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July 5, 2012

Cold Calling for Tax Schemes May Leave You Engaged… With HMRC

By Spear's

Paul Panayi wonders why anyone would sign up to a tax avoidance scheme after a cold call — just because you pay higher rate tax doesn’t mean you know what’s best for your tax planning
WHEN DISCUSSING TAX strategies with clients, I refer to a simplified version of Newton’s Third Law of Motion: every action has an equal and opposite reaction. To stretch my limited knowledge of science slightly further, what if the catalyst to a chain of events was a simple telephone call and the final consequence was ending up in court?

If clients could see the potential outcomes of their actions they may take a little more time and conduct a little more due diligence before making decisions around tax planning.

The number of firms that are cold calling in an attempt to sell tax planning ideas seems to have increased in the last few years. In itself cold calling is a very efficient method of marketing a product or service. It is also a numbers game – the more calls you make, the more appointments and potentially more sales, assuming the product is appealing, and what could be a more enticing concept than paying less tax?

But the names behind those numbers are meaningless; they are just a means to an end. The fact that they may be higher rate tax payers does not of itself make them suitably qualified to weigh up the merits of one tax planning strategy as opposed to another.
If we were a fly on the wall at the meetings where the planning is discussed, the adverse consequences of any planning would be probably talked about in abstract terms: ‘Any enquiries into the scheme will be handled by the sponsors, there may be some correspondence from HMRC but it will be dealt with by us,’ etc.

However, in recent months we have seen the arrest of several bankers and heard the prime minister commenting on a certain comedian’s tax planning and other participants in such schemes. I assume those actual outcomes were not put forward as possibilities to those individuals concerned.

 <br /> There is no evidence to suggest the celebrities and others named and shamed in the press acted as a result of an unsolicited call, but it is fair to assume there are many individuals who have. Yet the activity of cold calling to market tax planning strategies is, in the main, an unregulated activity – there is very little comeback on the caller.

This is especially true if the interests of the caller and the originator are not entirely dependent on the successful outcome of the planning – they get paid upfront regardless. Furthermore the more complexity in a deal, the more scope there is to be opaque in respect of fees.

Generally much is made of the opinion of the tax experts involved and whether the planning complies with the letter of the tax law. Yet the opinion of a QC is only in response to the questions asked – the more incisive the questions, the more comprehensive the opinion.

A few years ago I was involved in a class action case run by a large US litigation firm, suing a major bank. Their track record was impressive having won several billion dollar settlements in the past. This case was run on a contingent fee basis, the US firm funding all the costs and only getting paid their fee if they were successful in recovering a settlement for their clients. After several months and considerable outlay the US firm pulled out when they asked their QC to express in percentage terms the likelihood of success in court.

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They were looking for a figure which expressed a high probability of success, at least 70 per cent. When they received a figure from their QC below this number, they simply walked away from the case.

While it is not an exact science, to express tax strategies and planning in those terms may be more useful to clients. If something has a 60 per cent chance of success, it also has a 40 per cent chance of failing.

Paul Panayi is CEO of Optimus Family Manifesto – running smart family offices

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