Year-end tax planning and the value of investments

Never having to pay tax is a utopian dream harboured by many, not least Barcelona footballer, Lionel Messi who has only recently been given a 21-month tax fraud sentence. Simon Littlejohns, partner and Head of Tax at Birmingham chartered accountants Friend Partnership, discusses the future of financial planning.

However, despite a number of high profile blows by the HMRC being administered to aggressive tax planning schemes, there are many still out there which are being very aggressively marketed.

Any financial planning sold as a product or a scheme which is tax driven and yet has no – or at best a very flimsy – commercial basis is considered ‘aggressive tax planning’.

In a bid to convince clients there is a good chance of succeeding if challenged by HMRC, promotors of such schemes will argue their planning is within the law, they have tax counsel’s opinion in support, and there is a commercial purpose.  However, this confidence has not been borne out in recent court decisions that have resulted in resounding victories for HMRC on a range of tax planning schemes.

It is set to get tougher for businesses and individuals who buy into aggressive tax planning, with legislation constantly being enhanced to deal with these schemes.  In many cases, users of such planning schemes will have to pay an upfront amount calculated to exceed the amount of tax they hope to save, only to be repaid as and when HMRC is satisfied the planning ‘works’.

I do not see this as a viable proposition and I have never discussed such planning with clients.  However, I have assisted clients when the planning has been challenged by HMRC.  Many of these clients have indicated that if they had known the hassle and heartache, as well as the level of the tax and professional costs of concluding matters, they would never have gone into the planning in the first place.

While HMRC enquiries can prove costly, time consuming and potentially disruptive when it comes to the day-to-day running of a client’s business, there can also be an adverse effect when it comes to selling the business.  In many cases, clients have been forced to conclude matters with HMRC, agree to substantial price reductions with buyers, or agree escrow arrangements – which have made the potential sale not financially viable.

I am constantly amazed that taxpayers buy-into the tax avoidance dream they are sold by promoters and fail to read the small print, which clearly indicates in every case that the planning may be challenged and may ultimately not work. Oh, and by the way, you have to pay the tax up front.

I may be the odd-one-out here, but what with the range of new anti-avoidance measures and the stated intention on the part of HMRC to uncover and neutralise any ‘offensive’ tax planning, I simply cannot see the commercial and financial logic for anyone undertaking such planning. Maybe it is the influence and experience of the ‘bloke down the pub’ who apparently doesn’t have to pay any tax.  Just remember that the next call he may get is from the taxman.

Postscript: It has to be remembered that there is still an awful lot of tax planning activity which is not viewed as aggressive and if carried out properly and in a timely manner can yield material tax savings for taxpayers. See my other blogs for details.

Read more about tax planning here.