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.

Revenue condemns tax avoidance scheme

From Revenue and Customs on the K2 tax avoidance scheme highlighted in the Times - which Jimmy Carr allegedly used to shelter £3.3m:

Regarding the K2 scheme, all we can say is:

"This scheme (K2) was already under investigation by HMRC. If, as is alleged, it depends on the use of loans it will not work.  HMRC are looking into this. If the scheme does work technically, HMRC will challenge it in every way available to them. Government does not intend anyone, no matter who they are, to get away with paying less than they should."  

More generally, on tax avoidance, our comment is:

“HMRC is extremely effective at shutting down tax avoidance schemes fast and effectively. The avoidance “industry” has been seriously undermined by HMRC’s focus on tackling avoidance – preventing billions of pounds of tax being diverted from the Exchequer.

“In our 2010 spending review the Government made £917m available to us to tackle avoidance, evasion and fraud. This is being used to ensure a level playing field for all taxpayers.”