Tax Avoidance Schemes Are No Laughing Matter; Claire Johnson, a Lawyer and Tax Specialist with Morgan Cole, Looks at the Issue of Tax Avoidance Following Criticism of the K2 Tax Scheme

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Byline: Claire Johnson

IT IS ESTIMATED by the Revenue that tax avoidance costs the economy pounds 4.5bn out of pounds 7bn lost in total every year.

At a time when many ordinary people and small business owners are feeling squeezed by the credit crunch this may seem like no laughing matter (even if you are a comedian).

The now well-publicised K2 Tax Scheme in which comedian Jimmy Carr was participating involved individuals transferring their employment to a Jersey based company and being paid a modest salary topped up by loans which were not subject to income tax. Creative arrangements of this sort are by no means unique.

However, stringent disclosure rules introduced in 2004 oblige those promoting such tax avoidance schemes to register them with HM Revenue & Customs (HMRC) who will closely scrutinise and either challenge them if they do not stand up to scrutiny or bring in new legislation to close any "loophole" which has made them possible.

Treasury Minister David Gauke has warned people using the K2 scheme that there are "serious doubts" about whether it would work and that they could still find themselves facing bills for more tax.

In our experience, most hardworking individuals and business owners have little or no appetite for high-risk tax avoidance schemes and the prospect of protracted wrangling with HMRC in relation to their tax affairs. However, neither do they wish to pay more than their fair share of tax.

That's why we work closely with other professionals such as accountants and independent financial advisers to ensure that individuals and business owners are able to adopt a joined-up approach to arranging their business and personal affairs to make best use of exemptions and "reliefs" provided for within the tax legislation.

Simple strategies can often be the most effective. For example, it is frequently the case that one spouse will have more income than the other. Significant savings may be achieved by the couple equalising their taxable income.

This might involve switching savings into the name of the lower earner or entering into a simple declaration of trust in relation to a buy-to-let property owned by one spouse so that a proportion of the rental income may be taxed in the hands of the other.

In the case of business owners it may involve spouses who are regularly "helping out" in the business being formally employed and paid a salary which fairly reflects the work they are in fact doing. …