Avoidance or Evasion

[Red Wood]

Scenario.

Company A) FY running 1 Jan - 31 Dec
Company B) FY running 1st April - 31st Mar

Both companies share one director (other unrelated directors at each)

Could comp A invoice comp B for value of B profits prior to end of tax year reducing tax liability to £0. Then comp B invoice comp A for A profits prior to end of their FY in DEC.

I believe this is called 'Transfer Pricing', could be completely wrong, but if this is the case then SME's are exempt.

The aim is to bounce the profit from one company to the next each year thus removing tax liability indefinitely?

I'm sure it's probably classed as evasion, but I had the thought today driving home.

 

[Newchodge]

Invoice the other company for what, exactly?

 

[Adam93]

the transaction would be ignored for tax purposes for a few reasons - transactions between connected parties are deemed to occur at market value for tax purposes (so if no services/goods are purchased the market value will be £nil). Also GAAR.

Essentially what you describe is a sham transaction and will be ignored for tax purposes.

That said, with corporation tax rates increasing i would say deferring corporation tax this was would be a bad idea especially if you have the cash to pay it.

probably best running your ideas by your accountant.

 

[Red Wood]

Invoice the other company for what, exactly?

Consultancy, both companies are in the same sector and often share resources.

 

[Red Wood]

the transaction would be ignored for tax purposes for a few reasons - transactions between connected parties are deemed to occur at market value for tax purposes (so if no services/goods are purchased the market value will be £nil). Also GAAR.

Essentially what you describe is a sham transaction and will be ignored for tax purposes.

That said, with corporation tax rates increasing i would say deferring corporation tax this was would be a bad idea especially if you have the cash to pay it.

probably best running your ideas by your accountant.

Thanks for your response, I hadn't heard of GAAR before.

A quick Google seems to suggest the UK haven't applied GAAR as to not undermine UK company tax planning, according to PwC.

 

[Adam93]

Also, you wouldn't be able to take any dividends as there will be no profit. Each invoice will get bigger and bigger and impossible to justify.

 

[WaveJumper]

Pay your taxes, concentrate on your driving and sleep easy at night. Once you start trying to be "clever" with your books thats when HMRC will be wanting to have an audit. As @Adam93 mentioned run it by your accountant.

 

[The Byre]

This kind of Shennanigans is best done between companies in different countries and for real things that a tax official will understand and believe. For example, a license fee for IP or just royalties for a design.

Pay your taxes, concentrate on your driving and sleep easy at night. Once you start trying to be "clever" with your books thats when HMRC will be wanting to have an audit.

This is the real answer! If HMRC thinks that something is not kosher, they can go back 25 years into your books. And if the books are no longer complete and with full receipts for that period, they can make assumptions that have the full force of the law.

 

[Red Wood]

I agree @WaveJumper, but don't want to have to pay more than we have to

 

[Mark T Jones]

Invoicing stuff that didn't happen is definitely evasion.

You might be able to 'cleverly' justify it - but beware the afore-mentioned inspection. As was once said to me 'HMRC are the only organisation in the UK who can snap on rubber gloves without asking permission'.

 

[Spur Support Services]

If there is no commercial basis for the charge,
If it does not reflect a commercial arms length transaction for the value of services received by one entity from the other,

Then the cost is highly unlikely be tax deductible in the company that is being expensed simply because it's not wholly and exclusively for the business, trade etc.

However, you do run the risk that HMRC will turn round and charge tax on the invoice raised in the invoicing company.

So you could be taxed in one company, with no tax deduction in the other.
Your tax plans could be fairly costly.

HMRC doesn't take kindly to deliberate acts, with this being a clear deliberate movement of profit and the penalties if such a scheme results in a historic liability could be very high, especially if HMRC discover it, rather than you voluntarily disclosing the problem to them.

If HMRC deem that your charges are deliberate tax evasion, then HMRC will also mark you as high risk which will increase the likelihood that they will raise enquiries on any or all other tax areas (VAT, Payroll, etc), to ensure that you aren't trying to claim anything else that you shouldn't be.

 

[Bobbo]

I agree @WaveJumper, but don't want to have to pay more than we have to

Plenty of ways to legitimately reduce the tax bill without undertaking the blatant fraud you describe in the original post

 

[WaveJumper]

Thats we we pay our Accountants and hopefully they keep us on the straight and narrow path with as much of our hard earned cash in our pockets as possible ??

 

[Red Wood]

Plenty of ways to legitimately reduce the tax bill without undertaking the blatant fraud you describe in the original post

I'm sure there is, but our accountant who is not a tax specialist, suggest the usual low hanging fruits, with anything inventive left out.

Reducing profits by a 4 or 5 figure sum is hardly that impactful on a tax liability. The money available for the business rather than new laptops, mileage, every little expense is what I am aiming for.

Problem is, the profits are not large enough to pay for a tax specialist, so I like to investigate myself.

All the large comps have very interesting ways of legally avoiding tax, so I'd be stupid not to always try and explore these.

 

[The Byre]

but our accountant who is not a tax specialist,

How can one have an accountant who is not a tax specialist??? Isn't that what they are there for???

 

[WaveJumper]

How can one have an accountant who is not a tax specialist??? Isn't that what they are there for???

he's just not the Jimmy Carr type ???

 

[Red Wood]

How can one have an accountant who is not a tax specialist??? Isn't that what they are there for???

His tax planning is vanilla. There is nothing creative.

 

[Mark T Jones]

All the large comps have very interesting ways of legally avoiding tax, so I'd be stupid not to always try and explore these.

They pay lots of people lots of money to find legal ways to avoid tax.

Paying that kind of expert would cost more than the savings for most of us.

I've yet to find a business that isn't looking at ways to 'optimise' tax; some with more integrity than others.

My favourite is always small, cash business, who nod & wink when handing you accounts that show losses. 'Sorry mate, you can't have it both ways'.

 

[japancool]

A quick Google seems to suggest the UK haven't applied GAAR as to not undermine UK company tax planning, according to PwC.

They have. Haven't you seen the stories about those sham film making projects that have been prosecuted?

 

[japancool]

Set up a company in the Seychelles.
Sell your IP to them.
License it back off them.
Job done.

 

[Red Wood]

They have. Haven't you seen the stories about those sham film making projects that have been prosecuted?

I have yes, didn't realise it was related to GAAR. (First time I'd heard the term was in this thread).

 

[STDFR33]

Large companies are usually part of a group with large complex structures where more tax avoidance opportunities arise than a small consultancy firm.

It seems that you are looking for an opportunity that doesn’t exist.

Large companies can pay for a number of professionals to argue their case in the event of an enquiry but you can’t afford to pay for a tax specialist.

I would pay your tax and sleep easy knowing you’re doing everything by the book … there’s a value in that.

 

[Bobbo]

Set up a company in the Seychelles.
Sell your IP to them.
License it back off them.
Job done.

Pay income tax on dividends from Seychelles company

Or worse Seychelles company is assessed as being managed and controlled from UK and is considered UK resident for corporation tax

 

[Red Wood]

My favourite is always small, cash business, who nod & wink when handing you accounts that show losses. 'Sorry mate, you can't have it both ways'

This certainly isn't a case of that.