An introduction to tax planning

Tax planning is the legal process of arranging your affairs to minimise a tax liability. There are more than 200 such provisions specifically written into tax law. For example, you may invest in shares through an ISA. Here, the government encourages taxpayers to save and avoid tax. However this tax-free 'wrapper' is only tax-free so far as income tax and capital gains tax is concerned - the value of an ISA can be liable to a 40 per cent inheritance tax charge.

Other tax planning is well established and is not considered likely to be challenged, though this is an ever-changing area. Examples range from simply choosing a year-end date early in the tax year to maximise the period from earning profit to paying tax, to arrangements to shelter an appreciating asset from inheritance tax.

Tax evasion is different from avoidance. This is illegally minimising your tax, such as falsifying figures or not disclosing income. This carries serious penalties which can include a criminal prosecution.
A problem arises when the law is unclear, so it is not obvious whether a scheme is within the law or not. For this reason, there have been two significant developments.

First, we have seen a new approach to artificial tax avoidance which stands between avoidance and evasion. This was probably most accurately defined by a previous Paymaster General who said that: "Artificial avoidance schemes are those where they create economic distortions, provide commercial advantages over compliant taxpayers, redistribute tax revenues in an unfair or arbitrary manner, or represent an abuse that conflicts with or defeats the will of Parliament".

These must be disclosed, and are closely examined to see if they are legal. Even if they are, it is likely they will be closed in the next Finance Act, sometimes with retrospective effect.

The second is to publish a list of 'hallmarks' of tax avoidance schemes. If any of the following are found in a scheme, it is likely to be challenged as artificial tax avoidance:

• It sounds too good to be true
• Artificial or contrived arrangements are involved
• It seems very complex for what you want to do
• There are guaranteed returns for apparently no risk
• There are secrecy or confidentiality agreements
• Upfront fees are payable or the arrangement is on a no win/no fee basis
• The scheme is said to be verified by a top lawyer or accountant but no details of their opinion are provided
• The scheme is said to be approved by HMRC (it does not follow that this is true)
• Taxation of income is delayed or tax deductions accelerated
• Tax benefits are disproportionate to the commercial activity
• Offshore companies or trusts are involved for no sound commercial reason
• A tax haven or banking secrecy country is involved without any sound commercial reason
• Tax exempt entities, such as pension funds, are involved inappropriately
• It contains exit arrangements designed to sidestep tax consequences
• It involves money going in a circle back to where it started
• Low risk loans to be paid off by future earnings are involved
• The scheme promoter lends the funding needed.