Paul Lewis: ‘Evoiding’ the issue – when legal tax avoidance is anything but

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.

Paul Lewis: The end of advice as most know it

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.

Paul Lewis: If acronyms solved problems, the industry would be squeaky clean

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.

Tony Wickenden: New rules on IHT tax avoidance disclosures

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.

Paul Lewis: Investing in gold

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

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Comments

There are 18 comments at the moment, we would love to hear your opinion too.

  1. “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.”

    Really Paul, your figures do not add up when you take account of the number of higher rate taxpayers and the very restrictive LTA’s etc.

    • Pension tax relief is around £41 billion. The NHS budget is £116 billion. So Paul understated the percentage, as it’s 35% not 25%.

      • Your figure is revenue expenditure for England only. My figure is correct for UK total spending.

        • I’m agreeing with you, just pointing out it’s worse than you stated! The vast majority of pension tax relief is higher or additional rate, and has ballooned in the last 7 years. From a moral point of view, it is inequitable that so many (myself included) have benefited, when for example a flat rate of 30% would do far more to improve the future finances of those less well off.

          • The idea of a universal tax relief rate of 30% is often bandied about, though have there been any meaningful estimates of just how much such a measure would cost? If so, I’d be interested to see it/them.

            What it would mean is a 25% reduction to the amount of relief presently allowed on contributions made by made by HRT payers, set against a 50% uplift for basic rate tax payers.

            If we assume that HRT payers would almost certainly maintain their current levels of contributions (albeit somewhat grumpily) whilst BRT payers would increase them (the presumed intention), the increase in costs to the Exchequer would be huge. All the newly embarked upon contributions to AE workplace schemes are already costing the Exchequer a fortune, so the government is highly unlikely to be prepared to add to that. The idea is a non-starter.

            FWIW, I’m firmly of the view that everyone should be allowed tax relief on pension contributions at their highest marginal rate and that high earners have already been hammered beyond what’s fair and reasonable on the amounts of qualifying contributions they can make.

        • Paul
          It’s not the figure that Finian and I disagree with – but your assumption that it reveals the “wealthy” are disproportionately benefiting from taxpayer subsidy.
          There was an article on here a month or two back that looked into the figures and came to the conclusion that I have been arguing for at least a couple of years now.
          This is that the attacks on the amount that the wealthy can contribute to pensions from reductions in the Annual Allowance, Lifetime Allowance, and introduction of Tapered Annual Allowance has been more than offset by the increase in Automatic Enrolment contributions and employer contributions to DB scheme deficits.

  2. I would take issue in the case of SEIS/EIS schemes that operate under the new guidelines, who cares what the intention of the investor is, whether to obtain income tax relief, Capital Gains deferral or reduction, and IHT exemption.

    If they are fortunate to have sufficient wealth to justify using these approved schemes then good luck to them, all animals are not created equal and this sort of attack on the more well off has some political undertones that we need to be careful of.

    By investing in these schemes, and I include myself in this, there is a risk of loss of capital, which I have experienced, so it is not always a win win situation and start up businesses receive vital funding. Tax advantages are the compensation for the risk, if there is no risk then I would agree that such advantages should not be available.

  3. Robert Milligan 23rd April 2018 at 12:25 pm

    Lets hope the those now having to pay the correct amount of Tax, Recoup the Fee’s paid in getting the advice, I expect they were a % of the intended Tax saving!!Mind you, I suppose they will claim Tax Relief on the loss! Perhaps the HMRC should not allow these as an allowable Business Relief.

  4. As someone who spent the majority of their private-sector career in the tax planning sector – originating film schemes, EIS and the like – I’d offer some very simple rules of thumb in this space:

    * Anyone that lets the tax tail wag the investment dog is going to regret it.

    * Always look to capacity for loss, and understand what the maximum (leveraged) downside is.

    * If you don’t understand it, don’t do it.

    * If you DO understand it, talk to someone else who also does, and make sure you understand it the same way.

    And of course “avoision” is the right word – “avoidance” crossing over into “evasion”.

  5. John Hutton-Attenborough 23rd April 2018 at 2:27 pm

    As it would appear that many “duped” struggle to understand the offside rule is it a surprise that they did not understand the complexity of what they were investing in, or what was being flogged to them (I do not expect a great deal of “advice” was part of the package)?

  6. This seems more of a political piece than anything else and the undertone appears to be that wealthy people should just pay up and be done with it.

    But it’s not that simple, there is a balance to be struck between taxing and taking. If the latter gets too pervasive then the former will take up and leave and then there’ll be even less left for the takers.

    Income tax – the penalty you pay for being a productive member of society?

  7. Adam Smith is nearest the mark….the tax relief is in exchange for risk borne. So not just the wealthy but those with an above average risk appetite too.
    With the LTA at just over a £1million and annuity rates on the floor there are no clients who can maximum fund who would end up with an excessive pension.Paul beware the politics of envy! A post Brexit Britain must be brimming with enterprise and every incentive should be given (as long as it is what parliament intended!!!).

  8. John Hutton-Attenborough 24th April 2018 at 9:34 am

    Lord Clyde, President of the Court of Session, ruled in 1929: “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.

    “The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”

  9. Ever tried to trade out of an EIS or a VCT? I’d rather not advise than set a client up in one of these schemes.

  10. It seems to be more than coincidence that when all this bleating about tax avoidance – perfectly legal – rises up the agenda it is normally the case that most consider tax too burdensome.

    Odd isn’t it that when Margaret Thatcher was around, tax receipts were never better – as she kept reducing tax and didn’t have all these sneaky stealth taxes. Odd isn’t it. the Government can impose stealth tax without blinking, but if ‘stealth’ tax planning is involved they cry foul. Odd too that these same parliamentarians are allowed all sorts of expenses and tax breaks (second homes etc.) to which the general public are excluded.

    Is it any wonder we have disenchantment with the political status quo.

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