Helping clients to be as tax efficient as possible was once seen by accountants and business advisers as a creative challenge. An interesting – and dare I say enjoyable – part of the job. Finding a legal and effective path through the maze of tax law to the benefit of individuals and businesses alike. But now the line between tax planning and tax evasion has become increasingly blurred.

The Panama Papers, the offshore havens, and the outcry over the tax affairs of large multinationals has meant public and political opinion has shifted to view all tax planning with suspicion. But what is the ‘fair’ and ‘ethical’ amount of tax to pay? Why shouldn’t individuals and businesses arrange their affairs in the most efficient way possible? And why should we expect anything other than aggressive schemes and a tax evasive attitude in the profit-driven free market we all operate in?

THE CLIMATE CHANGE OF TAX

Tax avoidance, so the argument goes, means you arrange your affairs to legally minimise the amount of tax you owe. Tax evasion, on the other hand, relies on an ‘untruth’ about the tax saving and is likely to be considered a criminal act. In simple terms: tax avoidance is legal and so is fair game. Tax evasion is illegal and you stay well clear of it.

But now, we find ourselves in an environment where the climate has totally changed. The two are increasingly seen as being one and the same. David Quentin – a tax barrister – has gone as far as to say:

“It is highly misleading to claim that tax avoidance is ‘legal’ and tax evasion is ‘illegal’ since (a) tax avoidance is often ineffective – meaning that the taxpayer paid less than was legally payable and (b) just like tax evasion, tax avoidance can be based on lies.”

SCHEMING

And he’s right that tax avoidance is often inefficient and ineffective. Many tax planning initiatives are seen by the HMRC as questionable schemes. The HMRC then challenges them and the schemes are overturned. Which isn’t efficient for anybody. But these schemes aren’t usually based on lies. They’re based on advisers being creative and then finding – and taking advantage of – existing loopholes.

Furthermore, these schemes are verified by experts – barristers who confirm the legality of the initiative – and they’re registered with DOTAS (Disclosure of Tax Avoidance Schemes). They’re independently corroborated and then fully disclosed.

So. This sort of tax planning is seen to be legal. But is it ‘moral’?

A QUESTION OF ETHICS

The issue of ethics is arguably more pointed in the PLCs. They often consider their shareholders first and foremost – a pension fund, for example., who may invest only in the companies that give them the best returns. So if returns are negatively affected by higher tax liabilities, then they could see this as a problem.

The Googles, the Amazons. The Starbucks. They may well have done nothing illegal. They’ve possibly arranged their tax affairs efficiently. But the fact that they haven’t paid tax in an area they operate is challenged and it’s frowned upon, and it’s labelled ‘immoral’.

Yet you ask anyone whether they’d like to legally lower their tax bill. What are they going to say: no it’s immoral? Or yes please? You could argue that human nature’s default setting is not to pay tax…

The other moral issue is that we live in a democracy and elect a government which sets tax policy. You may disagree with the ways in which that government spends your tax revenue. The question is then whether you should try and reduce the amount of tax you pay so you can spend more on your family. Or whether you pay the maximum amount to support both the government and society.

SUPPLY AND DEMAND

There’s always been a balancing act between the HMRC and tax advisers. The former setting tax policy and the latter working within it to find tax effective solutions for their clients. There’s an argument that the large number of people working in the tax profession versus the smaller amount working for the government mean that it’s a game of cat and mouse that the HMRC can’t win.

But I’m not sure the numbers game is relevant: if the government thought that there was a way they could generate more tax revenues by hiring more staff, then why not put more resource into it? They’d get a return on their investment.

Of course, the counter argument is that HMRC isn’t very efficient. They fail to make tax law clear and there will always be loopholes that can be exploited as a result. And I think this leads us to the issue of supply and demand. If the tax payer demands tax planning services from the professional, then the tax professional will provide them. Who’s at fault – the tax payer who wants the efficiencies or the professional who helps implement them?

GREY AREAS

It’s more difficult than you might imagine for an accountant to advise on what’s a good piece of tax planning and what isn’t. You’re looking at a range of levels. At level one, you have government sanctioned tax planning initiatives that are all deemed legitimate – making pensions contributions, contributions to ISA’s, and capital gains exemptions. Then at level ten you have complete tax evasion. And everything else in between is a bit of a grey area.

It’s a complex issue. With more questions than answers. So perhaps the best advice is to remain neutral and listen to your clients. If they’d like to reduce their tax liability then advise them how to do it it legally. Tell them what the risks are and whether a scheme is likely to have consequences.

It’s then their decision. It’s their tax affairs. It’s up to them. Be there to advise your client and impart your knowledge as to what may be frowned upon and what’s accepted. That way as advisers we can honestly say we’re doing everything we can to help clients make the right decisions. And to help promote the idea that tax ‘planning’ shouldn’t always be a dirty word.

Do you have some questions about tax planning for you or your business? Give us a call on 0208 238 8730 or get in touch here