as an important distinction when
talking about tax avoidance.
Anyone who evades
taxes they should be paying is subject to the rule of law, and can be
rightly persecuted. However, when an individual undertakes perfectly
legal tax planning strategies, the question is one of morality rather
than legality. And, whether an individual should be allowed to
legally avoid taxes by such strategies is also a political question.
Currently in the UK,
there are numerous tax mitigation schemes which can legally help high
earners, but changes in government could in the future render such
strategies illegal based on a view that high earners should not be
able to avail themselves of tax planning strategies unavailable to
all.
But, for now
, they are
accessible to high earners and it pays dividends when hearing about
high profile individuals engaged in tax avoidance to read between the
lines and ascertain whether they are engaged in illegal activities or
merely taking advantage of the numerous legal tax schemes such as
remuneration trusts which provide them with substantial tax benefits
on their earned income.
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