The headline grabbing rates that advanced tax planning offer do look great – less than 1% tax in some cases. But you can find yourself in the headlines, as Take That and Jimmy Carr have just discovered, for all the wrong reasons. It’s claimed that members of the band and JC invested millions into schemes designed to save vast amounts of tax. Although such schemes are perfectly legal, in the current climate of austerity it’s a move that’s unlikely to get much support.
In the Take That case an investment was made in the music industry and then, with some jiggery pokery, potentially turned into a much bigger taxable loss. This loss can then be offset against other income to reduce a tax bill. In the trade it’s known as an investment with a tax downside. In effect, an investment you can’t lose on. If it does well then you’ve made a return on your investment. If it doesn’t do well then you save tax. I’m sure there’ll now be a protracted argument between HMRC and the firm promoting the scheme as to whether the investment was just a front for saving tax or whether it was a real investment with any tax saving being a happy coincidence.
The cases do highlight that anyone undertaking such tax planning needs to fully understand the risks involved. Here’s my advice.
1. Don’t expect a Christmas card from the tax man. They detest these schemes and will do whatever they can to spook you.
2. Do expect a tax enquiry – so make sure you’ve no other skeletons in the cupboard.
3. Don’t expect a quick process. Often it can be years before you know if a scheme has really worked.
4. Understand that tax rules change, the tax man can re-write the rules and that a top legal opinion is just that. An opinion.
5. Understand that if the scheme fails you could be worse off than just paying the tax. That is what risk is all about.
6. Run a mile from any accountant who doesn’t give you chapter and verse on what the risks are.
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