Tax avoidance and the K2 scheme

The comedian Jimmy Carr has been singled out by the government for aggressive tax avoidance because of his involvement with the now infamous K2 scheme.

Ignoring the fact that the scheme is a completely legal tax arrangement, politicians are instead relying upon emotive phrases such as morally wrong to stir up public indignation.

Is it legal?

They are blurring the lines between tax evasion, which is against the law, and tax avoidance, which is a wholly legal practice.

How does the scheme work?

Under the K2 scheme, an individual resigns from their company and any salary they subsequently receive is paid to an offshore trust.

A small amount of that is received as salary and the rest as a loan, which, because it can technically be recalled, does not incur tax.

Morally wrong

At the height of the furore, Prime Minister David Cameron blasted Carrs legal tax avoidance as ‘morally wrong’.

This association of morality with tax avoidance mirrors Chancellor George Osborne’s budget announcement in March 2012, where he described ‘aggressive tax avoidance’ as ‘morally repugnant’.

Even Labour leader Ed Miliband said: ‘I think what the politicians need to do is – if the wrong thing is happening – change the law to prevent that tax avoidance happening.’

The phrase the wrong thing clearly implies dishonest behaviour that should be prevented or penalised.

The sole voice of reason was PCS general secretary Mark Serwotka, with his comment: ‘It is sickening to see millionaires in the Cabinet wringing their hands about the immorality of tax avoidance when it is their lack of political will to act that means we lose tens of billions of pounds every year.’

What we are left with is the insinuation that taxpayers should manage their finances in a way that is considered to be morally correct. This is a very worrying situation. After all, where will it stop?

What about trading as a limited company or even pension payments? Both are methods of legal tax avoidance – are these going to be next on the radar?

Am I at risk of an investigation?

HMRC announced that £13.1 million in tax evasion has been recovered from just 2,000 medical staff while The Times [1] reported 1,300 doctors and dentists are being investigated for tax evasion.

Given there’s an estimated £25 billion in legal tax avoidance, it seems likely that tax avoidance loopholes may be next on the governments agenda.

[First published in June 2012.]