Over the last few days there has been a lot of coverage about comedian Jimmy Carr and the legal method by which he avoids paying tax on £3.3m of income per year. After days of public backlash, Carr used the online medium of Twitter to apologise for his 'error of judgement' over taking part in the 'K2 Tax Scheme' which was 'Entirely legal... fully disclosed to HMRC'. He is no longer part of the scheme.
How Do Tax Avoidance Schemes Work?
First of all, let's take a look at how this particular tax avoidance scheme works:
- K2 is a Jersey based trust, an offshore shell, through which a person could funnel all of/part of their earnings.
- The K2 Tax Scheme was a a service provided by Peak Performance Accountants, an accounting firm.
- A client will transfer their salaries/income into this trust as an investor.
- The trust then lends them the money back.
- As this is a loan, and in technical terms has to be paid back, their is no income tax liability on it.
The scheme has 1,100 clients, so the media scapegoating Jimmy Carr was unfair - others within similar schemes include Gary Barlow, Howard Donald, Mark Owen from Take That, as well as their manager, Jonathan Wild.
They used a scheme called Icebreaker, run by Icebreaker Management Services investing around £26M.
That scheme works in a different manner:
- An Icebreaker partnership puts together a fund of around £10 million from a collection of investors.
- The fund is used to purchased music rights in established and fledgling artists.
- The scheme can help the investor save more in tax than what they invest.
- The losses of an Icebreaker partnership are offset by a wealthy investor against that particular investor's other income over the last 3 years.
- The investor can also increase the tax relief by taking out offshore loans via Icebreaker.
- An example, a person investing £200,000 in cash can, after tax reliefs and offshore loans, earn £1 million tax free.
Should Carr have apologised?
Carr commented to a heckler at a recent gig that '..I pay all the tax I need to and not a penny more...' and in this regard he is correct. The schemes used here are perfectly legal as per HMRC rules, until they are challenged in the courts, or legislation is changed.
Carr picked up more flack on the basis of a comedy sketch he performed for Channel 4's weekly news satire programme '10 O'Clock Live'. In the sketch he aggressively lampooned a Barclays Bank Clerk on the basis that Barclays pays only 1% corporate tax by tax avoidance. The hypocrisy is what seems to have made him the scapegoat for all the tax avoiders.
Tax avoidance by individuals costs the economy £4.5 billion per annum and has prompted the Government to publish a consultation document for a general anti-abuse rule (GAAR) to put a stop to these types of tax schemes.
The Icebreaker scheme has already been challenged successfully in tribunals, and both its successor, Icebreaker 2 and the K2 scheme are now under investigation by HMRC.
Under a UK Tax scenario HMRC could challenge the legality of a performer or sportsperson channeling income through a corporate structure considering that the income is derived by the virtue of them being that individual.
If I earned £3.3 million as an employee, how much tax would I pay?
Using the tax calculator at www.uktaxcalculators.co.uk
, you would pay £1.69 million in combined tax and national insurance. In other words, for each pound you earn, you would get to keep just over 48 pence and pay just over 51 pence in tax
According to Government spending data, that would mean a contribution of £416,000 to Pensions, £400,000 to Healthcare, £187,000 to Welfare, £110,000 to Education, £150,000 to Defence.