Jimmy Carr's Favourite (Tax-Avoiding) Blue Chips

Published in Investing on 27 June 2012

Companies can legally minimise their tax liability and distribute their profits to shareholders.

Two weeks ago, if I'd seen the words "Jimmy Carr" and "K2" in the same sentence then I'd have assumed that one of Britain's hardest-working comedians had taken up mountaineering. It turned out that this K2 was an offshore tax avoidance scheme that Mr Carr had been using -- and it could have reduced his effective income tax rate to as little as 1%.

Soon after this was revealed, Mr Carr did a 180-degree mea culpa and he now says that it was a "terrible error of judgement". He was rich enough to benefit from a complex tax avoidance scheme, but unfortunately for most other taxpayers it isn't cost-effective to use these schemes because of their very high set-up costs.

But if you're a multi-billion pound multinational company, you have plenty of scope for avoiding tax by using similar methods to those employed by K2. Several of Britain's biggest companies have been in the spotlight during the last few years for having done exactly that and rewarding their shareholders in the process.

Avoidance is perfectly legal

Some people believe that tax avoidance is both immoral and against the law, but it remains a fact that it is still perfectly legal to arrange your tax affairs in order to minimise your tax liability.

This is a long-standing principle of English law that dates back to Lord Tomlin's judgment in Inland Revenue Commissioners vs Duke of Westminster (1936), although in recent years it has been weakened as the courts have ruled against a few "artificial" ways of avoiding tax.

In contrast, tax evasion -- the act of not paying taxes which are owed in law -- is illegal. Unfortunately, the borderline between avoidance and evasion is increasingly being blurred by politicians and HM Revenue & Customs in order to raise more taxes, as Mr Carr found out to his cost when he was criticised for his behaviour by the Prime Minister.

Pay up what you didn't owe us

Last February, Barclays (LSE: BARC) was ordered to pay £500 million that it had saved by using some tax-avoidance schemes. The government had introduced backdated legislation to prevent Barclays from doing this, and the taxman wanted Barclays to cough up even before this became law.

One day a company is going to challenge this behaviour in the European Court of Human Rights. That's because Article 7 of the European Convention on Human Rights clearly prevents people (and companies) from being punished for past actions that were perfectly legal at the time. Changing the law specifically to create a backdated tax liability looks an awful lot like a punishment.

Welcome to Luxembourg

The Grand Duchy of Luxembourg isn't the first European country that springs to most people's minds, but it's very popular among the tax-avoiding community because of its extremely generous treatment of multinational companies' tax affairs.

GlaxoSmithKline (LSE: GSK) was recently accused by the BBC of having made a deal with the Luxembourg authorities to avoid £34 million of corporation tax. The company issued a press statement in which it pointed out that it had paid all of the taxes that were legally due, and that the BBC had been highly selective in its use of facts.

You should pay, but we should be let off

Back in 2010, Vodafone (LSE: VOD) settled a long-running dispute with HM Revenue & Customs over the tax treatment of its acquisition of Germany's Mannesman some 10 years earlier.

This has become quite controversial because it is alleged that anything up to £6 billion was secretly written off by the taxman, so it has become a cause célèbre among people who want to criminalise tax avoidance. But some of the same people who are bashing Vodafone are hypocrites, because they too are engaging in tax avoidance and encouraging others to do so.

Members of Parliament, including some who have criticised Mr Carr, have been avoiding tax for many years by "flipping" homes, using deeds of variation and hiring their relatives on huge salaries to perform non-jobs. At least one national newspaper group that regularly campaigns against tax avoidance routinely uses tax-avoidance schemes, though at least it has admitted this.

As usual, it's one rule for us and a different rule for them. In the meantime, I'm perfectly to own shares in companies that engage in tax avoidance and thus increase their profits.

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> Tony owns shares in GlaxoSmithKline. He does not own any of the other shares mentioned in this article.

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Comments

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OxonianCambion 27 Jun 2012 , 10:41am

It's also perfectly legal to eat your pet and wear its skin as a coat.

Secondly, just because MPs are massive hypocrites does not mean that the point is not sound.

If everyone actually paid their taxes due* then maybe the tax system would be clearer and the actual rates would be lower for the vast majority of us and perhaps we could spend the effort saved chasing up on things like stopping people leeching at the other end of the income scale.**

OC

* I mean what they would pay without crass gaming of the system. SIPPs & ISAs etc. with appropriate limits are an excellent way of encouraging fiscal discipline.

** I mean people who have no intention of pulling their weight - it is right and proper that we have a safety net for people who fall on hard times.

m00rfield 27 Jun 2012 , 11:17am

The K2 tax avoidance scheme is like farting in a lift.

