Tax avoidance scheme used by Jimmy Carr investigated by HMRC

Authorities to challenge Jersey-based scheme that allegedly shelters £168m by creating offshore loans for UK earners
Jimmy Carr
Comedian Jimmy Carr is one of thousands of wealthy individuals using the offshore scheme known as K2 to allegedly avoid paying higher taxes. Photograph: Ian West/PA

A tax avoidance scheme alleged to be used by thousands of wealthy individuals, including the comedian Jimmy Carr, is under investigation by authorities.

HM Revenue and Customs told the Guardian that accounting firms using a scheme to create offshore loans and new contracts of employment for UK earners were being investigated and could be taken to court.

HMRC said the scheme, known as K2, was already under serious scrutiny by tax inspectors before a Times investigation on Tuesday (paywall) which alleged that comedian and presenter Carr was avoiding paying higher rates of tax by funnelling millions of his assets through a £168m Jersey-based scheme.

HMRC said it was currently investigating whether the scheme was technically legal.

"If it [K2] does work technically, HMRC will challenge it in every way. There is no way anyone, no matter who they are, is going to get away with paying less than they should," they said.

An investigation by the Times accused Channel 4's presenter of 8 out of 10 Cats and 10 O'Clock Live of sheltering £3.3m a year through the K2 scheme, which an accountant selling the scheme said was used by 1,100 tax avoiders.

The Times reported that at a seminar in Birmingham, Roy Lyness of Peak Performance told an undercover reporter that his scheme would net company directors 80% of their earnings. "A contractor will net approximately 82% of their earning after all taxes. And a director will net approximately 80% after all taxes and costs."

"So if someone is on a £100,000 contract they will get as a contract £82,000, no more taxes to pay," Lyness said.

The scheme is understood to work by UK earners "quitting" their job and signing new employment contracts with offshore shell companies. Those companies then "rehire" their new employee back out to the UK but take their earnings. The offshore company then pays their employee a much lower salary but also "loans" them thousands a month. However these loans can be written down as tax liabilities, and so reducing the overall bill to the government.

Lyness added that he believed it would take tax inspectors years before they put a rule in place to block the scheme, according to the Times. "We expect the process to take at least three years to get a proper ... rule in place. We say 'make hay while the sun shines'."

Lawyers acting for Carr, confirmed to the Times that he was part of the K2 scheme, and added that HMRC had been made aware of this. They denied any wrongdoing. Talent agents acting for Carr were unavailable for comment when contacted by the Guardian.

Activist group UK Uncut said it may change its campaigning strategy and protest against Carr personally for his alleged avoidance. A spokesperson said: "UK Uncut have staged hundreds of demonstrations in shops owned by corporations who avoid paying their tax, maybe we need to start targeting ...super-rich individuals as well.

"They are using these cheap scams to pay as little as 1% income tax and rob the public purse at a time when the rest of us are faced with recession, austerity and the deepest cuts to our vital public services in a generation. George Osborne referred to these schemes as morally repugnant so why isn't he doing anything to stop them?"

An HMRC spokesperson said: "HMRC is extremely effective at shutting down tax avoidance schemes fast and effectively. The avoidance 'industry' has been seriously undermined by HMRC's focus on tackling avoidance – preventing billions of pounds of tax being diverted from the exchequer.

"In our 2010 spending review, the government made £917m available to us to tackle avoidance, evasion and fraud. This is being used to ensure a level playing field for all taxpayers."

Channel 4, who have commissioned Carr to host and appear on a number of shows, refused to comment on the investigation.