What you can learn from the great celebrity tax avoidance scandal

Gary Barlow has come in for stick over his tax affairs

I bet a lot of famous people are spending a lot of time making panicked phone calls to their accountants and PR people right now.

The Times is making hay with its current big story. The newspaper has got its mitts on a list of names of people who have stuck their money into the ‘Liberty’ tax scheme, which is being disputed by the tax office as an ‘aggressive tax avoidance’ scheme.

As well as surgeons, lawyers, business people and criminals, a smattering of pop stars and film stars were using it too, including Gary Barlow, who’s already come in for a lot of stick on this front.

Cue back-covering excuses, ‘disappointment’ from charities who have worked with the tax-efficient celebs, and the usual circus antics.

It’s all very predictable.

Now, I suspect that you’re too sensible to have invested in anything as arcane as these aggressive tax avoidance schemes.

But I do think there are some useful lessons for investors about managing your money to be drawn from all this.

Yet another bonanza for the lawyers

I find it hard to drum up the obligatory moral outrage against these tax avoiders. Believe me, I’ve tried.

But when you add it to the great and ongoing roll of financial scandal over the last few years – never mind all the non-financial scandal – I guess I’m just all outraged out.

We’ve already had the banks and the politicians ripping us all off. So news that yet another part of the establishment firmament – celebrities this time – is on the make too, is hardly surprising.

Just to be clear, I don’t think people should be using outlandish schemes to create artificial losses and avoid paying ‘their fair share’ (whatever that is). And it’s always amusing to see how the sub-student union political utterances of your average pop star compare to their aggressively protective attitudes to their own money.

At the same time, if Britain’s tax system hadn’t been made so stupidly complicated by various governments intervening to try to favour one lobby group or another, then these opportunities wouldn’t exist.

Now we’ve just created yet another bonanza for the lawyers and the ambulance chasers. Mis-selling claims. Tax tribunals and appeals. Yet more brainpower and copious amounts of hard cash being devoted to arguing over the letter of the law.

Talk about a waste of resources.



Four key lessons to learn from celebrity tax avoiders

But as I said earlier, there are some useful lessons to be drawn from this story – even if you don’t have millions to stash away from the taxman.

Firstly, don’t invest in anything you don’t understand. The standard response from these people is: “my advisers told me to do it”. And in a lot of cases, I suspect that’s basically true.

But guess what? It’s not good enough. It’s your money. If you don’t understand how it’s being invested, or why your adviser is recommending it to you, you don’t just nod your head and sign on the dotted line.

Same goes for anything you invest in off your own bat. If you don’t understand how a company’s business model works, don’t invest in it. I wrote about a classic example of this on Monday – Spanish wifi provider Let’s Gowex went bust last week after a stellar run was brought to a halt by a short-selling firm who bothered to dig into its accounts. Investors clearly just hadn’t bothered to wrap their heads around its business model.

Secondly, risks always reflect returns. If you are being offered outsize returns, then there is risk involved, and you need to have your eyes open to that. If someone is telling you that you can hide millions from the taxman, then you need to be asking yourself – what’s the risk here? Clearly there’s the threat that the tax man gets fed up and decides to crack down.

Same goes for other investments. A stock offering a dividend yield of 9% for example sounds tempting. But investors are clearly concerned about its ability to continue paying that yield – so you should look closely at its finances before you invest.

More importantly, if you can’t see where the risk is, then don’t invest. Often, the real threat is ‘liquidity risk’ – the danger that you won’t be able to get at your money when you need it. Or ‘counterparty risk’ – the danger that another party will default on their end of the transaction.

Thirdly, things change. The people who used these schemes were not expecting to get a big bill and a heap of reputational damage at the end of it. The prevailing attitude was – if it’s legal, it’s acceptable. Remember – a lot of these investments were made at a time when New Labour was still “intensely relaxed” about people making money.

That’s not the case any more. It’s the era of austerity, and the new view on tax is that you should pay up, regardless of what the letter of the law says.

Again, it’s worth questioning your own assumptions about your investments. Right now, a lot of people are assuming that interest rates will remain low for the foreseeable future, for example. They might be right.

But if that assumption changes, it will change fast. And if that happens, is your portfolio ready for it? Is it sufficiently diversified that it could cope with that sort of shift?

Finally – make good use of legitimate tax shelters. The good news is that for the vast majority of people, there are more than enough ways to avoid tax on your investments perfectly legitimately.

A couple can now shelter £30,000 a year between them in individual savings accounts (Isa). And you can stick up to £40,000 a year in a pension. That’s plenty to be getting on with for most of us.

My colleague Ed looked at how to make the best use of your new and improved Isa in a recent issue of MoneyWeek magazine (sign up for a free trial here if you’re not already a subscriber).

And take a look at his free guide to the recent pension changes, you should do so right away – you really need to understand how these could affect your retirement.

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  • PaulCC

    “Right now, a lot of people are assuming that interest rates will remain low for the foreseeable future, for example. They might be right.” They are right. Unfortunately, the foreseeable future has a duration of less than a month – to the next MPC meeting.

  • Inquisitor

    Spend the money on mostly useless crap, realise you can’t fill the budgetary gap, then stir up envy and sentiments of sanctimony and “serving the public good”, and go after people who aren’t “paying their fair share” (as you say, whatever that means), and voila, you have the government’s policy on “tax evasion” and “tax avoidance”. Of course, they can just print the money, which they do anyway.

    I find it hard to take net tax recipients, like the government, seriously when it muses upon the topic of who contributes what. It is the service provider, we are the clients, and if it does a bad job, it should receive nothing. Taxing income just assumes it is doing a good job.

    • Inquisitor

      Also, it should be noted, it is largely its fault that the tax system is so utterly bonkers. Nearly all professional bodies, including freelancers’ associations, accountancy bodies, the OTS, the NAO etc. have characterised the tax system as broken and not fit for purpose. The Tories are listening and may change this if they merge NI/income tax next year, provided they win and actually stick to their promise. Taxes are too high, for spending that is too high, and collected in a grossly unfair, idiotic manner.

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