In this age of austerity, taking steps to minimise your tax
bill can be seen by some to be a little selfish. The Social Market Foundation
reported last year that the gap between rich and poor has widened significantly
in the last decade. So for the wealthier members of society to take steps to save
tax, when such planning opportunities are less readily available for the less
well off, perhaps increases the sense of unfairness.
We need to make a distinction here between tax avoidance and
tax planning. Tax avoidance schemes are often complex and high risk
arrangements that take advantage of loopholes in the tax regulations. A high
profile example was the case of the comedian Jimmy Carr using a legal but
morally questionable scheme several years ago which led to him paying as little
as 1% tax on his earnings. HM Revenue and Customs has tightened up the rules on
tax avoidance schemes in the last few years. Promoters of such schemes have an
obligation to disclose them to HMRC and they have specialist task forces to seek
out rule breakers. Many accountants and professional advisors would not
recommend avoidance schemes to their clients. Leaving aside the ethical
arguments, the risks are high with HMRC winning 80% of avoidance cases the
taxpayer chooses to take to court.
Tax planning however, that is, working within the tax
regulations to minimise your tax liability, is a sensible approach for many
people, particularly those with more complex tax affairs. One of the most
famous quotes in tax planning comes from Lord Clyde in a decision he gave in
1929, ‘No man in the country is under the smallest obligation, moral or other,
so to arrange his legal relations to his business or property as to enable the
Inland Revenue to put the largest possible shovel in his stores’.
So what kind of measures would come under the scope of tax
planning? Well often this is taking advantage of tax breaks the government has
put in place to encourage savings and investment eg maximising pension
contributions, making use of annual ISA allowances, using business investment
allowances etc. There are also planning steps for married couples and civil
partners to spread asset ownership to make maximum use of capital gains
exemptions and income tax allowances. Planning the timing of asset purchases
and disposals across tax years can also be a useful planning step. For business
owners, drawing income from their company in the most tax effective manner is
good practice. None of these are radical steps likely to attract the attention
of HM Revenue and Customs. With care and often with professional support such
steps can help you keep more of your hard-earned income and gains. What you
choose to do with the extra money is then up to you, rather than HM Government.
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