K2 scheme sparks tax avoidance debate
A Jersey-based tax avoidance scheme reportedly used by comedian Jimmy Carr has sparked further debate about the difference between unethical tax avoidance and legitimate tax planning. Nick Huber reports.
More than 1,000 people, including Carr, are reported to be using the legal Jersey-based K2 scheme, which is said to be sheltering £168m a year from the Treasury.
Under the scheme, revealed by The Times newspaper, an individual resigns from their company and any salary they subsequently receive is paid to an offshore trust.
Carr said on Thursday that he was no longer involved in the scheme and apologised for a “terrible error of judgement”.
In a statement released via his Twitter page Carr said: "Although I’ve been advised the K2 Tax scheme is entirely legal, and has been fully disclosed to HMRC (Her Majesty’s Revenue and Customs), I’m no longer involved in it and will in future conduct my financial affairs much more responsibly."
The apology came a day after the came after Prime Minister David Cameron said it was "morally wrong" to avoid tax using such a scheme.
Cameron’s comments highlight a recent change in the debate over tax avoidance. Although tax avoidance is legal, unlike tax evasion, the taxman is increasingly trying to close down “abusive” or the “aggressive” tax avoidance schemes.
HMRC said that it was already investigating the K2 scheme. “If, as is alleged, it depends on the use of loans - it doesn’t work anyway – but HMRC are checking. If it does work technically HMRC will challenge it in every way,” HMRC said in a statement.
The K2 scheme sparked a lively debate among AccountingWEB readers.
Referring to comments by Danny Alexander, the chief secretary to the Treasury who was reported as saying that people who use tax avoidance loopholes were no better than benefit cheats, Taxhound said that the government should find a way to close the tax schemes and “stop complaining”.
Others said they were uneasy about tax avoidance schemes that use loans and offshore trusts.
“There are commercial reasons for trading through a limited company (limitation of liability, some people take company's more seriously, etc),” said James Hellyer. “What's the commercial reason for putting your assets in an offshore trust and loaning them back to yourself?”
Critics of the proposed GARR, say that it isn’t tough enough and won’t make much difference in countering abuse of the tax system.
Richard Murphy, director of Tax Research UK, wrote in his blog that the proposed GARR is too narrow and would only stop a “handful of the most extreme tax planning cases”.
Labour MP Michael Meacher has tabled a private members bill in the House of Commons that would outlaw any financial transaction whose primary intention is tax avoidance or evasion rather than a genuine economic purpose.
The proposed bill would transfer the burden of proof, from HMRC having to prove that a transaction was really a disguised tax avoidance device, to a company having to prove that it had a genuine purpose, Meacher said.
“If HMRC believed for good reasons that it was really for tax avoidance purposes, they could declare that the transaction was null and void and it would be for the company, if they so chose, to challenge that decision in court,” Meacher wrote in his blog.