Its not illegal, immensely rewarding for the perpetrator, pretty distasteful for others, and generally not done.

OsbieFeel 27 Jun 2012 , 12:02pm

Not to excuse the tax-dodging antics of the super-rich, but ... this issue is simply not as black and white as it seems.

Considering what governments like to do with your money (start wars, spy on citizens, claim fraudulent expenses, bribe voters etc.), there's a point where paying taxes becomes as immoral than dodging them!

I believe in paying for what you get through the public services and the social safety net. Unfortunately you have to sign up for so much else when you pay tax, with no way to avoid it. And we haven't even mentioned waste, and modern governments' inability to balance a budget! So while I deplore those who refuse to pay their way, I can understand the mentality that wants to get away with paying less.

Tamilyrn 27 Jun 2012 , 12:35pm

Well... I put money in my ISA for the sole and explicit purpose of avoiding tax on the interest.

I pay myself dividend income on profit from my own company because it is more tax efficient to do so.

I save into a personal pension plan because it's tax efficient.

I sold a badly performing unit trust last year to offset a capital gain made elsewhere and I did so solely to avoid paying CGT.

I'm giving careful thought to minimizing the inheritance tax taken from my estate after I pass on.

Mea culpa, mea culpa, mea maxima culpa.

The point is simple. If the government cannot regulate taxation then either the legislation is too complex or the tax levels are too high.

tru2me 27 Jun 2012 , 1:04pm

"I believe in paying for what you get through the public services and the social safety net. Unfortunately you have to sign up for so much else when you pay tax, with no way to avoid it. And we haven't even mentioned waste, and modern governments' inability to balance a budget! So while I deplore those who refuse to pay their way, I can understand the mentality that wants to get away with paying less."
Reckon you are not wrong, OsbieFeel.

Tony this changing of the goal posts which politicians have traditionally used is now spreading to the tax collecting part of the system.
IMHO this is a very dangerous stance by HMRC.
It may remove corporate trust in the UK?

SinNick 27 Jun 2012 , 2:47pm

Jimmy Carr did nothing illegal. To make a moral judgement on him merely attempts to cast him in a bad light by positioning him as morally inferior and should, in the case of David Cameron's comments, be considered as bullying. The tax law defines what is legal and what is not, a boundary between right and wrong. There is no corresponding moral boundary, only generally accepted behaviour. What is moral for one person is immoral for another. Some people will not wear fur. Others will not wear leather or eat meat. That is for their own conscience. Morals are one thing, however it is the law that matters.

Having said that, I eat meat but the rest of my family are vegetarian. I would not partake in a K2-style scheme, but that is purely my personal position.

The real cause of the problem is that the law has been repeatedly changed, patched and tweaked over decades so that it is no longer fit for purpose. That is the fault of the politicians and the HMRC. They should put their own house in order so that their laws are unambiguous and enforceable, rather than resorting to 'moral' bullying.

rober00 27 Jun 2012 , 4:14pm

I would not "evade" my tax dues and I would encourage the HMRC to actively chase anyone who does.

I do "avoid" tax legally to the best of my ability, I have always done so and will continue to do so to the best of my ability.

If others wish to seek ways to pay tax the do not legally owe, then well done them and thank you very much.

I would be very surprised if MP's have followed this latter course.

This sort of action on the PM's part is bullying in my opinion and does nothing in my eyes other than reinforce his apparent lack of judgement, both here and in respect of certain individuals of whom we are all aware.

snoekie 27 Jun 2012 , 4:22pm

Now if the govt listened to the people and applied the tax according to moral criteria, most of the "Foreign" aid would be stopped, charity starts at home.

It is also 'the right thing to do' to prosecute all fraudulent expense/benefit claimants, not just a light tap on the wrist, but real hard prison time. Initially more expensive, perhaps.

That would make room for those that would really serve, in the Common and the Lords, less foreign scroungers and prisoners and consequently less waste on benefits and less demand for higher taxes.

This would require international warrants for the criminals populating the Brussels bureaucracy and result in lower precepts for Brussels, ergo less tax.

Then there are the self serving quangos and the usuary rates for the PFIs and the sacking of those who criminally incompetently furthered that scheme, not to mention the negligent purchasing at exorbitant prices of the NHS and govt depts, I think by the time we get there we have already saved getting on for £100 billion, if not more.

And oh, before I forget, apply to govt pensions since 1997 a reduction imposed on the private sector, and recoup from the pensioners and estates of the deceased pensioners sums over paid.

