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What is tax avoidance for landlords?

13 May 2014

With Take That’s Gary Barlow and a host of other celebrities and entertainers having to pay back millions in a tax avoidance scandal, just what is the difference between tax avoidance and tax evasion?

According to Prime Minister David Cameron tax avoidance is immoral and illegal.

It’s not.

The law says landlords can arrange his financial affairs to minimise the tax they pay – providing the arrangements are honest and legal.

The backing for this comes from a famous court case – Ayrshire Pullman Motor Services & Ritchie v The Inland Revenue Commissioners in 1929.

In that case, the Inland Revenue, as HM Revenue & Customs (HMRC) was then known, argued that the company and My Ritchie were not paying the right amount of tax on their earnings.

After hearing the evidence, the judge, Lord Clyde, disagreed and penned a well-used ruling.

“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores,” said the judge.

“The Inland Revenue is not slow to take every advantage open the taxing statutes for depleting the taxpayer’s pocket. The taxpayer is, in like manner, entitled to be as astute to prevent, as far as he honestly can the depletion of his means by the Inland Revenue.”

This view has regularly been supported in the courts.

The message is simple –

• Landlords have the right to arrange their finances to avoid paying tax if they can

• That right must be exercised honestly and transparently

• If a landlord acts dishonestly, then HMRC can demand the unpaid tax back plus interest

In the end, if someone comes up with a scheme to save tax that sounds too good to be true, it probably is.

In the case of Gary Barlow, and other similar recent cases, like the one involving stand-up comedian Jimmy Carr, the only winner is the guy taking the fee for setting up the scheme.

HMRC is about to be bestowed with new powers to force taxpayers taking part in tax avoidance schemes to pay the tax upfront and then argue their case to win it back.

That’s because many of these tax avoidance schemes sold by expensive accountants are really tax deferral schemes that delay tax payment rather than save money.