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Tax Avoidance or Sensible Tax Planning?

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Thursday April 19, 2012 at 1:37pm
The recent Budget saw a concerted attack on tax avoidance, especially the practices used by the super-wealthy. And when you look at some of the headline figures, it’s hardly surprising the Government saw this as a ripe target.

Many were dismayed when Gordon Brown abolished the 10% tax band for the lowest earners. However, with a little creativity, 10% tax still exists – only this time for the UK’s highest earners.

HMRC found that 10% is the average rate of income tax paid by those in Britain on the highest incomes. George Osborne was reportedly ‘shocked’ to discover the wealthiest in the UK pay ‘virtually no’ income tax. Consequently, the Budget was a case of giving with one hand and taking away with another.

The run-up to the Budget saw the media focus on whether the 50% top rate of income tax would be reduced. This is undoubtedly a popular theme, since unlike Americans, the British rather resent the successful and approve of their being taxed to the hilt. In reality, of course, higher tax rates are a disincentive for business and innovation, which is why George Osborne did indeed cut the rate to 45%.

However, to sweeten this particular bitter pill for the population Osborne also announced measures to prevent the very wealthy from exploiting tax loopholes, capping tax relief used to reduce tax bills.

Because the media prefers stories which create outrage this didn’t receive much attention at all, until it was pointed out this would potentially damage charitable donations, at which point media firestorms switched from Osborne helping out the rich to the Chancellor’s effective mugging of charities.

Does anyone like paying tax?

The media presents tax relief as a shambling monster of greed exploited by those with more money than conscience, but if that were the case it would never have been introduced in the first place. Tax relief is intended partly to help people who need it and partly to encourage prudent financial behaviour and good business. People, for instance, are given an incentive to save for their retirement through the tax relief provided on pension contributions. This is sensible, not greedy, and we would hardly look at tax relief here as a get-rich-quick scheme.

This is why there is a real risk that in targeting the super rich, there will be fallout for the much more modest earners who still do well but are hardly going to be found schmoozing on the mega-yachts where Mr Osborne has been found socialising. The average business owner works extremely hard for their success. To chip away at this because of the excesses of the wealthiest in society hardly seems fair, or wise in an economy which needs the dedication of exactly these people.

George Osborne has been faced with a difficult balancing act: encourage business and investment to boost the recovery, but crack down on deeply unpopular tax avoidance by the super rich. Unfortunately, there is an uncomfortable and complex middle ground where these two objectives clash and more modest earners are penalised.

Osborne noted: "I've come up with a budget that has reduced the 50p rate to 45p, so we don't have the highest income tax rate in the world. But I've also asked people who are currently paying zero to pay income tax."

It sounds fair enough in principle, but putting principles into practice is often highly problematic. We have years of experience in helping clients navigate the complexities of tax in order to maximise their income. Evading tax is illegal, but if routes exist to reduce your tax bill perfectly legitimately, why wouldn’t you wish to pursue them? Prudent tax management plans mean you pay your way in society with the tax you pay, but you also pay no more than you need to.

This isn’t immoral, it’s just common sense. And we all know the journalists stoking the flames would do the same too. In fact I invite them to make an appointment with us, and we’ll explore exactly how we can reduce their tax bill too.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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