The Paradise Paper leaks last week have have reignited a public debate again about what is permitted in reducing tax bills, and what is classed as tax avoidance.
The Paradise Papers
The Paradise Papers leak is one of the biggest data leaks in history. Like its predecessor, the Panama Papers leak, the Paradise Papers highlight again the tax affairs of some of the world’s most rich and powerful. In some cases it exposes the use of artificial structures to shelter their wealth in offshore tax havens. Among those named and shamed are the Queen, Justin Trudeau, Bono and multinationals including Apple and Facebook.
The law firm Appleby is at the heart of the leak. They firmly deny doing anything wrong or illegal, stressing that they advise clients on “legitimate and lawful ways to conduct their business”.
Despite nothing illegal having taken place, the leaks have been jumped on by both press and politicians, keen to reignited a public debate about tax avoidance, what is permitted and the professionals who are complicit in assisting it.
It has also increased pressure on HMRC to clamp down on improper tax behaviour.
An Accountant’s View
The most important thing to understand about the Paradise Leaks is that nothing illegal has taken place. However, the public outcry appears to focus around a misunderstanding of the difference between tax avoidance and tax evasion. Most people and most business owners are “happy” to pay the tax that they owe.
But nobody wants to pay over their fair share. In its purest form, there is nothing wrong with legitimate tax planning, when it involves arranging one’s affairs in the most tax efficient manner under UK law.
The problem occurs when some perfectly legitimate tax planning is perceived to be inappropriate by the public and the media. Questions then surface again about the law and the structures that permit tax avoidance.
Additionally, concerns have also been raised over the role of the lawyers and accountants who advise individuals and businesses and facilitate such structures.
Could it affect the upcoming budget?
Despite the activities that have been exposed by the papers, being within the scope of the law, the perception is that the ultra-wealthy and multinationals are not paying their fair share. There is therefore a growing pressure on tax professionals and the government to put an end to tax avoidance. It is likely that calls will again be growing for Chancellor Philip Hammond to clamp down on the complex offshore tax structures of some wealthy Britons in his forthcoming Budget. We wait to see if this has an effect.
How Will HMRC Respond?
Last week, Jon Thompson, Chief Executive and Permanent Secretary of HMRC, confirmed that the HMRC will be investigating each allegation. It’s likely that the public outcry will galvanise HMRC in its ongoing battle against tax evasion.
In recent times HMRC has introduced a host of legislation and increasingly punitive measures to target tax evasion. The combination of leaks and tools in HMRC’s arsenal is going to make it more and more difficult for individuals to keep offshore matters secret, and those with offshore assets should urgently consider whether these require a review.
How should business owners respond?
It is important not to fall foul of any changes in legislation that might occur. The risks of not spotting an error and failing to correct them have increased dramatically. Enormous potential penalties could not be due, in excess of 200% of any additional tax due.
At this stage, it is unclear what actions, if any, HMRC will take in retaliation to the release of these 13.4m documents in the Paradise Papers. But at the very least, individuals and corporations will now have their tax affairs and offshore empires brought under greater scrutiny, which means that it is more important than ever to work closely with an accountant who is reputable and can help you make the right tax decisions for yourselves and your business, with a weather eye on the prevailing winds in HMRC too!