K2 (tax scheme)

Last updated

K2 was an offshore wealth management scheme in which salaries of individuals in the United Kingdom were channelled through shell corporations in Jersey, Channel Islands. In June 2012, media reporting of people using K2 for the purposes of tax avoidance was followed by the United Kingdom's Prime Minister David Cameron characterising the scheme as "morally wrong". [1] Later that year the UK government began to introduce legislation to deter people from using such schemes.

Contents

Operation

The K2 scheme was promoted by a Kirkcaldy-based accounting firm, Peak Performance. [2] The scheme involved companies having their main operations in the UK and shell companies offshore. An employee of the UK company would quit their job and then be rehired by the offshore company to the UK. The offshore company would pay a lower salary than the person was originally on but would additionally loan them a large sum of money. Those loans would then be written down as tax liabilities to reduce the amount of tax payable. [3]

Controversy

On 19 June 2012, The Times published an investigation into individual tax avoidance, estimating that around 1,100 people had been using the K2 scheme to avoid making tax payments totalling around £168 million. The Times report named comedian Jimmy Carr as the K2 scheme client who was the largest beneficiary of these arrangements, claiming that he was sheltering £3.3 million per year and only paid 1% tax through using the scheme. [4] That evening, Carr was challenged on the matter at a show in Royal Tunbridge Wells. When an audience member told him he didn't pay tax, Carr responded with "I pay what I have to and not a penny more." [1] Speaking to ITV News, the Prime Minister of the United Kingdom at the time, David Cameron, called the scheme "morally wrong". [1] [5] Carr responded and issued a series of statements on his Twitter account; he apologised for using the scheme, stating it was a "terrible error of judgement" and that he had ceased using the K2 scheme. [6] The Herald reported that the accounting firm promoting the scheme may have taken around 15% in commission. [2] The Institute of Chartered Accountants of Scotland (ICAS) said they would investigate the K2 scheme and Peak Performance. [7]

HMRC crackdown

HM Revenue and Customs (HMRC) viewed K2 as a scheme for aggressive tax avoidance. [8] [9] In 2012, HMRC stated that they would be investigating how to challenge the scheme, [10] stating if it worked technically, they would challenge it in court. [11] In December 2012, the UK Government introduced the 2013 Finance Bill, which included a General Anti-Abuse Rule (GAAR) and a residency test, measures to deter people from using schemes like K2. [12] [13] In October 2013, Cameron announced an intention to publish a register of the owners of shell companies. [14] In January 2014, having stopped using the K2 scheme, analysis of the accounts of Carr's company FN Good Limited suggested that corporation tax payments of around £500,000 were now being made. [15] In March 2016, The Herald reported that firms running schemes like K2 had disappeared. [16]

Related Research Articles

Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes. Tax avoidance should not be confused with tax evasion, which is illegal. Both tax evasion and tax avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system.

<span class="mw-page-title-main">United Kingdom corporation tax</span> UK tax on UK-resident companies and companies with permanent establishments in the UK

Corporation tax in the United Kingdom is a corporate tax levied in on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK.

<span class="mw-page-title-main">HM Revenue and Customs</span> Non-ministerial department of the UK Government

HM Revenue and Customs is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support, the administration of other regulatory regimes including the national minimum wage and the issuance of national insurance numbers. HMRC was formed by the merger of the Inland Revenue and HM Customs and Excise, which took effect on 18 April 2005. The department's logo is the St Edward's Crown enclosed within a circle.

<span class="mw-page-title-main">Jimmy Carr</span> British-Irish comedian and television presenter

James Anthony Patrick Carr is a British-Irish comedian, presenter, writer, and actor. He is known for his deadpan delivery of controversial one-liners, for which he has been both praised and criticised, and his distinctive laugh. He began his comedy career in 1997, and he has regularly appeared on television as the host of Channel 4 panel shows such as 8 Out of 10 Cats, 8 Out of 10 Cats Does Countdown and The Big Fat Quiz of the Year.

<span class="mw-page-title-main">Shell corporation</span> Company with few, if any, actual assets or operations

A shell corporation is a company or corporation with no significant assets or operations often formed to obtain financing before beginning business. It may hold passive investments or be the registered owner of assets, such as intellectual property, or ships. Shell companies may be registered to the address of a company that provides a service setting up shell companies, and which may act as the agent for receipt of legal correspondence. The company may serve as a vehicle for business transactions without itself having any significant assets or operations.

Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxpayer's tax liability, and it includes dishonest tax reporting, declaring less income, profits or gains than the amounts actually earned, overstating deductions, using bribes against authorities in countries with high corruption rates and hiding money in secret locations.

IR35 is the United Kingdom's anti-avoidance tax legislation, the intermediaries legislation contained in Chapter 8 of Income Tax Act 2003. The legislation is designed to tax 'disguised' employment at a rate similar to employment. In this context, "disguised employees" means workers who receive payments from a client via an intermediary, i.e. their own limited company, and whose relationship with their client is such that had they been paid directly they would be employees of the client.

<span class="mw-page-title-main">Michelle Mone, Baroness Mone</span> British businessperson (born 1971)

Michelle Georgina Mone, Baroness Mone, is a Scottish businesswoman and life peer. She has set up several businesses, including MJM International Ltd in 1996 and the lingerie company Ultimo along with her then husband Michael Mone. Other ventures include naturopathic 'weight-loss' pills, and a fake tan product via Ultimo Beauty.

Ingenious Media is a division of London-based Ingenious Capital Management Limited, also known as Ingenious. The company was founded in 1998 by Patrick McKenna.

<span class="mw-page-title-main">UK Uncut</span>

UK Uncut was a network of United Kingdom-based protest groups established in October 2010 to protest against cuts to public services and tax avoidance in the UK. Various sources have described the group as left-wing in its political orientation.

<i>Copthorne Holdings Ltd v Canada</i> Supreme Court of Canada case

Copthorne Holdings Ltd v Canada, 2011 SCC 63, [2011] 3 SCR 721, is a decision of the Supreme Court of Canada on the applicability of the General Anti-Avoidance Rule ("GAAR") in the interpretation of the Income Tax Act (Canada). ("ITA")

General anti-avoidance rule (GAAR) is an anti-tax avoidance law under Chapter X-A of the Income Tax Act, 1961 of India. It is framed by the Department of Revenue under the Ministry of Finance. GAAR was originally proposed in the Direct Tax Code 2009 and was targeted at arrangements or transactions made specifically to avoid taxes. GAAR provisions were also present in the Direct Tax Code 2010 and Direct Tax Code 2013. However, the Direct Tax Code did not see the light of the day and was not implemented in India. GAAR was finally introduced in India by then Finance Minister, Pranab Mukherjee, on 16 March 2012 during the Budget session introduced vide Finance Act, 2012. However, it was considered controversial because it had provisions to seek taxes from past overseas deals involving local assets retrospectively.

<span class="mw-page-title-main">Dutch Sandwich</span> Dutch withholding tax avoidance tool

Dutch Sandwich is a base erosion and profit shifting (BEPS) corporate tax tool, used mostly by U.S. multinationals to avoid incurring European Union withholding taxes on untaxed profits as they were being moved to non-EU tax havens. These untaxed profits could have originated from within the EU, or from outside the EU, but in most cases were routed to major EU corporate-focused tax havens, such as Ireland and Luxembourg, by the use of other BEPS tools. The Dutch Sandwich was often used with Irish BEPS tools such as the Double Irish, the Single Malt and the Capital Allowances for Intangible Assets ("CAIA") tools. In 2010, Ireland changed its tax-code to enable Irish BEPS tools to avoid such withholding taxes without needing a Dutch Sandwich.

<span class="mw-page-title-main">Bermuda Black Hole</span> Corporate tax avoidance strategy

Bermuda black hole refers to base erosion and profit shifting (BEPS) tax avoidance schemes in which untaxed global profits end up in Bermuda, which is considered a tax haven. The term was most associated with US technology multinationals such as Apple and Google who used Bermuda as the "terminus" for their Double Irish arrangement tax structure.

<span class="mw-page-title-main">Panama Papers</span> 2016 document leak scandal

The Panama Papers are 11.5 million leaked documents that were published beginning on April 3, 2016. The papers detail financial and attorney–client information for more than 214,488 offshore entities. The documents, some dating back to the 1970s, were created by, and taken from, former Panamanian offshore law firm and corporate service provider Mossack Fonseca, and compiled with similar leaks into a searchable database.

