What Jimmy Carr’s tax muddle may mean for IFAs – Celebrity efforts to mitigate tax by using complicated (if legal) schemes hit the headlines this month. But, with David Cameron getting involved, what are the implications for advisers?
Many advisers say Jimmy Carr had it coming – especially after he tried to blame his IFA for a week of bad press.
The comedian was forced to apologise after it emerged he, and hundreds of other high-profile individuals, diverted most of his earnings into K2, a Jersey-based trust which repaid the money as a loan, mitigating their tax bills to little more than 1%.
- I met with a financial adviser and he said to me ‘Do you want to pay less tax? It’s totally legal.’ I said ‘Yes’,” Carr said.
- “I now realize I’ve made a terrible error of judgment.”
Whether his error was simply being caught investing into the (entirely legal) scheme is another question.
But the reaction from David Cameron, who called Carr’s behaviour “morally wrong”, signals such arrangements have become riskier for advisers, whatever the moral implications.
Avoidance schemes
“The risk is now massive compared to ten years ago,” said Dante Peters, director at Magus Financial Management.
- “If the client wants to spend a large period of time in litigation with HMRC then that’s fine, but most clients don’t.”
Carr said he was advised the K2 scheme was “entirely legal and had been fully disclosed to HMRC”.
But IFAs have to balance potential returns with the risk of retrospective action.
- “If you are employing tax avoidance schemes, you do it with an element of risk,” said Alistair Cunningham, director at Wingate Financial Planning.
- “We measure tax avoidance risk in a very similar way to how we measure investment risk. I have a client who is in something very similar and I’ve actively discouraged him from doing it.”
This risk is not just consigned high net worth clients, Cunningham adds:
- “At least once a year one of my clients will ask if the pension lump sum is going to disappear from the Budget.
- Every year I say probably not, but we can’t guarantee anything.”
The real problem with IFAs recommending the K2 scheme, Peters said, is that advisers lack the knowledge to properly advise on them.
Many have been designed for a particular client for a specialist tax firm, then another firm will buy it and market it en masse.
- “Even accountants don’t tend to understand the legislation. It’s an incredibly specialist area.”
Both are cautious on whether there is a moral issue for advisers.
- “It’s a trivial example, but pensions, ISAs and putting money in your wife’s name are all examples of tax avoidance, though they are all low risk,” Cunningham said.
- “There probably is a moral distinction a bit, but I would avoid getting drawn in to the conversation on tax avoidance and morality.” Peters added:
- “There is a moral element to it but, on the other side, is it someone who earns £2m paying £1m in tax? I don’t think that’s fair either.”
Simplified tax system
More dubious are the high commissions often paid to advisers and the creators of avoidance schemes, he added: “If you were a fee-based adviser, at least you’d be able to say they were doing it for the right reasons.”
Perhaps, Cunningham said, the result will be a simplified tax system – though for advisers, that is “a side issue.”
Ultimately, Peters said, the simple fact is that income tax is much higher than capital gains tax (CGT), so higher earners will always attempt to convert their income to CGT.
“There needs to be a general discussion on tax in general. We have a ridiculously complex system.”
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