If you can legally save some tax, why wouldn’t you? Don’t all businesses use accountants to help them to save tax?
First of all there is a difference between tax evasion and tax avoidance. Tax Evasion is illegal, Tax Avoidance is legal!
So how do these schemes work?
There are various tax avoidance schemes set up, some for individuals some for organisations.
An example of a tax avoidance scheme for individuals is detailed below, some of the structured tax avoidance schemes are fairly complex
- - An individual (Person A) sets up a company in the UK as a director and is also then an employee of an organisation in the Isle of Man
- - The UK company receives income (Person A maybe working as a contractor somewhere and receives the income in his/ her UK company....e.g. Jimmy Carr)
- - The UK company is then billed by the company in the Isle of man for services provided by Person A, so in the UK the company pays more or less zero tax, as the income it receives equals the expense paid to the Isle of Man company
- - The Isle of Man company will then give the director of the UK company a small salary (no tax due on this), and the rest of the money as a loan from the company to the employee (perfectly legal for an organisation to give an employee a loan)
- - The loan is not taxable on the employee and the Isle of Man company has no corporation tax to pay for the income received from the UK company!
Tax evasion is not declaring and paying tax by illegal means. This is obviously unlawful and is usually a criminal offence and is subject to a prison term or a fine if you are found guilty. Tax avoidance on the other hand is generally perfectly legal within the scope of the law and is the legal use of the tax system to reduce taxes.
Organisations can avoid tax by various means, a recent example is Starbucks, despite having sales of over £400m in 2012 year, they only paid £8.6m in corporation tax in the previous 14 years of trading in the UK, and no tax in the last 4 years.
How was this done? The firm transferred some money to a Dutch sister company in royalty payments, bought coffee beans from Switzerland and paid high interest rates to borrow from other parts of the business, basically meaning its UK arm had little or no profits!
Another example is Amazon, which had sales in the UK of £3.35bn in 2011, yet only reported a "tax expense" of £1.8m.
Happy days for everyone? Maybe not.......
Whilst high sales does not necessarily mean an organisation has to then pay a lot of tax, as they may not be making a profit, but the commons public accounts committee who looked into some of the large organisations lack of tax payments, said it was extremely unlikely some of the organisations made no profits, or very low profits.
There is currently a debate about whether individuals and more importantly organisations who are operating tax avoidance schemes are ethically and morally right to do so, considering large organisations have external stakeholders who should also be important in the organisations decisions such as the local community and the government.
Organisations and individuals can save taxes in other methods, ok maybe not at the levels they save through these tax avoidance schemes, but there are other methods such as paying into pension schemes, or giving money to registered charities (which has a double benefit, the organisation saves taxes but the charity they donate to can benefit from the donations).
Less than 2 years ago, the national audit office has stated HMRC (the powerhouse in charge of collecting taxes) had a backlog of tens of thousands of cases of tax avoidance schemes to look into to check if they were legal, but this only totalled around £10bn of potential lost taxes. There are reports that tax avoidance is costing the UK economy around £69bn in lost tax revenues, £69BN!!!
So what can £69bn actually pay for? Well it can pay for ALL of the following:
- - The total cost of running the police force and its £222,000 employees (March 2013)
- - 381 tons of gold bullion
- - The fire service and all of its running costs
- - The full costs of running all the transport in the UK
- - Pay for the UN aid budget for a year
- - 20,000 military tanks
- - 20,000 single engine planes
- - Provide clean water for the entire globe
- - Feed 180 million poor people for a month
- - A CD for every single person in China
Reports suggest tax avoidance affects developing countries as much as it hits the UK, whilst £69bn is a huge figure for us in the UK, it is even larger for a developing country.
The good news is HMRC, are cracking down on tax avoidance schemes, and scrutinising these and closing some down. There are individuals who are being tracked down, and asked to pay taxes as they should have done in previous years like millions of other UK citizens who are employed and pay the regular taxes the government sets. However reports do suggest they are only managing to collect around 1% of the lost tax revenue.
Is it not about time the wealthy individuals and multinational successful organisations, who use these schemes, paid tax like the rest of us do in the UK?