<span class="mw-page-title-main">Edward Troup</span>

Sir John Edward Astley Troup is a British tax lawyer, and was a civil servant at HM Treasury and then HM Revenue & Customs. He spent two periods as a tax partner at the law firm Simmons & Simmons, from 1985 to 1995 and from 1997 to 2004, and was a special adviser to Kenneth Clarke as Chancellor of the Exchequer in 1995-97.

This article lists some of the reactions and responses from countries and other official bodies regarding the leak of legal documents related to offshore tax havens from the law firm Mossack Fonseca, called the Panama Papers.

Blairmore Holdings, Inc. was an offshore investment company established by Ian Cameron, father of former British Prime Minister, David Cameron. Following the Panama Papers leak, it was discovered that Blairmore Holdings was a customer of Mossack Fonseca, a large Panamanian law firm and corporate service provider at the centre of an international scandal on tax havens, tax avoidance and corruption.

<span class="mw-page-title-main">Panama Papers (Europe)</span>

The Panama Papers are 11.5 million leaked documents that detail financial and attorney–client information for more than 214,488 offshore entities. The documents, some dating back to the 1970s, were created by, and taken from, Panamanian law firm and corporate service provider Mossack Fonseca, and were leaked in 2015 by an anonymous source.

<span class="mw-page-title-main">Dan Neidle</span> British tax lawyer

Dan Neidle is a British tax lawyer, investigative journalist and commentator, who researches and writes on issues of tax law and tax policy. He founded Tax Policy Associates, a non-profit which advises policymakers and journalists on tax policy.

References

  1. 1 2 3 Patrick Wintour and Rajeev Syal (2012-06-20). "Jimmy Carr tax arrangements 'morally wrong', says David Cameron". The Guardian. Retrieved 2016-08-13.
  2. 1 2 Bain, Simon; Settle, Michael (22 June 2012). "Carr's £600,000 tax advice". The Herald . Glasgow. Retrieved 27 August 2016.
  3. ↑ "How the K2 tax avoidance scheme works". ITV News. 2012-06-20. Retrieved 2016-08-13.
  4. ↑ Mostrous, Alexi (19 June 2012). "Times investigation: the tax avoiders" . The Times. Retrieved 2016-08-13.
  5. ↑ "PM: These very dodgy tax avoiding schemes are wrong". ITV News . 20 June 2012. Retrieved 27 August 2016.
  6. ↑ "Comedian Jimmy Carr: I've made terrible error over tax". BBC News. 2012-06-21. Retrieved 2016-08-13.
  7. ↑ Hutcheon, Paul (1 July 2012). "Scottish firm behind Carr's 1% tax scheme to be probed". Sunday Herald . Retrieved 27 August 2016.
  8. ↑ Gompertz, Simon (21 June 2012). "When is tax dodging illegal?". BBC News.
  9. ↑ Cumbo, Josephine (2012-06-22). "End in sight for 'aggressive' tax planning". Financial Times. Retrieved 2016-08-13.
  10. ↑ "The 41,000 tax dodge schemes that HMRC can't crack". Telegraph. 2012-11-21. Retrieved 2016-08-13.
  11. ↑ Shiv Malik (2012-06-19). "Tax avoidance scheme used by Jimmy Carr investigated by HMRC". The Guardian. Retrieved 2016-08-13.
  12. ↑ Morrison, Sarah (9 December 2012). "Special report: People power forces big business to pay up". The Independent . Retrieved 27 August 2016.
  13. ↑ Crump, Richard (11 December 2012). "Government publishes much-anticipated GAAR". Accountancy Age. Retrieved 27 August 2016.
  14. ↑ "Secret owners of 'shell' companies to be made public". BBC News. 31 October 2013.
  15. ↑ Pauley, Nigel (2015-01-31). "Reformed tax-avoider Jimmy Carr paid £500,000 bill last year after bumper profits". The Mirror. Retrieved 2016-08-13.
  16. ↑ Bain, Simon (13 March 2012). "Tax avoidance crackdown never final". The Herald. Glasgow. Retrieved 27 August 2016.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.