Tax avoidance involves bending the rules of the tax system 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 that you are being offered to join one.
It sounds too good to be true
It probably is. Some schemes promise to lower your tax bill for little or no real cost. They will say you do not have to do much more than pay the scheme promoter and sign some papers.
Pay in the form of loans
Some schemes designed for contractors involve giving you some or all of your payment in the form of a loan that you’re not expected to pay back. It’s diverted through a chain of companies, trusts or partnerships and you’ll be told this is to save you tax.
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
The scheme involves money going around in a circle back to where it started, or some similar artificial arrangement.
HMRC has given it a Scheme Reference Number
This is where HMRC has identified the arrangement as having the hallmarks of tax avoidance and are investigating it. You will have been given a Scheme Reference Number (SRN) by your promoter and will have included it on your tax return. Having an SRN does not mean that HMRC has ‘approved’ the scheme. HMRC does not approve any tax avoidance schemes.
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 will still be challenged by HMRC.
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 to you 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 do not have a contact you should contact HMRC’s dedicated team for help with settling your tax affairs.
If you’ve been given a Scheme Reference Number
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.