The completely legal K2 tax dodging scheme, for which David Cameron the Prime Minister condemned the comedian Jimmy Carr, goes something like this:
· The offshore company invoices the dodger’s clients for his services. For example, when a joker tells jokes on TV the offshore company will invoice the tv company. Being in a well chosen tax haven, the company pays no tax on this receipt of money.
· The dodger takes money out of the offshore company in the following forms:
o Minimal amount as salary
o Maximal amount as a loan
· He pays tax on the minimum salary.
· For the loan, the Inland Revenue has an assumed interest rate. In July 2012 this is deemed to be interest at 4%.The Inland Revenue assumes that the taxpayer is receiving only the interest as taxable income.
· The dodger pays tax on the interest only: 20% on 4% = 0.8% tax.
An example in real money of a K2 arrangement could be like this:
· take a salary equal to your personal allowance, £8,105 at zero tax
· take a loan from the company of £859,250.
· The taxman deems that you pay interest on this at 4% = £34,370 (which happens to be the 20% band limit). You are taxed on this interest.
· Pay tax on this £34,370 (notional interest) at 20%.
Which means using a K2 type dodge, on the “loan” of £859,250 you would pay £6,874 tax.
An effective tax rate of 0.8% instead of the 50% income tax rate were the “loan” to be recognised as salary.
HMRC makes no requirement on how quickly the loan should be paid back - so why bother.
Except the loan still exists the next year - another 4% to tax, on income you've already received, and unless you really do only earn the 8k that year, now you're up in the next tax band, too. Unless you leave the UK for that year, actually live in the other country for tax purposes and pay off the "loan" that way.
ReplyDeleteIt's a nice theory, but a lot harder than this description suggests. Could work well for those with very variable incomes - pop stars with infrequent major tours, Olympic athletes - not for most though.
You are correct, the loan continues to exist and the 4% interest remains taxable in future years.
ReplyDeleteThis is just one arrow in the quiver of a well advised tax dodger. Other arrows can deal with the loan in due course. As our list of tax dodges grows - as we find time to write them - we will aim to show this.
A Flat Tax of maybe 10% , for everyone , even on benefits , no allowances , no refunds , no accountants , no black economy , simple , easy to understand and Fair .
ReplyDeleteNo...the company simply writes off the loan at the end of the year as unrecoverable...that's what I was told by someone who has done this for 15 years consecutively...£500k per year more or less tax free through Isle of Man bank account.
ReplyDelete