Legal Basics
Question O
ther than Roger Moore, Dwayne “The Rock” Johnson and Groucho Marx, most of us probably don’t consider our
eyebrows to be assets in business – but they can, potentially, save us from making big mistakes. When someone describes a new plan that sounds great on its face, that urge you sometimes get to raise a disbelieving eyebrow can be a warning that the plan might not be the right one to take.
Even when things are strictly legal, which of course should be the primary concern, if a plan fails the “eyebrow test” (also known as the “sniff test”, the “smell test” and various other, more colourful terms) then pushing ahead with it may not be entirely trouble- free. If the plan fails the eyebrow test with you, then you must assume that it will likewise fail with other people - and those people may be unwilling to do the work required to establish whether or not the plan is in fact legal. That may put off a potential partner, investor or employee or,
at worst,
cause a regulator or authority to begin an investigation of your affairs – or even legal proceedings.
Developing a reliable eyebrow test is, of course, a balancing act. Success does not often come without some element of risk, and it is absolutely the case that entrepreneurs who have ignored an instinctive reaction to avoid a certain route with regard to their venture have gone on to see that risk pay off. Others, however, have seen parties interested in acquiring them put off by a complicated structure that looks wrong on first glance.
When something does fail the “eyebrow test”,
it is therefore always worth
considering whether the potential gains outweigh any risks. This is something that should always be in an
By David Willbe
entrepreneur’s mind, especially when making a commitment which could put their own financial security as well as the future of their business at risk – and doubly so when the entrepreneur is making this commitment without the benefit of proper legal or financial advice.
Tax Avoidance
The subject of tax avoidance schemes has been prevalent in the media this year. These schemes are the perfect example of a situation where one should employ the “eyebrow test” in order to judge whether the potential reward of paying significantly less tax outweighs the potential drawbacks. Tax
avoidance is legal (it is the
structuring of a person’s affairs so that they pay less tax), but certain schemes designed to be avoidance may in fact be tax evasion (where a person does not pay tax that they ought to pay) – and tax evasion is illegal.
Even where a scheme does not amount to evasion, enough of a stigma has been built up around avoidance that those with a public reputation should consider the potential repercussions of being “outed” as a tax avoider against the potential saving. When Jimmy Carr and Gary Barlow were revealed to have been using tax avoidance schemes earlier this year, the issue was not that what they were doing was illegal – but their schemes failed the eyebrow test, and therefore they found the morality of their tax affairs being debated in the media by the leaders of political parties. If they had considered that possibility, would they still have invested in the schemes?
Such schemes are not a new phenomenon. In
1967 journalist
and interviewer David Frost used a partnership with a Bahamian firm to
keep his international earnings out of reach of the United Kingdom tax authorities. Mr. Frost’s involvement with the partnership, however, also failed the eyebrow test – and, in this case, led to a protracted set of court proceedings. Mr. Frost was a UK taxpayer who was well established within the UK as a television presenter, and decided that it was time to take his skills across the pond and attempt to break the American market. Mr. Frost would not be spending too much time out of the country, and would remain resident in the UK (not America) for tax purposes, but of course payments for his American work would be made outside of the UK. He therefore began to look into whether or not he could keep those payments off-shore, and therefore avoid paying any tax on them – a perfectly legal idea to reduce the amount of tax he would have to pay.
Having received financial and legal advice, Mr.
Frost entered into a
partnership with a Bahamian company called Leander, which was authorised to, “carry on financial, commercial, trading or other operations” with the object of, “exploiting copyrights and…television and film consultants and advisers, publicity agents and providers of publicity services…. throughout the world outside the United Kingdom…and…producing television programmes, film…and other entertainments”. Leander was a company set up expressly for this purpose.
The idea was that Mr. Frost’s
American clients would not hire Mr. Frost directly, but would hire the Frost/ Leander partnership which, under the partnership agreement, could then compel Mr. Frost to show up for work. Under the terms of the partnership agreement the majority of any profits made by the partnership would go to Mr. Frost, and a small portion would
41 entrepreneurcountry
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