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Jimmy Carr's Favorite Tax-Avoiding Blue Chips

LONDON -- Two weeks ago, if I had seen the words "Jimmy Carr" and "K2" in the same sentence, then I'd have assumed that one of Britain's hardest-working comedians had taken up mountaineering. It turned out that this "K2" was an offshore tax avoidance scheme that Mr Carr had been using -- and it could have reduced his effective income tax rate to as little as 1%.

Soon after this was revealed, Mr. Carr did a 180-degree mea culpa, and he now says that it was a "terrible error of judgement." He was rich enough to benefit from a complex tax avoidance scheme, but unfortunately for most other taxpayers, it isn't cost-effective to use these schemes because of their very high set-up costs.

But if you're a multibillion-pound multinational company, you have plenty of scope for avoiding tax by using similar methods to those employed by K2. Several of Britain's biggest companies have been in the spotlight during the last few years for having done exactly that -- and rewarding their shareholders in the process.

Avoidance is perfectly legal
Some people believe that tax avoidance is both immoral and against the law, but it remains a fact that it is still perfectly legal to arrange your tax affairs in order to minimize your tax liability.

This is a long-standing principle of English law that dates back to Lord Tomlin's judgment in Inland Revenue Commissioners vs Duke of Westminster (1936), although in recent years it has been weakened as the courts have ruled against a few "artificial" ways of avoiding tax.

In contrast, tax evasion -- the act of not paying taxes which are owed in law -- is illegal. Unfortunately, the borderline between avoidance and evasion is increasingly being blurred by politicians and HM Revenue & Customs in order to raise more taxes, as Mr. Carr found out to his cost when he was criticized for his behavior by the prime minister.

Pay up what you didn't owe us
Last February, Barclays  (LSE: BARC.L  ) was ordered to pay 500 million pounds that it had saved by using some tax avoidance schemes. The government had introduced backdated legislation to prevent Barclays from doing this, and the taxman wanted Barclays to cough up even before this became law.

One day a company is going to challenge this behavior in the European Court of Human Rights. That's because Article 7 of the European Convention on Human Rights clearly prevents people (and companies) from being punished for past actions that were perfectly legal at the time. Changing the law specifically to create a backdated tax liability looks an awful lot like punishment.

Welcome to Luxembourg
The Grand Duchy of Luxembourg isn't the first European country that springs to most people's minds, but it's very popular among the tax-avoiding community because of its extremely generous treatment of multinational companies' tax affairs.

GlaxoSmithKline  (LSE: GSK.L  ) was recently accused by the BBC of having made a deal with the Luxembourg authorities to avoid 34 million pounds in corporation tax. The company issued a press statement in which it pointed out that it had paid all of the taxes that were legally due, and that the BBC had been highly selective in its use of facts.

You should pay, but we should be let off
Back in 2010, Vodafone  (LSE: VOD.L  ) settled a long-running dispute with HM Revenue & Customs over the tax treatment of its acquisition of Germany's Mannesman some 10 years earlier.

This has become quite controversial, because it is alleged that anything up to 6 billion pounds was secretly written off by the taxman, so it has become a cause celebre among people who want to criminalize tax avoidance. But some of the same people who are bashing Vodafone are hypocrites, for they too are engaging in tax avoidance and encouraging others to do so.

Members of Parliament, including some who have criticized Mr. Carr, have been avoiding tax for many years by "flipping" homes, using deeds of variation, and hiring their relatives on huge salaries to perform non-jobs. At least one national newspaper group that regularly campaigns against tax avoidance routinely uses tax avoidance schemes, though at least it has admitted this.

As usual, it's one rule for us and a different rule for them. In the meantime, I'm perfectly happy to own shares in companies that engage in tax avoidance and thus increase their profits.

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Tony owns shares in GlaxoSmithKline. He does not own any of the other shares mentioned in this article. Motley Fool newsletter services have recommended buying shares of Vodafone Group Pl. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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