Are K2 Tax Schemes Legal?

There has been a lot of press lately about the K2 Tax Avoidance schemes that are used by some high earners to significantly reduce their tax bill. The one person who was singled out by Prime minister David Cameron was comedian Jimmy Carr.

For many years high earners have looked for ways to reduce their tax bill and with a top rate of 50% currently, there is quite a bit of impetus for them to do this. The problem lies between the two different terms – tax avoidance and tax evasion. Tax avoidance uses legal (if not morally right) schemes and methods to reduce a person’s tax bill. There have always been ways whereby tax experts can move money around, obeying all the laws, and come up with a lower tax bill. Many of the tax loopholes that were open in the last few decades have been closed and more emphasis has been put on not following the letter of the law but following the intent behind it.

The K2 tax avoidance scheme was one such way of not paying tax in the spirit of the law, but instead finding a legal way around paying as much as maybe other people were paying. However, if you are asked by your accountant if you want to pay less tax in a legal manner then who really in their right mind would say no?

What many people had come to believe was the norm and would not get them into trouble, is something that now they really need to think twice about. Is it really right that you are earning possibly millions of pounds a year and you are only paying 1% tax on those earnings? You know that the top rate of tax is 50% (or at least you have an inkling that it is more than 1%) so when someone offers you a scheme at a much lower rate you need to have some alarm bells ringing in the back of your mind.

Gone are the days when you can blame your accountant for not paying the proper tax for you (although you really have an obligation yourself to ensure that you are) – in the current climate everyone is expected to use their own moral compass to make sure that they are doing the right thing.

Maybe this even extends back as far as 1992 when the Queen herself started to pay tax and thus enter her own realm of accountability. Added to that the scandal of the MPs expenses and no-one is safe in their own bank account. Since then the onus seems to have been on people to ‘do the right thing’ and with the advent of social media and everyone knowing immediately what everyone else is up to, it is difficult to run and hide from a situation like this.

No doubt Jimmy Carr has learnt his lesson from the recent ‘outing’ by Cameron and there are likely many others waiting in the wings, panicking and phoning their accountants to check that they are not next on the list, but in the meantime we all have to look at ourselves before we cast the proverbial stone in the greenhouse.

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