In the past, creative tax planning tended to mean finding loopholes in the tax law and exploiting them for your clients. In many cases that could result in your wealthiest clients paying no tax at all. Less wealthy clients could not afford many of the more sophisticated schemes, especially as they would usually need to pay for a barrister’s opinion, which never comes cheap, but may have benefited from some simpler strategies and reduced their tax burden a little. The least wealthy clients could not afford any of the schemes on offer and paid the full tax Parliament intended. This turned our progressive tax system on its head, resulting in a system more accurately described as regressive – the wealthier you were the less tax you paid.
This may seem inequitable, and actually it was! But as long as the opportunities were there and were not too high a risk it was appropriate for a clued up adviser to alert clients to them, even if that adviser did not actively promote such schemes.
Over the past few years, however, the mood of the government, the media, and the general population has changed. What used to be perfectly legitimate is no longer regarded in the same light. It may be legal but it is now seen as morally distasteful. The combination of public mood and witch hunts conducted by the popular press can make abusive strategies very unwise, as Michael Caine, Gary Barlow, Wayne Rooney and Jimmy Carr all found to their cost.
We are now in the new “GAAR era” – if specific anti-avoidance legislation does not outlaw an avoidance strategy, the General Anti-Abuse Rule probably will. Courts are also far less willing to allow any abuse than they were at the time of Lord Clyde’s quote in Ayrshire Pullman Motor Services v Inland Revenue (“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”). It would be a rash client, and probably an even rasher adviser, who would still consider finding loopholes in the law an acceptable tax planning strategy.
However, the demise of tax loophole planning certainly does not mean it is no longer possible to be creative in designing tax planning strategies. There have always been a number of ways of planning one’s financial affairs, some of which result in lower tax bills than others. This is still the case in the GAAR era. It is up to the taxpayer how to structure his or her financial affairs, and if that structure results in more tax being paid than is absolutely necessary HM Revenue & Customs are not going to complain. Equally the Revenue will not object if the taxpayer arranges things, in line with what parliament intended, such that less tax is paid.
As advisers we should remain aware of the strategies clients can adopt in order to reduce their tax bills, and not let them blindly pay more tax than is absolutely necessary. Ideally, though, these strategies should not be stand alone, and certainly not packaged products. We should simply look at the most tax effective ways for our clients to reach their goals. Always, of course, remembering that the tax tail should not try to wag the investment dog, and that the best investment for a client’s particular circumstances may well not be the most tax efficient investment.
In some future articles I will outline some specific ideas for creative but perfectly legal tax planning. The first of these articles will focus on income strategies for small business owners. If you are on our mailing list, keep your eyes open for this article, which I believe will be relevant to most advisers. If you are not on our mailing list, please leave your details here so you don’t miss out!
Graham Dragon ATT (Fellow)