No tax please, we're celebrities

British comedian Jimmy Carr is among a host of stars facing a media backlash this week, after it emerged that he used a controversial tax-avoidance scheme to pay as little as 1% tax.

Cut your tax bill by 98%
The Times revealed the 39-year-old stand-up was a leading member of K2, an artificial tax-avoidance scheme that allows its members to pay as little as 1% of their earnings in tax (something for which he has since apologised).

Carr paid £3.3 million a year into Jersey-based K2, which is promoted by Scotland-based Peak Performance Accountants.

Carr was one of an estimated 1,100 of the UK's rich and famous - including highly paid celebrities, musicians and sports stars - paying some or all of their earnings into a Jersey-based trust. This trust then gives no-interest or low-interest loans to members, who pay negligible tax on these advances. In theory, these loans are repayable; in practice, they are written off against untaxed earnings paid into the trust.

Carr is said to have been the biggest participant in K2, into which Britain's elite pour £168 million each year so as to avoid UK income tax and National Insurance Contributions (NICs). In effect, they are squirrelling their money offshore, to be returned to them as lightly taxed loans.

Prime Minister David Cameron has waded into the debate, describing Carr's tax arrangements as "morally wrong".

This morning, Carr issued a statement indicating he was no longer involved in the tax shelter in question.

Carr blimey!
Since the revelation came to light, Carr has become something of a laughing stock after repeated taunts on Twitter and Facebook. The outspoken host of panel show 8 Out of 10 Cats was also heckled at his Tuesday night gig in Tunbridge Wells, Kent. When an audience member yelled out, "You don't pay tax", Carr responded, "I pay what I have to and not a penny more".

Of course, Carr could be right, in that the K2 scheme may be entirely legal under current tax legislation. Even so, almost all Brits regard such offshore tax dodges as contrived devices created to allow the rich to pay artificially low rates of tax.

For example, if Carr does indeed pay £3.3 million a year into K2 and pays just 1% of this in UK tax, then his yearly tax bill would be just £33,000. On the other hand, were he to earn this sum through Pay As You Earn (PAYE), then his tax bill would be closer to £1.7 million.

Thus, thanks to K2, Carr coughs up roughly a fiftieth of the tax he would otherwise pay, saving himself a tidy £1.66 million a year.

Furthermore, the funny man has previous form as a tax-dodger. For instance, to avoid paying full stamp duty on the purchase price, Carr bought his family home through Offence Defence with Carr, a company he co-owns. Also, he was a member of a previous aggressive tax-avoidance scheme that was closed down by Her Majesty's Revenue and Customs (HMRC).

Carr tax
Following these reports, Carr has been called a hypocrite, not least because he lampooned Barclays' tax-dodging efforts in a Ten O'Clock Live skit. Watch Cashier Number 4, Please to see Carr describe the bank using "the world's biggest, most aggressive team of blood-hungry amoral tax lawyers".

In another blow to Carr's reputation, he was likened to a benefit thief by chief secretary to the Treasury, Danny Alexander who described Carr and other tax-avoiders as "the moral equivalent of the people who cheat the benefit system".

Take That and Terry Venables
Tax-dodging has gained even greater coverage following news that the stars of best-selling boy band Take That also stand accused of aggressive tax avoidance.

Gary Barlow, Howard Donald, Mark Owen and their manager Jonathan Wild are investors in a music industry investment scheme known as Icebreaker LLP (limited liability partnership).

Allegedly, the four invested £26 million of their combined earnings into the scheme, which HM Revenue & Customs (HMRC) argues improperly lowers investors' tax bills by claiming tax relief for investing in loss-making music projects.

It's also been revealed that ex-England manager Terry Venables is an investor in Icebreaker. Overall, more than 1,000 rich Brits have contributed £480 million to 62 different partnerships investing in the music industry.

While HMRC argues that Icebreaker and similar schemes cause 'unacceptable tax losses', its operators argue what they do is legal and provides valuable support to recording artists. The case will be decided at a tax tribunal in November.

If HMRC successfully outlaws K2, Icebreaker and similar schemes, then its members would face paying millions of pounds of back taxes. This could lead to some pretty stiff cutbacks for free-spending British celebrities.

Everyone hates taxes
While people are lining up to criticise rich tax dodgers, the truth is that not one of us is keen to pay more tax than we absolutely must. After all, 20 million Brits legally dodge tax by investing in Individual Savings Accounts (ISAs) in order to collect tax-free savings interest, share dividends, bond income and capital gains. Likewise, by paying into pensions, we reclaim billions of pounds each year from HMRC in tax relief at rates ranging from 20% to 50%.

Nonetheless, many of us see paying taxes as a civic duty, creating the glue that binds together British society. Hence, we get angry when we see wealthy tax avoiders breaking this 'pact between the people'.

In truth, like Jimmy Carr, not one of us wants to pay 'a penny more' in tax than we owe, and it is important to remember that while tax evasion is a criminal offence, tax avoidance is not illegal. And yet, despite this, we feel a sense of outrage when everyday tax planning turns into abusive tax avoidance.

Invention versus prevention
Likewise, instead of criticising greedy celebrities and mercenary Premier League players for legally lowering their tax bills, shouldn't we instead be demanding that MPs tighten up our tax laws? For example, a simple rule requiring those earning over, say, £100,000 a year to pay a minimum of 35% of their earnings in tax would undo offshore-loan schemes such as K2.

In short, what offends us most about Carr's tax-dodging is its sheer scale. As US hotel tycoon Leona Helmsley said (ironically, before she was jailed for tax evasion): "Only the little people pay taxes". It is this high-handed arrogance that makes modest-earning 'little people' so angry.

Finally, here's a quote from Paul Baxendale-Walker, a tax lawyer who invented EBTs (Employee Benefit Trusts), a now-outlawed tax dodge similar to K2: "For my clients, tax is a cancer."

This kind of attitude certainly makes hard-working Britons feel sick...

So what do you make of it all? Should celebrities be criticised for avoiding tax, or is the government to blame for allowing these loopholes to exist? Share your views in the comments section below.