Immediate starting place, the payoffs (up to 3 or 4 times more than the private sector) for 'redundant' seat polishers who are almost immediately given consultancies, that runs across LAs, NHS, ministries, quangos etc.

kiffberet 27 Jun 2012 , 4:23pm

If a company avoids paying tax at 27% (or whatever it is these days), then pays out the saved tax as profits to shareholders, who then have to pay personal tax on their profits of 20% or 40%, doesn't the government get more tax?

ANuvver 27 Jun 2012 , 6:11pm

There is also Lord Clyde in Ayrshire Pullman vs Inland Revenue (1929):

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue."

NB "moral or other".

Tangentially relevant is the US ruling by Learned Hand in Helvering vs Gregory (1932):

"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

Interesting in its historical context, for referencing the arch-crime of anti-patriotism. Okay, it's a US decision, but it isn't unusual for decisions in other jurisdictions to have significant influence.

Law is not ethics - and much as I've always struggled to find Jimmy Carr's humour actually humorous, Cameron is on dangerous, perhaps even naive, ground by playing the morality card. Too much PPE, not enough L, IMHO (LOL and TTFN).

Meanwhile in the corporate world, the ever-rumbling saga regarding HMRC being challenged for breach of EU law over advance corporation tax from foreign activities is interesting too. BAT is the lead, and the Exchequer is potentially on the hook for £5bn in tax refunds dating back to the 1970s.

As far as I can recall, the latest ruling strongly supported the case of the companies involved (16 or so multinationals). However, given the amounts involved, HMRC can be expected to appeal, wriggle and obfuscate for years to come.

Perhaps if we could manage to hack Gordon's Big Book of Taxes down to size, we could all enjoy more clarity and fairness.

I'm only a cock-eyed optimist...

jaizan 27 Jun 2012 , 10:47pm

Taxing the productive and subsidising the indolent is immoral & is bad economics, but unsurprisingly, the Bolshevik Broadcasting Corporation don't see it like that.

OxonianCambion 27 Jun 2012 , 11:23pm

Actually, can we have fewer of these articles whingeing about tax and more of the irreverent and entertaining ones instead? These seem to bring out the worst in everyone.

fartarse2 28 Jun 2012 , 7:42am

- Get rid of all tax breaks and all ISAs etc.
- Raise the personal tax allowance.
- Everyone pays the same flat tax on all their income above this allowance. No different tax rates, no tax bands and no tax allowances. I don't care if the income comes from employment, capital gains, dividends, inhertance etc.
- Mercilessly pursue those who owe tax.

Simplify the tax system.

couldnotmakeitup 28 Jun 2012 , 10:50am

Hello Tony,
Hm, can't agree on this one with you.

I think fartarse2 has a better slant on this, but let's look at the problem. If one would follow your line to the bitter end (and a bitter end it would be for the majority of the nation) you could kiss good by to our Education System, NHS, Police Service, Fire Service, to name a few.
Sure, part of the underfunding of these services is incompetence but, I think we can agree these are essential services for the benefit of all.
Therefore the gouvernment should make sure that all of us pay their fair share of tax, companies, corporations and indivituals alike. If I understood you correctly, you are implying that tax shoud be paid by the next man not by me. Won't work, -look at Greece-total mayhem!
Also, think of your children/grand children. Take the long term view, what's best for the country! Therefore, I think it is wrong for corporations and individuals to have billion/million pound incomes and paying an effevtive rate of tax of say 5%(as some have according to the financial press).

My solution: simplyfy the tax system and lock up the tax consultants!

Regards

Ben

TonyTwoTimes 28 Jun 2012 , 11:10am

Hi couldnotmakeitup,

My argument is that tax avoidance is perfectly legal, whilst tax evasion is illegal and should also be treated as such.

My "bitter end" is that if politicians want to tax something then they should have the decency to pass a law that taxes it rather than bleating about morality and "fairness", a term which is increasingly being used to justify stealing from the productive and giving to the feckless and indolent.

I have no problem in paying the tax which I legally owe. I do have a problem with politicians ignoring the rule of law and trying to shake down people for money (especially when they've used similar strategies to avoid tax).

There's plenty of anti-avoidance case law (Furniss v Dawson (1985)) and legislation on the statute book to deal with tax avoidance.

Greece's problems are caused by tax evasion and a massively overpaid and underproductive public sector which politicians have used to buy votes and loot the state treasury. Tax avoidance has nothing to do with it.

Cheers :-)

TonyL (the author)

kempiejon 28 Jun 2012 , 5:37pm

m00rfield said
The K2 tax avoidance scheme is like farting in a lift.

I think the next line should be
wrong on so many levels

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