Much has been written and discussed about the morality of trying to reduce the amount of tax arising from people’s income and assets. The law and tax professionals have long been clear on the difference between tax evasion and tax avoidance: tax evasion is a crime and is when people deliberately don’t pay the tax they should. This includes National Insurance not just duties labelled as “tax”. It also means paying less tax as well as nothing at all.
Tax avoidance is less clear cut, both legally and morally. For that reason, you are unlikely to find an absolute definition of what constitutes avoidance even from HMRC themselves. They do however state that they want to help taxpayers to “distinguish between artificial avoidance schemes and ordinary sensible tax planning”.
The emphasis now seems to be on differentiating between artificial or abusive avoidance and reasonable steps to take advantage of the existing tax laws to minimise current and/or future liabilities. What’s more, tax law is constantly changing so the decisions a taxpayer makes today may not be appropriate tomorrow. This makes it absolutely necessary to have a tax adviser who really knows their clients personal circumstances and who is up-to-date technically; it also requires the tax adviser and the taxpayer to have a relationship built on honesty, openness and mutual trust.
Government actively encourages tax planning, many of which are common practices but not necessarily seen as tax planning by the ordinary public. To name but a few:
- pension contributions
- charitable donations
- Entrepreneur’s Relief
- Enterprise Investment Scheme (and the newly introduced Seed Enterprise Investment Scheme)
- Business Asset Rollover Relief
- Inheritance Tax planning
Most tax planning incentives and reliefs come with conditions attached which is where the planning element becomes important. Some have time conditions, others have annual and lifetime limits or specify the exact nature of the assets involved. Many are relevant to private individuals and businesses. Some are specific to one or the other with significant overlap and interdependence.
If you run your own business and are thinking about your exit strategy, you should consult a tax adviser as soon as possible and start planning immediately. You also need to ensure that any past decisions will still achieve their desired outcome as tax planning should be an ongoing process not a one-off exercise. Even if your business is in its early stages, you should still take advice from a tax adviser as the choices you make now can have a major impact on the options available to you in the future.
Pensions, charitable donations, Gift Aid, Entrepreneur’s Relief, Enterprise Investment Scheme, Seed Enterprise Investment Scheme, Venture Capital Trusts, Business Asset Rollover Relief, Income Tax, Inheritance Tax, Capital Gains Tax, Trusts and Estates, Reinvestment Relief, Gift Relief, tax evasion, tax avoidance, tax avoidance schemes, tax planning