Advisers have an important role in ensuring clients are not scared off by legitimate tax planning strategies
Most people know that tax evasion is wrong but, not so long ago, tax avoidance used to be thought of as “acceptable”. So the public could be forgiven for feeling a little uncertain these days as to whether it can ever represent acceptable tax reduction.
Uncertainty will have been influenced by the fact avoidance has had more negative publicity than evasion over the past few years.
Indeed, the confusion over what is and is not acceptable has led some to shun even the most permissible planning through fear of an HM Revenue & Customs challenge.
Given the importance of clarity in this area, official guidance is vital. The most useful comes in the form of the HMRC/Treasury policy paper entitled Tackling Tax Avoidance, Evasion and Other Forms of Non-compliance, published in March. Within it, tax evasion, avoidance, non-compliance and planning are all defined, along with a clear statement of the consequences of each:
- Tax evasion is always illegal. It is when people or businesses deliberately do not declare or account for what they owe. It includes the hidden economy, which is when someone hides taxable activity from HMRC completely;
- Tax avoidance involves bending the rules of the system to gain an advantage that parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law. Most tax avoidance schemes simply do not work, and those who use them may end up having to pay much more than the tax they tried to avoid, including penalties;
- Tax non-compliance is not getting your tax right the first time, for any reason. It includes evasion, avoidance and other behaviour, such as making careless errors or mistakes on your tax return;
- Tax planning involves using tax reliefs for the purpose for which they were intended; it is not tax avoidance. For example, claiming relief on capital investment, saving in a tax-exempt Isa or saving for retirement by contributing to a pension scheme are all legitimate forms of tax planning.
So that’s clear then. Tax-plan all you want but do not defeat the intent of parliament. Use tried and tested strategies that are contemplated by the legislation, or otherwise have been clearly and reliably accepted as “non-confrontational” by HMRC.
However, to conclude that ruling out aggressive or edgy tax avoidance arrangements means planning is then reduced to the easy stuff would be a grave misjudgment.
There are so many hard choices to make in all aspects of the financial planning process, and the consequences of making the wrong ones can be serious and financially detrimental.
Which brings us to the value of advice. Knowing that choices exist, knowing the consequences of those choices, and then making the choices that will have the most positive impact on the achievement of the client’s objectives is vital.
For example, which wrapper (after the no-brainers of pensions and Isas) will deliver the optimum after-tax outcome – UK or offshore collective? If offshore, reporting fund or non-reporting fund?
And what about enterprise investment schemes or venture capital trusts?
Or which trust is the best to use for estate planning? The list of choices – and consequences – goes on.
Making clients aware of those decisions, and telling compelling stories that illustrate the differences between choosing the right or wrong ones, is a key part of the process that leads to engagement and better outcomes.
And, importantly, especially in the new era of disclosure of costs and charges, this level of clarity will be a strong contributor to proving the value of advice.
Tony Wickenden is joint managing director of Technical Connection (a St James’s Place Wealth Management group company). You can find him Tweeting @tecconn