The Morality of Tax Planning and Avoidance

This article discusses the role of the financial planner in treading the fine line between mitigating tax effectively and respecting a client’s view on the morality of taxation and the level of avoidance that he or she is comfortable with.

Written by Mark Underdown

The outrage in the UK over the recent Panama papers revelations and, in particular, David Cameron’s father’s offshore financial affairs, brings to light the sensitivity of tax planning.

Although perfectly legal, it’s clear that sections of the public and the media frown upon (and some are outraged by) an individual or corporation having their finances offshore.

From a financial planning perspective, a large part of our role is to mitigate tax effectively, and it’s basic investing logic to ensure that you minimise taxes so that compound interest can work it’s magic unrestricted.

The leak highlights the importance of ensuring that we get the details correct from any legislative point of view (as they just might get checked in the future), but there are also other more subjective factors to take into account.

Personal views towards tax avoidance

I think it’s sensible to get an idea of a client’s personal views towards taxation in general and the level of tax avoidance they deem reasonable.

For example, a higher rate taxpayer may not blink at obtaining higher rate tax relief on pension contributions, knowing full well they will only pay the basic rate at retirement, and yet may find it immoral setting up an offshore trust to mitigate inheritance tax.

Another person may feel that everyone should pay their fair share, but when faced with a potentially large inheritance tax bill, suddenly this specific tax is unfair and they should rightfully attempt to avoid it.

Then there are those who claim every tax allowance and benefit available, maximize their expenses (often times to questionable levels) and would be comfortable not disclosing a few cash in hand payments, yet criticize wealthier tax avoiders as unscrupulous tax dodgers and robber barons.

I think we are all at some level, guilty of a little hypocrisy when it comes to tax avoidance, or perhaps what is right and proper in this field requires public debate so we all know where the line should be.

Ironically, people don’t appear to understand that the UK is itself a tax haven for corporations and individuals from around the world and especially relative to other European countries’ tax rates.

The views, opinions and beliefs of your clientele will diverge on this subject, similar to how they will diverge on investment risk and it’s important to understand how they feel and the type of structures they would be comfortable with.

Practical tax planning

To an extent, I feel political power comes into play when deciding what type of tax planning is acceptable and what isn’t.

For example, the government loses millions in revenue from ISAs and Pensions tax vehicles, however they are politically supported and used by a huge amount of the British population. Attempts to attack these, if HMRC decided they wanted to, would prove extremely challenging.

Then there are tax avoidance measures that on the surface appear outright scams and are shut down (think Employee Benefit Trusts) and schemes that try to cleverly work within existing tax rules, but whose purpose appears solely focused on the tax relief, rather than the investment that the tax relief is attempting to promote (EIS film schemes).

In my opinion the reason why these types of schemes fail is partly because there is no political support for them. In the minds of some, cleverly utilising pension tax relief would be viewed as just as much of a scam as the above examples that were shut down, yet pension tax relief is taken advantage of throughout the country in a perfectly respectable behavior.

It’s always worth remembering that the government makes the rules and is more powerful than you are. So ignoring any moral debate, from a practical point of view, it seems far more sensible to stay mainstream than it is to try and save extra tax on weird and wonderful schemes and structures.

Where is the line drawn?

It seems to me that those who are in the middle, draw the moral line. Both the rich and the poor are viewed as either scroungers or tax dodgers, and yet I expect if the shoe was on the other foot, we would all claim benefits if we financially needed to, or would live in some exotic low tax location if we could afford to.

An ISA and Pension is arguably just as tax efficient as many offshore tax structures and yet it is perfectly acceptable behavior to invest into them.

Perhaps then it’s the level of wealth someone has that makes tax avoidance unpalatable. If so, at what level of wealth does arranging your tax affairs appropriately become morally wrong?

Is it a net worth of £1million, 10million or £100million?

Each of us will have our own view on the morality of taxation and the level of avoidance that we are comfortable with, however it’s important to understand the personal views and wishes of our clients before applying the tax legislation to their circumstances.

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Over to You…

What do you think? Does an individual or corporation having their finances offshore make you see red?

Mark Underdown is The Nomad Paraplanner.  He works remotely and can assist with investment research and financial planning reports. Visit www.nomadparaplanner.com to find out more.