It’s safe to say it wasn’t a laughing matter. He might be a comedian, but Jimmy Carr wasn’t having a giggle when the story broke about the K2 tax avoidance scheme he’d been invested in. He didn’t have the police knocking down his door, but he did have the paparazzi surrounding his house.
See, whilst he might not have done anything illegal, strictly speaking, he did do something morally wrong. Or so David Cameron told us anyway.
Of course, morals are important to everyone, but for those in the spotlight as a celebrity (or even those of us who have a business with clients who take note of what you’re up to), tax decisions are very visible.
In the long run, a tax avoidance scheme is definitely not in your interest as the best way to get money out of your business.
This is how tax payments backfired on Jimmy Carr, and how you should avoid tax issues backfiring on your creative agency.
1. He Spoke To The Wrong Accountant.
Carr decided he wanted to reduce his liable income tax, but instead of speaking to an accountant who actually cares, he spoke to someone who likes to dice with the line of legality. The accountant he spoke to advised him to invest in a K2 Scheme.
It was the accountant’s attempt at being creative with his taxes. We say attempt, because it’s not exactly a successful way of doing things. You stick to being creative; let your accountant stick with doing your accounts well.
2. He Invested In A K2 Tax Avoidance Scheme.
A K2 scheme is not tax evasion. That’s illegal. But it is tax avoidance, and basically, it’s a bit dodgy. It’s like lying to your parents. You know you shouldn’t be doing it, and you know you’re going to regret it in the future.
The scheme works because you resign from your business, and sign up with a K2 offshore company, who then loan you back to your business as an employee. Your salary gets paid into the offshore company, who then lend it to you, rather than paying you.
And so because you’re receiving money on loan, and not as a salary, there’s no tax to pay.
Not very ethical right?
3. He Got Discovered.
Someone, somewhere, leaked it. Or HMRC got smart. Or some dubious hacking went on. Whatever happened, we all found out about the tax avoidance scheme. It wasn’t a scam per se, because it wasn’t illegal, but it was certainly cunning and conniving.
Which we don’t like. We’re British.
We might be all for complaining about taxes, but when it comes down to it, we don’t like cheaters. You have to pay what you have to pay. We’re all for protecting what’s legally yours, but no-one likes fat-cat bankers scamming the system.
So, Jimmy’s reputation got a bit of a hit, and he had to apologise.
And that says it all. You don’t apologise if you haven’t done anything wrong. (Unless you have a wife, in which case you should always apologise for absolutely everything – it’ll keep everyone happy!)
You don’t want your creative agency to have to apologise for wrongdoings.
4. It Could Have Been Worse!
Jimmy closed his K2 scheme, and stayed on the right side of the law. Of course, he now has to be absolutely squeaky clean about his accounts, and can’t take advantage of any tax reduction schemes, lest he attract more media attention.
So he had to pay over £500,000 in taxes this year. Ouch.
Still, it could have been that HMRC found the K2 scheme fraudulent, and ordered Carr to pay backdated taxes, plus interest, plus penalty fees. Loopholes can be closed, and there are lots of complicated and complex rules surrounding tax avoidance schemes. It’s very easy to get stung.
Just those words – interest and penalty fees – should have you quivering in your shoes.
It all boils down to one of those golden rules in life. If it sounds true good to be true, then it probably is.
There’s a blurred line between utilising the best ways to take money out of your business with legitimate tax planning, and these artificial avoidance schemes which could land you in a whole heap of trouble.
Don’t do a Jimmy Carr, and don’t put your creative agency in the dog house. Just pick up the phone and give us a ring, and we’ll help you plan the best way to keep your taxes to a minimum.
