Tax avoidance versus tax evasion

Posted in 'Personal Finance' by Amy Flower

02 July 2012

Have you watched Jimmy Carr on '8 out of 10 Cats' or been to see him at one of his live stand up gigs? Are you now a little annoyed that you had to work to earn the money to pay for your ticket and pay tax on your income, to find out that he was signed into a legal tax reduction scheme, known as ‘K2’?

Unfortunately for Jimmy Carr, his personal tax information has now become a media frenzy with criticism coming from all around, including the Prime Minister, labelling his actions 'morally wrong'.

If you found yourself in a similar financial position as Jimmy Carr, would you try to avoid tax in a similar way?

It turns out that the K2 scheme is used by more than 1,000 people and has reportedly reduced the Treasury coffers by £168m a year.

Prime Minister David Cameron has stated that he wants to take action against such schemes as they are allowing top earners to 'reduce the public purse by £4.5 billion a year' and continued to say that he will be looking at reducing the number 'of dodgy tax avoidance schemes'.

In Jimmy Carr's defence, he was advised about the scheme by a financial advisor who asked him a series of questions, one them being 'would you like to pay less tax?' If the government is aware of schemes which allow the wealthy to reduce the amount of tax they pay, why have they not taken the proactive step of passing legislation to make them illegal?

How can the government rule the average UK citizen to pay tax or be heavily investigated and penalised for missing a tax return date, when they have knowledge of schemes allowing wealthy citizens to pay much less than is expected, with little or no repercussions?

Surely this is not promoting fairness throughout the country and begs the question about what is now going to be done to rectify matters.

The K2 scheme requires the individual to resign from their original position and to register with a separate offshore company, which then hires out their services to the UK. The individual is paid a small salary (which attracts tax) and a large 'loan' (which does not, and is never actually repaid).

Jimmy Carr has quickly accepted that his actions were morally wrong and has publically apologised for what he calls a ‘misjudgment’.

Despite the speed and unreservedness of his apology, at one of his latest gigs, Jimmy became the joke throughout his show, suffering a barrage of jibes from the audience.

One from a man that entered the show 20 minutes after the start date and was met with, 'What time do you call this? What on earth have you been doing? It's a ten o'clock show.' The man responded: 'Sorry, I've been doing my tax returns'. To which the crowd, and Carr, responded with applause.

The Prime Minister has readily answered questions about the K2 scheme and Jimmy Carr, repeatedly saying that the K2 scheme is 'morally wrong', but when questioned about other celebrities who have been alleged also to take advantage of tax avoidance schemes, such as Gary Barlow, he refused to comment . Labour has called for Gary Barlow’s OBE to removed.

Accountants and Tax Advisors are worried that the Government are 'blurring the line' between tax evasion, which is illegal, and tax avoidance, which is not.

Amy Flower is a Credit Analyst at checkmyfile and has a degree in law. She can be contacted at amy.flower@checkmyfile.com