I never thought the day would come when I would write an article on this subject but I am going to use my column this month to talk about why you need to pay your tax. I haven’t suddenly become a socialist and I am certainly not going to give moral advice. I am well aware that many people avoid paying tax because they think with good cause that our government wastes huge amounts of the money that they collect from us. I am also well aware of the opposite argument that the tax that we pay is the price of living in a civilised society. But my job is to give business advice, not moral advice, and the fact of the matter is that tax avoidance and evasion is no longer worth the risk.
Just the other day, there was an article in the Sunday papers about how HMRC are pursuing 780 wealthy investors for over £2 billion in tax and penalties that they claim to be due because they invested in film investment schemes. The facts of the case are quite terrifying. People who invested just £200,000 are facing a tax bill of up to £4 million – twenty times their original investment. What is worse still is that these investors will be asked to pay these penalties in advance, i.e. before the individual schemes that they invested in have been judged by a court to be illegal. This seems to contravene the principle of innocent until proven guilty but it is how the law works now. There are some very wealthy and well-known celebrities amongst the 780 people but there are also many ordinary people including lawyers, doctors, accountants and no doubt a few estate agents. It has been claimed that up to 70% of their investors could be driven into bankruptcy and some are said to be suicidal.
This story is a terrible example of the consequences of tax avoidance and evasion but it is by no means unique and I see examples of it in my work almost every day. When I am asked to value a business, the first thing that I have to do is to assess the true level of profit and this is often far from straightforward. I come across all manner of different tax avoidance methods, some crude, some sophisticated, some legal, some illegal and some borderline. A good tax advisor can do a great deal to minimise the tax payable using legitimate methods. However, it never ceases to amaze me how many business owners rely on their accountant for tax advice rather than using a specialist tax advisor. Accountancy and tax advice are two different professions. Most large and medium-sized accountancy practices have a separate tax specialist. If yours does not, you will need to pay for specialist tax advice elsewhere.
Time after time I come across cases where failure to take proper tax advice ends up preventing my clients from selling their businesses. A business that I sold for £1.35 million turned out to have a £2.5 million VAT liability because the owner had been misadvised by their sole practitioner accountant over a period of twenty years. The sale fell through and the owner’s retirement plans have been postponed whilst it is determined who will be liable for the cost of rectifying the mistake.
In another case, the sale of a business at £1.1 million nearly fell through because the owners had paid themselves via a service company that paid them using inter-company loans rather than cash. The scheme saved them approximately £200,000 over the years but created a potential tax liability of over £600,000 and almost cost them the sale of their business.
On an ever more frequent basis, I am also asked to sell businesses by owners who have run up tax bills that they cannot afford to pay. A few years ago, HMRC would have agreed a payment plan but now they are increasingly playing hardball and seem only too happy to call in the receivers regardless of how the debt was incurred.
It is almost impossible to achieve the best price for a business that has to be sold quickly in these circumstances and I have seen cases where the owners of businesses that should have sold for several million pounds have ended up with nothing.
So to sum up, my advice would be to ensure that you take proper advice from a specialist tax adviser, not an accountant, and that you avoid all temptation to sail too close to the wind. A scheme that saves you a relatively small amount of tax can all too easily end up costing you your business. Let’s face it, the rewards are simply no longer worth the risk.
There is really only one completely foolproof way to avoid paying tax and that is not to earn the money in the first place. My gardener has got this down to a fine art. He works hard all year until he hits the higher rate tax band and as soon as he does, he does not do another day’s work for the rest of the year. He says that if he has to give the government half his earnings (tax and national insurance), he would rather not have his half than let them have theirs. A perfect example of a legitimate tax avoidance in a legitimate form but not one that would suit all of us.
Adam Walker is a management consultant, business sales agent and trainer who has worked in the property sector for more than twenty-five years.