Business tax and snake oil schemes
Accountants’ tax duties
Times are difficult, but there are still many small businesses making profits, although those profits may well be under pressure. Some are making losses of course. It is fair for all business owners, whether they have companies turning over some millions, partnerships turning over hundreds of thousands or sole traders turning over tens of thousands to expect their accountants to ensure they pay no more tax than they should.
Tax planning by accountants should also include proper management of loss claims, because this also ensures that tax refunds are claimed to the maximum level.
In the case of profitable companies, there should be a good dividend policy so that the (usually) family shareholders pay no more personal tax on their income than they need to, and while accountants are not generally authorised to give pension advice they will remind their clients of the tax advantages of putting money away in the most beneficial way in order to minimise their tax liabilities. All well and good.
Arranging one’s affairs to pay less tax is what most people would think was fair. Not everyone would know of Lord Tomlin’s famous quote “Every man (and we can infer “woman”) is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.” (IRC v. Duke of Westminster (1936)
Increasingly, though, the Treasury has been concerned to get in every penny it possibly can out of the taxpayer, whether business or otherwise. In the Seventies, tax rates were very high for various reasons, and really it was in that period that tax avoidance became very popular, especially amongst businesses. In those days it was mainly very large businesses which had the wherewithal to try to avoid tax. Tax barristers and other experts pored over the statutes to find ways of channeling funds so as to reduce tax due from companies. Many of these means had no commercial reason for being, but were simply to reduce tax.
The game changer
In 1982 the Inland Revenue, as it then was, had two major successes with cases known as Ramsay v. IRC and IRC v. Burmah Oil Co. Ltd. Basically it was determined that any arrangement which has pre-arranged artificial steps with no commercial purpose other than to reduce tax liabilities would effectively fail. This is a simplification, but the rulings established what has become known as the Ramsay Principle, which would mean that any wholly artificial scheme to reduce tax would fail.
Of course this didn’t stop the game of tax avoidance, but tax specialists then tried other ideas which were not totally artificial, often using established principles, but which schemes would not have been set up without the objective of reducing tax.
In recent years, there has been a real crackdown on tax avoidance and HMRC have got very tough. All schemes which are set up with a view to reducing the tax liabilities of businesses and individuals have to be advised to HMRC and that means they can then address how these may be shut down either by changing the legislation or quite commonly taking the taxpayers themselves to the Tax Tribunal and perhaps to the Courts thereafter.
Snake oil purveyors
You as a business owner might receive a telephone call or an email suggesting that you might be able to reduce the business’s and your own tax liabilities though a special scheme. Sometimes the idea might be introduced to you as an “HMRC / Inland Revenue approved scheme”. There is no such thing as an approved scheme; only a scheme which has been advised to HMRC and has not yet been shut down. Such a scheme might of course work for you, but you would need a strong nerve and be prepared to have your tax affairs enquired into in depth. Most directors, partners and business principals would not sign up for that if they knew the risk.
So beware the snake oil salesman selling tax schemes unless you are a risk taker with a strong nerve and funds reserved to pay for the defence of your tax position. You might need to take something for your nerves in addition to the snake oil.