Prime Minister David Cameron suggests that tax avoidance is immoral and illegal, but according to the law that’s just not true.
In the wake of Take That’s Gary Barlow and a horde of other celebrities branded as tax cheats, here’s a guide to the difference between tax avoidance and tax evasion for property investors.
What is tax avoidance?
Tax avoidance is the open and honest arrangement of a landlord’s financial affairs to pay the least tax possible.
What is tax evasion?
Tax evasion is deliberately misleading HM Revenue & Customs (HMRC) about your financial affairs in order to pay less tax than you really should
Who says tax avoidance is legal?
Tax law backs a landlord’s rights to pay less tax. The right is backed up by two well-known court cases which the then Inland Revenue lost in the courts.
What are the cases?
Ayrshire Pullman Motor Services & Ritchie v The Inland Revenue Commissioners in 1929 is the landmark ruling.
The judge, Lord Clyde, said: “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.”
The other case is Inland Revenue Commissioners v The Duke of Westminster in 1936.
The judge, Lord Tomlin, echoed Lord Clyde’s words by saying: “Every man is entitled, if he can, to order his tax affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.”
So what did Gary Barlow do wrong?
He invested in an artificial tax scheme that generated losses that he could set off against other income to pay less tax.
Is claiming property business expenses illegal?
No. Its legitimate tax planning that takes open advantage of the law to reduce taxable profits.