Mossack Fonseca: Tax Planning "Witch-Hunt"

The newspapers continue to be flooded with stories about the Mossack Fonseca papers revelation. One senior politician has described the furore as a “witch-hunt” which might turn individuals away from tax planning.

Around the world, leaders and influential figures have been implicated in the Panama Paper scandal; in the UK, it has focused predominantly on David Cameron and his personal finances. The public release of his personal tax affairs has revealed that the Prime Minister has acted legally and legitimately. So, are the papers blowing this out of proportion?

Downing Street has released a summary of David Cameron’s tax affairs and they show that he has paid over 33% of his total earnings in tax every year since he came to power. The revelation that he was gifted £200,000 by his mother has been the source of most controversy. Although a simple tax planning technique used to reduce his tax liability, Cameron has come under considerable scrutiny.

The current rules on Potential Exempt Transfers (PETs) state the individual is exempt from paying tax on the sum providing the individual gifting the money survives seven years after donation. PETs are legitimate financial planning tools and enable people to pass money to their children and grandchildren efficiently. These financial tools have become especially important with the rise in property prices. It is important to note that PETs are not tax-avoidance techniques, if the donor dies within seven years of gifting, the money will become part of the donor’s estate and therefore liable to inheritance tax.

The newspapers and Labour party have called for stricter rules against tax avoidance. A senior business chairman has explained that the spectrum of tax-related activity is very precise and is often dependent on the politics of the day. Currently, even the most innocent, straightforward tax planning is considered to be indecent.

Cameron has commented; “it is right to tighten the law and change the culture around investment to further outlaw tax evasion and discourage aggressive tax avoidance, but as we do so, we should differentiate between schemes designed to artificially reduce tax and those that are encouraging investment. This is the government – and this should be a country – who believes in aspiration and wealth creation.”

There are concerns that with the media describing tax planning solutions are illegitimate, individuals who should be considering tax planning might not seek advice. Treasury committee member and Conservative MP, Mark Garnier, has also commented on last week’s events; “If you are a tax evader then you should go to prison, and if you are avoiding tax then you are using the wording of the law to avoid complying with its spirit, and we should act to stop that. But when it comes to tax planning, it’s absolutely legitimate. “

Cameron has responded to the crisis by doubling his manifesto promise of corporate penalties for assisting tax evasion, explaining he will put pressure on companies with inadequate supervisory mechanisms that deliberately look to evade. Company need to have clear systems to prevent any illegitimate activity taking place, and for rogue individuals, the companies should not act for them or take responsibility.