What tax avoidance is
Tax avoidance involves bending the rules of the tax system to try to gain a tax advantage that Parliament never intended.
It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.
Most tax avoidance schemes simply do not work, and those who use them may end up having to pay much more than the tax they tried to avoid, including penalties.
How to identify tax avoidance schemes
Here are some of the warning signs that you might be in a tax avoidance scheme or you are being offered to join one.
It sounds too good to be true
It almost certainly is. Some schemes promise to lower your tax bill for little or no real cost, and suggest you do not have to do much more than pay the scheme promoter their fees and sign some papers.
Pay in the form of loans or other untaxed payments
Some schemes designed for contractors, agency workers and other temporary workers or small and medium sized employers, involve giving workers some or all of their payment either as a loan or other payment that they’re not expected to pay back.
The payment may be diverted through a chain of companies, trusts or partnerships often based offshore and received from a third party. Sometimes the payment is received directly from an employer.
Other ways in which these untaxed payments may be described include:
- grants
- salary advances
- capital payments
- credit facilities
- annuities
- shares and bonuses
- fiduciary receipts
In all cases the schemes promise to put money in a workers pocket without having to pay tax on it. These schemes are often sold by non-compliant umbrella companies.
Huge benefits
The benefits of the scheme seem out of proportion to the money being generated or the cost of the scheme to you. The scheme promoter will claim there’s very little risk to your investment.
Round in circles or artificial arrangements
The scheme involves money going around in a circle back to where it started, or some similar artificial arrangement where transactions are entered into which have no apparent commercial purpose.
Misleading claims
The scheme is advertised using misleading claims. These may include claims suggesting a scheme is endorsed or approved by HMRC or that a scheme can increase your take home pay. For example:
- ‘HMRC approved’
- ‘Retain more of your earnings after tax’
- ‘We ensure you get the highest take home pay’
- ‘Compliant tax efficient pay’
These statements are likely to be misleading. HMRC does not approve tax avoidance schemes.
HMRC has given it a scheme reference number (SRN)
If HMRC has identified an arrangement as having the hallmarks of tax avoidance and are investigating it, you will receive an SRN by your promoter and you should include this on your tax return.
If an arrangement has an SRN, this does not mean that HMRC has ‘approved’ the scheme. HMRC does not approve any tax avoidance schemes.
If an arrangement does not have an SRN, this does not mean that the arrangement is not tax avoidance and could still be investigated.
Non-compliant umbrella companies
Many umbrella companies operate within the tax rules, however, some umbrella companies promote tax avoidance schemes. These schemes claim to be a ‘legitimate’ or a ‘tax efficient’ way of keeping more of your income by reducing tax liability.
Find out what to do if an umbrella company offers to reduce your tax liability and increase your take home pay in Spotlight 45.
Schemes HMRC has concerns about
You can find examples of tax avoidance schemes HMRC is looking at closely. Even if a scheme is not mentioned, it may still be challenged by HMRC.
Before you sign up to a scheme
You should do your own research to find out more about the adviser and the scheme on offer before you sign up to it.
You can ask for advice or help from an independent, qualified, accountant or tax adviser. Choose one who is a member of a professional body that regulates its members’ standards and behaviour.
If you enter into a tax avoidance scheme
If you’re involved in a tax avoidance scheme HMRC will fully investigate your tax affairs, and may also:
- require you to pay the tax you’re trying to avoid upfront — you may receive a tax bill called an accelerated payment notice, this is a requirement to pay the full amount of tax or National Insurance contributions HMRC calculates as being due, upfront and within 90 days
- take legal action — you may end up in court if you do not pay the tax and National Insurance contributions you owe — HMRC wins around 9 out of 10 avoidance cases heard in court, if you lose you could face life-changing bills, with legal costs on top of the tax you owe, penalties and growing interest
- treat you as a high-risk taxpayer — this means HMRC will closely inspect all of your tax affairs in future, not just your use of the avoidance scheme
If you think you might be in a scheme
HMRC has dedicated teams to help you pay what you owe to settle your tax affairs. The earlier you contact HMRC, the less interest you’ll pay.
If you are not already speaking to someone about settling your tax affairs, you can contact HMRC’s dedicated team.
If you’ve been given an SRN
You must tell HMRC about schemes that fall within the disclosure rules. If you do not you could be liable to a penalty of up to £5,000.
How to report tax avoidance
You can report tax avoidance to HMRC by contacting the HMRC hotline or completing the online reporting form if you:
- have been encouraged to get into a tax avoidance scheme
- are aware of a tax avoidance scheme
- want to let us know about someone selling a tax avoidance scheme
