Unless you’ve just arrived in this country you may have noticed how much exposure the topic of tax avoidance is getting at the moment. In fact it seems to be one of the key issues leading up to the general election with every party explaining how tough they are going to be on the subject. For those of you that haven’t read some of my previous articles on tax avoidance I’ll just have a quick recap.

Tax avoidance is deliberately structuring your business activities to exploit weaknesses in tax laws that were intended for other purposes. It is not illegal as activities are conducted within the law but can often backfire as it relies on subjective legislation that can then subsequently be disproved in a tax tribunal or court hearing leading to back taxes and penalties being owed by the investors.

An example which has featured in the media recently is the film investment schemes run by some of the larger accountancy practices for their clients, they were able to fund movies and then claim tax relief for their clients to the extent of several times their investments. It’s falling apart now because a recent court ruling said that the movies were never likely to generate a profit and as a result didn’t qualify for the scheme.

This is a more prominent issue as it involves rich people who the media and working classes love to portray as villains but let’s think about a situation that effects many small business owners, the tax savings available between being a sole trader and a limited company. At what point does incorporation become tax avoidance?

It depends on your reasoning behind the incorporation, if you want the security and prestige of being a company director then yes incorporation is recommended. But what if you are only doing it for the tax savings, then surely you are committing tax avoidance? Now no one wants to admit to tax avoidance so if an owner director is asked to explain their decision around this than they will probably quote the reasons that don’t implicate them in avoidance.

Don’t get me wrong there are tax avoidance schemes that have subsequently been proven to be illegal and the people involved are rightly being prosecuted for them, but as a nation we are developing an attitude that assumes guilt when it comes to tax before a crime has been proven, this could lead to the UK gaining an international reputation for being a bad place for foreigners to invest which could only damage our economy.

If someone went into Tesco’s and bought a lawnmower which scanned out at £10 instead of £100 due to a system error should there be a national debate on that subject as well? Should they be treated as a criminal when all they did was get a good deal at the time? The reality is that everyone is trying to reduce their food, utility and housing costs so why does it suddenly become wrong to try and reduce their tax bill as well?

And a final thought I would like to leave you with is that if less money ends up in the hands of HMRC because of avoidance is it really lost revenue? If someone saved £1,000 a year because they worked through a limited company instead of as a sole trader and then spent that money in local shops and restaurants wouldn’t that create more jobs and lead to more people paying taxes anyway?

As accountants based in Northampton we help our clients stay on the right side of the law while saving as much money as they can through their tax bills or other business improvements, if you would like to find out how we could help you do the same then please contact us for a free intitial consultation.