Have you ever wondered what is Tax planning about? Have you ever thought that you could benefit from Tax Planning or legal UK Tax Avoidance?
Many people suspect that the rich pay little or no tax at all. Well, we are here to confirm that. In fact one of the reasons these people are rich is that they have managed to legally reduce their taxes over the years so that their wealth can grow a lot faster than those open to paying maximum levels of tax. However, it is no longer a “Forbidden Secret” and the methods and structures employed by the rich are now open to you as well.
What is Tax Planning? Tax Planning is the legal structuring of your finances so as to exploit existing legislation and loopholes to best effect – paying as little tax or even no tax ever. This is essentially legal Tax Avoidance, which is not to be confused with Tax Evasion. Tax Evasion will land the participants incarcerated! Tax evasion is the illegal concealment of income or profits to avoid paying tax on it. As the reader will see there are easier and less risky methods of achieving the same result. How big is the Tax Planning Industry? The UK Inland Revenue estimated that circa Â£10 Billion was being sheltered from Taxation using legal methods of Tax Planning. However, the Industry estimated that this figure is more like a massive Â£100 Billion per year! Naturally the majority is a result of large corporations but the rest, is down to people like you!
Previously legal Tax Planning was the domain of the super rich and not available to anyone without an exceptionally large income and net worth. However, some Tax Planning companies have lowered the qualification levels in terms of income and total assets, making this service available to perhaps one person in 100 instead of one in ten thousand like before. You can get the same Tax Planning methods and structures if you should plan to visit the Big Five accountancy firms like Deloitte and Touche, KPMG, Ernst and Young etc but the entry qualifications make it beyond even those who are comfortably wealthy. You will also find that the fees charged for services by the Big Five are also sometimes ten times as much as those charged for services by some of the smaller tax planning consultancies.
How does it work? Well the partners of these Tax Planning companies have generally the very best Accounting and Legal minds in the country studying on their behalf to find ways of reducing or even totally eliminating your tax bill. Once these teams feel that they have a workable Tax Scheme, they put it to very senior Legal Counsels in London to see if what they have proposed is firstly legal and secondly, works. Once two favorable legal counsels’ opinions have been obtained the scheme is then put in front of the Inland Revenue for vetting. Since 2004 all Tax avoidance methods must be disclosed to the Inland Revenue within 5 days of offering the scheme to the public. This is known as DOTAS (Disclosure of Tax Avoidance Schemes). It is a criminal offense not so.
The Inland Revenue will then question the legality and functionality of a scheme and once satisfied will give the scheme an ID number, which successively is then added to the income tax return of the clients participating in the scheme and enables the Revenue to gauge how much a particular scheme is being exploited. If the Inland Revenue deem it worth their while because an excessive amount of taxable revenue is being lost through a particular scheme, they will then decide to close the taxation loophole, which allows this. Typically the time when the taxation legislation is changed is during the annual Budget, which is announced in March/April each year and also at the Pre-Budget Report, which is released in late October each year. The scheme is then offered to potential clients through introducers who are usually accountants, solicitors and IFA’s (Independent Financial Advisors).
What guarantees do the clients have that a scheme works they will not be prosecuted for Tax Evasion? Firstly the fact that Legal Counsel has been sought means that a client can never be prosecuted for tax evasion. What guarantees do they have that it will work? Well, all providers of these methods to the Tax Planning companies guarantee that if clients are ever investigated by the Inland Revenue for some of the Tax Planning, which they have done for a client, they will support the client up to and including High Court stage with their own money. As you can probably guess, representing a client as far as the High Court Level is a very expensive activity and would probably cost more than the fees, which the average client has paid. Therefore the providers of tax planning will never do Tax Planning for a client unless they are certain that it will work.
What is most adverse thing that can happen to a client who participates in Tax Planning? The tax scheme might be “cracked” Inland Revenue, making the client liable for the tax due and interest. Clients will never be prosecuted for this whatsoever. The downside is obviously the fact that a client has paid fees, which can range from 10 % to 25 % of the income being sheltered. Some clients deem this “worst case” scenario as being just a high interest loan from the Inland Revenue because by the time it has come to a client paying their tax (perhaps several years), they have ideally turned that money into a significantly larger sum, which they may not have otherwise been able to do had they paid the initial tax on it. Needless to say this is not a common scenario but it does occur. This is why potential participants in tax planning should vet the companies they intend to go with beforehand.
How do Tax Planning companies operate? Typically tax consultancies will not market their own services but those of an accountancy firm, law firm or even an insurance company whom are the creators of the various schemes. Most introductions are made by personal referral to an existing client base and an initial screening is conducted over the telephone or via a questionnaire. Once their need has been established it is standard practice for a FREE and no obligation consultation being arranged where the client can see first hand how their taxation issue will be addressed. Clients will often take their own accountants to such a meeting and some will consult their accountants afterwards once they have the technical notes for the scheme and the Legal Counsel’s opinion.
How do Tax Consultancies get paid? For the introduction of a client to the right accountancy source, which they will not be able to source themselves, The Tax Planning companies charge a small fee worked out on a percentage of the income being sheltered based on the method being used. Some are also given referral fees by the providers of the various schemes. Of course there is usually no fee for just evaluating what is available, however some will charge one to keep away clients “fishing” for free information and attempting their own solutions to their taxation issues.
At the period of time of writing this article most Tax Planning companies are in a position to offer clients ways of eliminating every tax there is except VAT and Council Tax! As a sample clients can expect to reduce or in some circumstances even eliminate Income Tax, in some cases clients are able to claim back all the tax paid for the last three tax years, avoid/eliminate Capital Gains Tax, avoid/eliminate Death tax, reduce corporation tax by 50 %, eliminate Stamp Duty, withdraw tax-free cash from pension funds being used today and not when clients retire, contractor schemes to avoid IR35, create asset holding structures to hold investments in a tax-free environment for Inheritance tax and capital gains tax purposes. This is just a small sample of what may be sourced for clients.
As already stated, the Inland Revenue at each budget seeks to close these services down. This means that some methods of tax savings might only have a life-span of six months. Therefore delaying or deliberating too long may mean losing out on a “Golden Opportunity”.
Yes, tax is optional!