Ian Warwick explains why it’s so important for advisers to fully consider the facts behind tax mitigation, particularly in the context of encouraging economic growth.
In recent months, we have seen the plethora of headlines muddy the water around tax planning and the ethics thereof. Opportunists have jumped on the band wagon with outrage that anybody should even consider the notion of being unhappy at paying ever increasing taxes – remember the VAT increase from 17.5 per cent to 20 per cent, that was originally branded a short term measure wasn’t it?! I’ve even seen comments from a financial adviser purporting that advisers should not get involved in clients’ tax matters as it is immoral, which I’m assuming means that this adviser doesn’t advise his clients to save in a pension or ISAs?
When the sensationalism has died down, it is important to reflect that tax incentives are offered by the government in order to manipulate public behavior. A key economic and political philosophy behind this is that nobody ‘likes’ paying tax. It is therefore strange that the opportunists have been so outraged by this notion which has been central to political rationale for centuries.
Tax incentives are all around us, whether it be pensions and ISAs to encourage saving or Gift Aid to encourage charitable giving. There are then incentives offered by the government to encourage investment in growing UK businesses and stimulating economic growth, which is where the likes of the Enterprise Investment Scheme, VCT and Business Relief come in.
The government’s Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) is a, HMRC-backed, government initiative introduced over 20 years ago in order to encourage economic growth and funding for UK businesses. As the rules have changed and developed, EIS investing has become increasingly popular with roughly £1bn per annum now being invested via EIS. The government regularly changes the rules around EIS to ensure it remains appropriate and relevant; whether that is increasing limits, introducing SEIS or excluding/including specific sectors – a prime example of that being the decision to remove government-subsidised renewable energy projects from EIS qualification at the end of this tax year.
Our rough workings-out suggests that during the past 20 years, as many as 150,000 jobs could have been created in the UK as a result of EIS alone. Rough calculations suggest the income tax generated as a result of these new jobs will have offset the income tax mitigated by the EIS investment in the first place, so once you then add on corporation tax, VAT, national insurance, etc. the treasury is most likely in the black and we have additional jobs created. So, before opportunists jump on the band wagon of moral superiority and slamming tax mitigation the facts and benefits should be fully considered.
Of course, advisers shouldn’t be involved in tax evasion schemes, that is illegal, and advisers and investors should make their own judgement regarding offshore tax mitigation or such like; that is not for me to judge. However, where there are legitimate government tax incentives I believe it is an adviser’s duty to consider these options as part of their financial planning. Investing in EIS is not suitable for everyone but where it might be suitable it can offer tax savings as well as potential growth. EIS investing can also be good for the wider economy.