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K2, #toffshore and aggressive avoidance

June 21, 2012

So you resign from your job with – let’s call them “Employer Ltd” – and you go to work instead for a company, which we’ll call, originally, “Company”.  And your old employer takes out a contract with the company for Company to provide various services to Employer… Services like, oh, exactly what you used to do when you worked for them, for example.  And – what a coincidence – Company sends you to go off and provide those services for Employer.

You might be doing the same stuff, perhaps sitting at the same desk, surrounded by the same people.  But you don’t work for Employer any more.  You work for Company.  And all that Company pays you is minimum wage, so that’s what you pay tax on, all legally done and dusted.

Except – oh look!  Company are also making you a loan of a remarkably large amount of money.  And you don’t pay tax on loans, do you.  So you’re quids in… until you have to pay the loan back.

You never have to pay the loan back.  You effectively own Company (via a trust and a couple of quick offshore shuffles).  Woo hoo.

That, at least as I understand it, is the essence of K2, the avoidance scheme that has embarrassed Jimmy Carr over the last 24 hours.  And, to his credit, he’s said he was just acting on the advice of his accountant and, now he gets it, he’s not going to do it any more.

And here’s an infographic showing the difference in scale between the amount of tax he might perhaps have avoided, and the amount of tax a certain multinational might have avoided recently…

There are a couple of things to be said about all this.

First of all, there’s a huge amount of hypocrisy from politicians about this case.  It makes me think it would be a good idea if we went down the American route and made tax returns subject to Freedom of Information Act requests, with a reasonably chunky fee payable (to discourage the frivolous or plain nosy) without preventing or pricing out proper investigative journalism.

Secondly, not that I’m a conspiracy theorist or anything, but there’s a worrying number of pieces about tax avoidance that seem to end with a plea for a flat rate tax.  It’s a trojan horse: don’t be fooled.  We might have to come back to that one!

Finally, it’s relatively easy for the press, the political class, and the twitterati to go after a tax-avoiding individual.  People have reputations to maintain.  People have family and friends to look in the eye.  People have shame.

Big business?  Their reputations may not suffer from an aggressive “tax arbitrage” or “tax mitigation” strategy.  And how many of them have any friends?  Any shame?

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