We've all heard of them, the "new" way to reduce how much tax each of us pay each month or each year. There always seems to be some "exciting" scheme that comes out that promises exactly this.
Working in my sector, I hear way too many stories about how people have been sold a plan which frankly relied on such a convoluted process that Einstein himself would have struggled to unwind and understand it.
Acronyms like EFURBS and EBTs are often thrown around by advisers as "legal" ways to reduce some element of taxation.
Firstly, I hate to be the bearer of bad news, but frankly most of these are absolute rubbish, or even worse - flat out scams.
If you've followed the news, you will have seen how the use of these types of schemes has brought down the likes of Rangers Football, Jimmy Carr and a whole bunch of others by HMRC.
In fact, HMRC won 22 of the 26 cases it brought to the courts in 2016/2017.
Do you really want to take the chance?
The reason that most of these cases were ever investigated by HMRC is simple - they are schemes that tax advisers/lawyers/accountants set up. While I can agree that this is actually these professional's job, it does make me wary of what they put together.
Ok, enough doom and gloom.
There is a light at the end of the tunnel here. There ARE ways to legally reduce the tax you play. Just be smart about it.
The answer is quite simple - use the schemes that HMRC and the government themselves have established.
There are 3 primary schemes which the powers that be have created for all of us to use:
Unfortunately as with everything in financial services, because we use acronyms for everything, these three legal and approved schemes get lumped in with the "not so above board" ones.
Don't be confused!
These three schemes are actually the creation of HMRC (click the links above if you don't believe me) and are therefore something that you can legally use to reduce your tax bill.
They are not without their issues though - they tend to be high risk and less liquid than your run of the mill investments. The upside is the tax breaks you receive for investing in them, as well as the potentially significantly larger gains that can be achieved.
So before you put pen to paper on that "new" scheme to reduce your tax bill, ask yourself the following:
- Who created this scheme? Was it HMRC or was it some clever guy in a dark room somewhere? If the latter, be afraid, be very afraid...
- What am I investing in? Is it directly into a company for shares (as SEIS/EIS is) or directly into a VCT (it's how they work)? Or am I investing in some company in Jersey, who then will invest in some company in Ireland, who then invests in some company in Bulgaria, who then finally just gives you all your money back? (You get my point?)
- And remember the old adage - if it seems to be too good to be true, it probably is