Thursday, 21 June 2012

Is Jimmy Carr's tax scheme legal?

There are a lot of rash statements being made about whether or not the K2 tax avoidance scheme used by Jimmy Carr was "legal".

The implication being that if it wasn't, it was a bad thing to do - obviously. And if it was "legal", well that's OK, then - even if the PM says it was "morally wrong".

Unfortunately, tax is a bit more complicated than that.

Tax evasion is the illegal thing. It happens when people deliberately don't pay the tax they should. It's criminal.

Tax avoidance is the arrangement of a taxpayer's affairs in such a way as to pay the least amount of tax legitimately.

A fine line? Some would say so.

However, Revenue & Customs is referring to K2 in the category of tax avoidance, so let's concentrate on that.

Just because a scheme is classed as tax avoidance doesn't mean it's all right.

Usually, it has to be registered with HMRC, so they can check if it complies with tax rules.

If HMRC decides it's not acceptable, then the taxpayer would have to hand over all the unpaid tax along with interest and, possibly, penalties.

Basically, officials treat the underpayment of tax as a mistake.

It could be that the scheme takes advantage of some obscure loophole. In that case the tax people would get the Treasury to change the law, but the scheme's users would get away scot free until such an order was made.

So the Jimmy Carr ruse isn't being talked about by the authorities as illegal, but that doesn't mean he won't have to pay back the tax.

HMRC's line is that K2 is being investigated, they don't think it's compliant and that they'll challenge it anyway.

Another phrase being bandied about is "tax abuse" which, confusingly, can be applied to both evasion and avoidance.

A tax avoidance scheme which the Revenue finds to be a blatantly artificial construction to dodge tax could be an abuse.

There will soon be a General Anti-Abuse Rule to deter this sort of dodging. Some accountants say it will "kill it stone dead", others that it'll just lead to more complicated disputes.


  1. Hi Simon

    Thanks for a piece of reporting that starts to get near the truth about "legal tax avoidance". The fact is that at the moment absolutely no one knows whether K2 is legal or not. I say this from the perspective of 30 years experience of investigations of such arrangements. The people who devised it no doubt have a counsels opinion that says what they are doing is legal. Its a fact that from invading Iraq, to tax avoidance you can find a counsel who will tell you what you want to hear. No one will know whether these arrangements are legal until they have been thoroughly investigated and the facts and law are put before a tax tribunal and ultimately the House of Lords. This process usually takes up to 10 years. The people who sell these schemes know this but like bankers all they care about is their next bonus.

    The real problem here is that our tax system has become so complex and opaque, professionals/fraudsters can take advantage of that to muddy the waters and make a quick buck duping clients with sophistry about what they are doing, whether the client gets the tax benefit or not, the adviser always wins. Unless the adviser is not as smart as he thinks he is (all to frequent) and HMRC do their job properly and the adviser ends up in jail (all too rare).

    I'm sorry to say the General Anti-Abuse Rule will not stop the tax avoidance industry as it has been drawn too tightly and mirrors lots of specific anti abuse rules in different parts of tax legislation that have long been ineffective. We need the principle established by the house of lords in Ramsey to be put into law and that will do the job. Our morally repugnant politicians will never countenance that as it will interfere with their own arrangements and those of their mates, the 1% for whom these arrangements work at present.

    For me this corruption at the heart of the rule of law is what puts us on the slippery slope of ending up like Greece. Another point, why doesn't the bar council tighten up on the sleazy end of its membership that provides the cover for this abuse to take place. Why is this question never raised in the msm?

  2. Thanks - that's very interesting