Tax has historically always been a controversial subject. Who pays taxes and how much they pay often being a sore or sensitive point. And when you hear about tax avoidance, it can immediately provoke a hostile reaction, with people immediately, and often erroneously, assuming some law has been broken.
That tends to be the common reaction, and in the UK, a number of high profile figures have been pilloried in the press for their tax avoidance. But under scrutiny, most such individuals may be the recipients of moral outrage but rarely legal retribution.
The reason being is that they are taking advantage of perfectly legal tax avoidance schemes. One of the most common schemes utilised by high earning individuals revolves around remuneration trusts. In the UK, they represent perfectly legal tax mitigation schemes.
They operate by allowing an individual or company to use an offshore company to invoice for their services rather than paying them directly, which, unsurprisingly, provides a whole host of tax benefits. The offshore company can then, without breaking any UK tax law, transfer these funds to a UK company to invest on its behalf. Because the money is held on trust for the offshore company, there is no tax payable on the UK company’s investment or the profits it then accrues from the investment. Additionally, the offshore company can pay loans to private individuals who receive these loans tax free.
Naturally, remuneration trusts prove one of the more robust and legal tax avoidance strategies, but they are only accessible to high earners, usually companies, shareholders and individuals earning in excess of £100.p.a. Such schemes have been accepted by HMRC in the UK since 1994, and have been scrutinised by legal opinion too. As such, they remain perfectly legal, and serve as an important distinction when talking about tax avoidance.
Anyone who evades taxes they should be paying is subject to the rule of law, and can be rightly persecuted. However, when an individual undertakes perfectly legal tax planning strategies, the question is one of morality rather than legality. And, whether an individual should be allowed to legally avoid taxes by such strategies is also a political question.
Currently in the UK, there are numerous tax mitigation schemes which can legally help high earners, but changes in government could in the future render such strategies illegal based on a view that high earners should not be able to avail themselves of tax planning strategies unavailable to all.
But, for now, they are accessible to high earners and it pays dividends when hearing about high profile individuals engaged in tax avoidance to read between the lines and ascertain whether they are engaged in illegal activities or merely taking advantage of the numerous legal tax schemes such as remuneration trusts which provide them with substantial tax benefits on their earned income.