Keep clients clear of the increasing grey area between tax avoidance and evasion
It is a living language, English, and I like to have a neologism or two ready for when it needs, you know, improving. But when I write or tweet the word “evoidance” I get nothing but flak. “Spellchecker on the blink?” is usually the kindest, if dullest, riposte.
But the Daily Mirror’s exclusive front-page splash earlier this month: “£250m tax bill for 129 Prem stars” illustrated the word perfectly (also reported in Money Marketing here).
It does not take much to work out that the average bill is close to £2m each – more than most of us will earn in a lifetime. None of the players were identified but were described as “household names” who play for famous clubs including Liverpool, Aston Villa and Manchester United.
In fact, the “exclusive” was an update on a story The Sunday Times ran in November 2015, which did name many of the stars involved.
The scheme they used takes advantage (as most tax evoidance does) of a well-meaning chancellor trying to boost a bit of the economy – in this case, the film industry.
But the simple fact of investing in a film and getting tax relief on it was supercharged by a clever wheeze whereby £200,000 put in was used to generate a loan of £800,000, creating a much larger tax loss than the original investment. In this way, tax was evoided on a big chunk of the stars’ earnings.
This particular scheme claimed it was about tax deferral rather than paying less tax, as the loan would eventually be repaid. But that was not accepted by HM Revenue & Customs, which saw it as a sophisticated means to avoid tax.
In the Revenue’s manual, sophisticated + avoidance = if not evasion then aggressive avoidance. In my term, evoidance.
It is highly unlikely the footballers understood the detail. The arithmetic is a lot more complex than distinguishing 3-4-3 from 4-2-4. They have people to understand these things for them. And if you still do not quite see how the scheme worked, do not worry – few outside the tax business can truthfully say they understand the complex mechanism that makes it work. Or rather, was intended to work, because it turns out it did not.
And that is why it so clearly falls in the basket of evoidance – something sold as legitimate avoidance but which turned out not to be allowed within the complex tax laws.
In fact, HMRC now adopts different terminology. A spokesman explained: “Tax avoidance is bending the rules to gain an advantage that parliament never intended.”
This definition destroys the simplistic arguments of critics who say: “what about Isas? Are they not avoidance and the same as the film schemes?” No. Isas were set up by parliament with a single purpose – to encourage people to save by making them free of tax.
So anyone who uses them for that purpose is doing what parliament intended. In fact, HMRC now calls this tax planning, not avoidance.
Similarly, putting money into a pension. The Treasury has put layers of complex restrictions around just how much can be put into one to prevent any veering towards avoidance or worse.
To me, it certainly is avoidance when people put far more into a pension than they could ever need to live on in retirement with the objective of leaving a large amount to their children outside the inheritance tax rules. That was not parliament’s purpose, though, for now, it is tolerated.
The cost of tax and National Insurance relief for pensions is expected to reach £41bn in 2017/18 – a quarter of the cost of the NHS. Most of that public subsidy is due to wealthy people salting away large amounts of money tax free. There must be better things to do with public money.
Other wheezes are harder to categorise. There are legitimate and illegitimate ways to reduce a tax bill using the alphabet soup of EISs, VCTs, SITRs, or SEISs. I remain sceptical about whether these acronyms achieve their stated purpose.
I certainly know advisers who make a good living putting their wealthy clients into such schemes, not to boost small businesses or support social enterprises but to reduce their tax. That is why clients pay them well for their advice and put in up to £2.3m each to get 30 per cent tax relief on their investment.
So, what did this large squad of booted film buffs think they were buying when they gave up a hefty chunk of their easy-earned? Perhaps they really were fulfilling a childhood dream to support the Disney empire. Or were they simply ‘enchanted’ by the prospect of paying less than 40 per cent of their wages in tax?
Of course they all believed it was legal. And well worth the £5m in commission the salesmen at the firm which marketed them (Kingsbridge Financial, now in liquidation) were reported to have earned.
Let us not forget the role the banks played by lending them money to turbocharge the losses they could claim. Some of the players say they were duped and were victims of “appalling misselling”.
Hence evoidance – the grey hinterland where something thought to be legal avoidance turns out to have been outside the law all along.
My new word has not yet been declared officially part of the English language. For some odd reason, Oxford Dictionaries prefers the blend “avoision”. Give it 10 years.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney