Tuesday, July 14, 2009

Tax avoidance schemes - a simple guide

Further to this morning's post about the difference between legal and illegal tax avoidance - where do tax avoidance schemes sit?

Most tax avoidance schemes are structured so as to be legal rather than illegal. And they tend to be more in the way of 'wipe-out' schemes than simple reductions in the overall tax liability. But that's not the whole story.

Anyone who gets involved in structured tax avoidance schemes needs to be aware of and willing to accept all of the consequences and risks as well as the headline (hoped for) tax savings. Many promoters focus only on these and minimise the risks - after all, they only earn their commission if you or your client go ahead.

At least one promoter I know claims to be more honest than most when talking to people who have expressed interest in his schemes. Apparently he explains that anyone who would be worried sick by the inevitable Revenue enquiry, the letters, the demands, the time it takes to resolve and the inconvenience should NOT get involved in his schemes – even though he also claims they are legal, have full Counsel’s opinion and are fully disclosed to HMRC.

He manages clients’ expectations and makes clear that these enquiries are almost inevitable and often last 3 – 7 years; and even though he claims they are usually resolved in favour of the taxpayer, he admits there are no guarantees.

All of these are generic risks and consequences of course. In addition there will be further risks and consequences inherent in each specific scheme. Too often these are underplayed, overlooked and misunderstood.

When I was in practice, I often found myself talking with clients about specific tax schemes. Often I had been approached to offer an independent view of a scheme put forward by promoters. In my experience, once clients really understood all the risks and consequences of getting involved in an otherwise tempting tax scheme, only around 10% of clients actually chose to go ahead.

I have since heard from various other advisers and promoters whose experience it seems is much the same. Less than 10% of well advised taxpayers choose to proceed. So maybe the appetite for legal tax wipe-outs has reduced in recent years.

What do you think and how do you manage your clients’ expectations? Please add your comments to this blog post.

1 comment:

  1. To be honest I am surprised it is as high as 10% that go ahead.

    I do not promote tax schemes as a matter of course but only discuss them if the client approaches me which is currently only 1 client and they went ahead with the scheme but were always likely to as they were in the position of generating reasonable profits and is currently cash rich and was looking at living offshore if it reduced his tax bill so had a certain mindset anyway.

    I have gone through the risks and likely outcomes ad nauseum to ensure that he cannot come back to me and claim he didn't realise what he is likely to have to go through and the possibility that the scheme may be succesfully challenged meaning that the fees he has paid will be lost.