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Tax avoidance schemes have received a lot of attention in recent press with celebrity comedian Jimmy Carr becoming the butt of all jokes for subscribing to the K2 tax avoidance scheme – “World record for the fastest climb down from K2 goes to Jimmy Carr” being a personal favourite.

David Cameron struck out at Jimmy Carr and all those involved in similar schemes branding them ‘morally repugnant’. But how do IFA’s distinguish between ‘morally repugnant’ tax avoidance and ‘commercially sensible’ tax planning? And will IFA’s be exposed to a flurry of professional negligence claims once the proposed General Anti-Abuse Rule takes effect?

Jimmy Carr has been paying as little as 1% income tax by subscribing to the Jersey based K2 scheme. The government has classed these artificial tax avoidance schemes as ‘morally repugnant’ however they are only illegal if HMRC can prove they are artificial and an abuse of tax laws. The government now refers to ‘tax avoidance’ where there is an abuse of tax laws, as opposed to ‘tax planning’ which the government believes makes good commercial sense and is undertaken by responsible businesses and individuals. We have to ask ourselves how easy it is for the taxpayer to make this distinction.

In an attempt to clear the muddy waters, in April 2013 the government will implement the advice given in Aaronson’s Committee Report on the General Anti-Abuse Rule (GAAR). The GAAR will capture ‘artificial and abusive arrangements’ whereby the taxpayer and IFA’s will have to decide for themselves if what they are planning is ‘reasonable’. Under the GAAR:

A scheme is artificial “if obtaining a tax advantage was the main purpose, or one of the main purposes, of the arrangement”
A scheme is abusive “if it cannot reasonably be regarded as a reasonable course of action” (a double reasonableness test)
The government has stated that hundreds of targeted anti-avoidance rules (TAAR’s) currently monitoring these schemes are unlikely to be repealed, suggesting that the effect of the GAAR will not be seen immediately.

There is concern that whilst the GAAR should stop ‘morally repugnant’ tax avoidance, as a knock on effect it may also prevent legitimate ‘tax planning’. Although the government has stated it will not introduce a ‘broad spectrum’ GAAR there are still concerns it may deter companies from operating in the UK, and taking their business elsewhere. Can this be a legitimate consideration when every UK citizen has to pay tax; is this not also ‘morally repugnant’ by David Cameron’s recent standards?

The hope by many is that the GAAR will knock back tax avoidance schemes like K2 before they ever get off the ground. However to get to this stage an increase in litigation is likely, both in claims brought by taxpayers against a HMRC decision, and in claims brought by taxpayers against IFA’s for negligent advice.

Jimmy Carr wrote on twitter:

“I met with a financial advisor and he said to me ‘Do you want to pay less tax? It’s totally legal’. I said ‘Yes’. I now realise I’ve made a terrible error of judgement.”
There are thousands more people who have said yes to similar advice, consequently the GAAR may open the floodgates to a series of professional negligence claims against financial advisors. Until the exact scope of the new legislation is known it is likely there will be a series of complicated disputes to follow. If you would like to discuss ATE insurance or third party funding for a professional negligence case relating to tax avoidance advice please call to speak to one of our brokers.