You can't have missed it. It's been all over the news for about a week or so.Some of the top names in UK entertainment people like comedian Jimmy Car and the guys from Take That are aggressively' avoiding paying their dues.
And since the news broke, tax accountants and financial advisers have been on the rampage. They claim the press and the government are on a witch-hunt to get their clients.
They say the press has it all wrong and us plebs don't understand the difference between tax evasion (illegal) and tax avoidance (prudent financial planning).
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What rubbish. We know perfectly well the difference. In fact, if there's any misunderstanding with this whole affair, it's in determining who's to blame, and in reality who's profiting from these below-radar' tax avoidance tactics.
Once again, this story comes down to a rotten financial services industry. The biggest gainers out of all this have been the advisers themselves as I'll show you.
This might not come as a surprise. After all, I've been banging on fora while about how the industry is out to fleece us from outrageous fees on funds to chunky commissions lining thewallets of independent financial advisers(IFAs). And again, it's these advisers who are taking home mega-bucks at the expense of not only HMRC, but also their clients, while entertainers such as Jimmy Carr and the like are taking the rap.
How the big bucks get siphoned off
In case you missed it, it was a fantastic bit of investigative journalism by The Times that first brought this whole tax avoidance kerfuffle to light. They sent an undercover journalist to a tax adviser to learn how the tax avoidance' K2 scheme works. He posed as an affluent £280,000-earner, currently paying something like £130,000 a year in tax (ie, just under half his income).
The reporter was advised that under K2 he'd be able to take home nearer 80% of his pot!
I guess you're wondering: How's that?
In essence, the scheme is very simple. Mr Rich breaks his current employment contract and enters a new contract with K2 (a business registered in Jersey). K2 now invoices the employer for Mr Rich's work and K2 pays Mr Rich his salary...
But here's the thing. K2 only pays Mr Rich £10,000 a year. Well, that's what goes through the books in the normal way and that means there's only about £3,500 to pay in tax. And that's where his tax ends!
That's right, just over one percent (of Mr Rich's £280,000)goes to HMRC. But of course Mr Rich isn't expected to live on a pitiful £10,000...
So K2 loans' Mr Rich the rest of the money to make up his new wage... And here's the kicker you don't pay income tax on a loan. Essentially the loans never get repaid... K2 has received the income from Mr Rich's employer and then it's just lent back to him. In the world of double-entry book keeping, the things essentially net off'. Lovely jubbly!
But there's a point almost everyone seems to be missing...
If Mr Rich is getting 80% of his gross income and HMRC is getting just over 1%, then where has the rest of the money gone? We're talking about nearly a fifth of his wages...
How the finance industry preys on the ignorant
Jimmy Carr was approached by an adviser who asked him "Do you want to pay less tax? It's totally legal" and Carr said "yes". Nothing wrong with that.
If you're Jimmy Carr and you're approached by a professional who says that he can bring your effective tax rate down, then you'd consider it, wouldn't you?
He's the money-man, you're the funny-man... each to their own. And you trust the adviser's judgment no?
Well, on reflection Mr Carr seems to have realised that this adviser was pushing things too far. And though it would seem spineless to blame it on all on the adviser, I think that's exactly where the real blame lies. And what's more, I wouldn't be surprised if this story isn't finished yet.
I think the likes of Carr could be the ones who end up absolutely stuffed here. Let me explain...
You may remember the case of Barclays bank that was paying some of its high-flyers in a perfectly legal, yet tax-dodging way. Again, it was all to do with replacing income with loans. The scheme was later deemed to be not in the spirit of the tax rules'. What happened? Well HMRC retrospectively imposed the tax that should have been paid.
So what if HMRC comes looking to retrospectively undo some of the more aggressive avoidance schemes? What if they want their money? Then who's going to be on the hook?
Remember, in the case of Mr Rich, 20% of his income has now disappeared into the ether/advisory fees.
Do you think the advisers will issue any refunds for their advice if HMRC comes looking for its money? I don't think so!
Don't always trust the guys in smart suits
Long-time readers will know that I'm no fan of the mainstream finance industry. Of course, there are many advisers out there with integrity. But the industry is also full of clever guys just waiting to skim as much money as they can out of unsuspecting clients.
I know finance and investment can be daunting. I know that many, just like Mr Carr, will want to get on with their day-to-day jobs and leave the finances to the guys in the know'.
But surely this is yet another episode that highlights the dangers of leaving your finances in the hands of the so-called professionals. Whether you're rich or poor, you need to keep your eye on the ball and learn how to look after your own finances.
If you need another example of how the professionals' could be ripping you (or your family and friends) off, just look at this unsettling briefing.
This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
Bengt also writes our free email, The Right Side, an aid for free-thinkers on how to make money across financial markets.
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