Tax schemes, a ticking time bomb and the safe and sound alternatives

Tax Schemes, a time bomb with a short fuse

William Pitt (The Younger) is commonly regarded as the British Prime Minister (and Chancellor at the same time) who in 1799 introduced income tax to the UK.  The tax rate then was 0.8% for annual incomes over £60 and 10% for annual incomes over £200.  At the same time, tax planning, tax avoidance and tax evasion became common place and since that day individuals, businesses, accountants and lawyers have been working to structure their affairs to be able to pay the least amount of tax whilst adhering to the law of the land.

Aggressive Tax Planning

Aggressive tax planning has hit the headlines over the last twelve months as the government and HMRC have sort to adopt a new and different approach to increasing the tax take, name and shame.  From well-known comedians to international coffee chains there has been a campaign to highlight those who have chosen to adopt strategies that, whilst legal, some would note as aggressive tax planning.  There appears to have been some success with this as the government and HMRC play the morals card.

The Key Issues of Aggressive Tax Planning

It appears to be the greatest unspoken secret of personal and business wealth management, but despite what the press has reported over the last 12 months, most people in business know someone who has taken advantage of a “tax strategy” that in some way could be seen as aggressive.

Over the last 15-20 years, and starting with film industry partnerships, a whole industry has evolved from tax planning and in particular huge sums of money have gone into various schemes and plans, which initially was the domain of bankers’ bonuses.

Some of the more “exotic” strategies are, however, not only legal, but quite robust in their commercial structures and approach.  There are common issues and pitfalls, however, surrounding a lot of the more aggressive schemes:

• Some fail a number of years after introduction as HMRC challenge and successfully expose errors in the structures, leaving the tax payer and their advisers to negotiate a settlement.
• Many come with Tax Counsel/Barrister opinion, which are sold as reasonable guarantees of their legal robustness.  If you care to fully read these opinions, many do not fully support the structures, as they only address a number of key areas.  Many of the opinions do, however include significant health warnings.
• Typically providers of the schemes are a sales organisation.  The fine print will note the warnings and point to either some limited help or no responsibility, when things go wrong.  The key point to note is that this may not be for the long haul and such help will fall on your accountant and adviser.
• Some of the providers have chosen closure and insolvency before HMRC could expose their potentially flawed structures.

Many of the largest accountancy businesses, which have built their business on the sales of such schemes have either closed the schemes, as well as seeking to ring-fence their business units which have provided the schemes.  This does not say much about how they are supporting their clients, but the clients will find out when they try and get support or when they try and make a claim against them.  We always stick by our clients as well as helping and supporting new clients who find themselves in this position.

The Safe And Sound Tax Planning Solution ©

We do not say that such tax structures and strategies are wrong or illegal and some do form part of certain solutions.  Some are both commercial and can offer users and tax payers other commercial opportunities, such as potential returns from development properties and new technologies.  Our role, however is always to make clients aware of what can be done and what is available and outline the legality and risks involved.

Our starting point, however, is always to discuss and offer SAFE tax planning ©, which is bespoke to each and every client and forms what even Mr Cameron has said to be sensible tax management.  Here are some of the legal, safe and sound tax saving approaches that we use to save our clients significant amounts of money, whilst ensuring that they also win the legal argument, the commercial argument and the moral argument, if they ever get challenged by HMRC over their affairs.  We see it as safe and morally sound tax planning:

EIS and Seed EIS for new start-up limited companies

The newly introduced Seed Enterprise Investment Scheme (SEIS) is an attractive source of funding for early stage trading companies and an exciting tax advantaged investment opportunity for business angel investors.  Key facts relevant to SEIS are as follows:

• SEIS is available for business angel investors and early stage companies seeking seed funding
• Investors can receive 50% income tax relief on investments up to £100,000 per year.
• SEIS investors will pay no capital gains tax on ultimate disposal of their shares
  • Companies are limited to raising a cumulative maximum of £150,000 under SEIS – after this, they may be eligible for SEIS’s Big Brother, EIS, provided 70% of the SEIS cash has been spent.
  • An investor cannot control the investee company with share subscriptions limited to 30%. Investors can be directors but not employees.
  • Companies can obtain advance assurance on whether the company is a qualifying SEIS company from HMRC.

Incorporation of unincorporated businesses

There are many unincorporated businesses trading in the UK.  Sole traders, simple partnerships and Limited Liability Partnerships, which are still an excellent and sensible way to start a business.

There is still an excellent opportunity to reduce a tax cost to 10% and less, by seeking to transfer an unincorporated business to a limited company.  This can be done with approval from HMRC and can potentially save tens and sometimes hundreds of thousands in tax.  This route often gets missed as many small businesses believe that the costs of running a limited company outweigh the savings, which is far from the reality.

Research and Development

Currently claims for research and development costs attract tax relief at 200%.  This equates to HMRC potentially providing 25% of the cash required to develop new areas with your business.

Another statistic widely quoted is that 85% of German businesses claim a similar relief, yet only 15% of UK claim R&D relief.  The chances are that your business could be eligible to make this claim and yet many businesses are failing to look at this valuable area.

Growth with LLPs

Most businesses are building new business areas, products, services and customer location.  Yet most are also missing an opportunity to reducing their tax costs in these areas to below 10%, as well as taking advantage of £10,000 annual tax free reliefs.

With some thought as to how you can structure your new business ventures using limited liability partnerships, LLPs, there are significant savings to be obtained and this can be maximised over a 3 – 5 year period.

Try Safe and Sound Tax Planning ©

Many accountants and tax advisers have sold tax schemes and plans, which whilst are legal, they do not fit the government and HMRC’s definitions of appropriate and moral tax management.

We, however, believe that before such structures are discussed and offered, many small and medium sized businesses would benefit from a number of safe and sound tax planning routes, that will save significant sums of money, but will also ensure that any moral, legal, commercial or other such disputes with HMRC are avoided.

You could call it tax avoidance avoidance!!!