Comedian Jimmy Carr Criticised for Tax Avoidance Scheme

Comedian Jimmy Carr was criticised for using an “aggressive tax avoidance scheme” to reduce his tax bill. The K2 tax scheme involves channelling Mr Carr’s earnings through an offshore trust based in Jersey. Jimmy Carr is estimated to have paid tax of as little as 1% on annual earnings of £3.3m. Had Mr Carr paid tax in the UK via the PAYE system, his earnings would attract tax of approximately £1.7m per annum. The K2 Wealth management scheme is a common tax scheme used by celebrities and high earning individuals including Gary Barlow, a conservative donor and recently made OBE. 

Prime Minister David Cameron generated headlines by criticising the scheme as “morally wrong”. The Lib Dem in tandem described Jimmy Carr and other tax dodgers as “the moral equivalent of people who cheat the benefit system”. The bullying of Jimmy Carr has led to much controversy with David Cameron being cited as hypocritical given that many of his Conservative peers employ similar offshore tax schemes. David Cameron’s father also has significant business registered offshore.

Jimmy Carr has since closed the scheme apologised for a “terrible error of judgement”. In a statement released via his Twitter page Carr said: "Although I’ve been advised the K2 Tax scheme is entirely legal, and has been fully disclosed to HMRC, I’m no longer involved in it and will in future conduct my financial affairs much more responsibly."

To put this in context it is important to distinguish between tax avoidance and tax evasion. Tax avoidance is entirely legal and involves the use of careful tax planning to reduce an individual’s tax bill. Such methods are commonly used by wealthy individuals, freelancers and contractors to reduce effectively manage their financial affairs. Tax Evasion is illegal and involves the use of techniques to deliberately defraud the Revenue. Tax evasion is a criminal offense and we do not condone such treatment. The use of offshore trusts however are often perfectly legitimate vehicles many of which have been approved with the HMRC.

How the K2 Tax Avoidance Scheme Works:

The K2 scheme involves channelling earnings via an offshore trust in Jersey.

The Trust will pay a basic salary to the individual (often via a UK personal service company) which is subject to basic rate tax in the UK.

The Trust will then make loans to its members which are interest free (or at very low interest rates).

The borrowers will not repay the loans for a long period of time and will often forget to make the repayments after which time the loans will be written off.

Offshore tax schemes are not viewed favourably by the HMRC and there is a risk that “aggressive” schemes will be unwound.  Earlier in the year, wealthy investors in the Eclipse 35 partnership scheme were found to have employed an aggressive tax avoidance scheme and face large penalties. Investors include high profile individuals Alex Ferguson and Sven Goran Eriksson. It would have been simpler and more cost effective to have employed standard tax planning schemes in the UK as used by many investors and contractors.