Newspapers have reported today of the Comedian Jimmy Carr’s involvement in a tax avoidance scheme which allows him to shelter millions each year and pay just 1% income tax.  The tax avoidance scheme known as “K2”, marketed by Peak Performance Accountants (PPA) enables income to be routed into a Jersey-based trust which lends the money back to the individual taxpayer.  It is not taxed as income in the hands of the taxpayer as it is treated as a loan. According to a special investigation by The Times newspaper thousands of taxpayers in Britain use the scheme to carefully do their accounting ‘under the radar.’

HMRC have brought in several measures, including the Disclosure of Tax Avoidance Schemes (“DOTA’s”) regime requiring tax avoidance schemes to be disclosed to HMRC in advance.  An HMRC spokesperson said on Tuesday morning, “HMRC is extremely effective at shutting down tax avoidance schemes fast and effectively. The avoidance ‘industry’ has been seriously undermined by HMRC’s focus on tackling avoidance – preventing billions of pounds of tax being diverted from the Exchequer.”

More recently, a consultation document in the general anti-abuse rule (GAAR) has been released by HMRC as it looks to clamp down on the practice of tax avoidance. The rule would apply to income tax, corporation tax, capital gains tax, petroleum revenue tax, inheritance tax, stamp duty land tax and national insurance contributions.  It will operate by using a “main purpose” or one of the “main purposes” tests in order to determine whether a scheme is artificial.  The intended consequences of the GAAR would be to:Deter abusive tax avoidance schemes;

• Reduce legal uncertainty around tax avoidance schemes;
• Contribute to providing a more level playing field for business; and
• Offer opportunities to simplify the tax system

The GAAR is therefore intended to proactively define specific schemes as abusive and would explain what types of avoidance schemes are “abusive” and covered by the rule.  As to whether the K2 scheme will be caught by the GAAR remains to be seen.  The clauses in the draft GAAR legislation included in the Consultation Document will be applied for a step-by-step analysis as to whether the scheme will be caught.

If the Chancellor is to achieve his aim of tackling tax avoidance without damaging the tax competitiveness of the UK it must be properly targeted at abusive anti-avoidance schemes. The period of consultation, before the draft 2013 Finance Bill is published, is expected to take place until September 2012.  It is hoped that in this period appropriate safeguards will be built in to protect taxpayers who are not undertaking abusive avoidance.