Tax avoidance scandals are becoming a something of a regular occurrence. Following the Panama Papers in 2016, German newspaper Süddeutsche Zeitung obtained and shared documents (called the Paradise Papers) in November pertaining to the avoidance of tax through the use of British offshore territories like the Isle of Man.
Who is to blame for this “aggressive tax avoidance”? And how is it done? Today we look at the structure surrounding tax avoidance and see how accountants play a part in the scheme.
How Do Individuals and Companies Avoid Paying Tax?
The standard 20% VAT charge added to many products is used for public services. Through offshore company registration, companies and individuals can avoid paying VAT by creating leasing businesses and renting their own product back from the company they own.
One example from the Paradise Papers outlines a luxury item on which no VAT had been paid. The product was owned by Company 1. Company 1 then leases the product to Company 2 who happens to be based on the Isle of Man. Company 2 then leases the product again to Company 3 at a higher price, turning a small profit from the service. Company 3 then rents the product to Company 4 who happens to be owned by the owner of Company 1. Each company in the chain can deduct VAT costs as business expenses. This product, however, was used for private purposes and, thus, should have had a percentage of VAT paid depending on how often it was used for private use. Instead, no VAT was paid on the initial VAT import, and no further VAT was paid on private usage.
Another example from the leak revealed how individuals avoided paying income tax through a similar network. In this example, Company B pays a UK company representing a group of employees (Company R). Company R then transfers the wages to Trust O in an offshore tax haven. Trust O takes a cut of the money then transfers the remaining wages to companies based in the same tax haven (Company W and Company N). Company W and Company N are controlled by the employees working for Company B; Company W and Company N then employ a third party to loan the money back to the employees. Loans are not considered income so income tax is not applicable.
What Can Accountants Do?
A noteworthy point from the BBC Panorama investigation highlighted several individuals and companies offering services based on their skills in helping others avoid tax. Clearly, there has been a breakdown in professional ethics in a select few lawyers, accountants and firms.
Professional ethics are vital for the accounting profession. Each accountant that reports data accurately serves the public interest and, in turn, retains the public’s confidence in individual companies and the wider taxation system.
Consumer confidence in a company that has been implicated in a tax avoidance scheme often falls. An AAT report “showed that 43% of [consumer] respondents said not participating in tax avoidance would be an important consideration when deciding whether or not to engage with a business.” Simply, consumers vote with their cash. The report went on to encourage accountants to increase transparency by working with their employer to share information regarding company accounts with the general public and presenting that information in a clear and accessible format.
By complying with tax regulations (as opposed to circumnavigating them), companies create a more sustainable basis on which to build their business; it seems to be just a matter of time before the corporations and individuals involved are brought back into compliance – if they’re unprepared for this increase in tax payments, their companies may fall into financial difficulty.
Become a flagbearer of ethics with an AAT qualification at UKCBC; all AAT members are bound by AAT’s Code of Professional Ethics. Contact a UKCBC course advisor today for more information regarding the AAT courses available at UKCBC.
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