What you need to know about tax avoidance

09 September 2016

HMRC has published an introduction to tax avoidance which provides ways of identifying tax avoidance schemes and what to do if you think you might be in a scheme.

What tax avoidance is

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 engage in them can find they pay more than the tax they attempted to save, once HM Revenue and Customs (HMRC) has successfully challenged them.

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.

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

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 (SRN)

This is where HMRC has identified the arrangement as having the hallmarks of tax avoidance and are investigating it. You will have been given an SRN by your promoter and will have included it on your tax return. Having an SRN doesn’t 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 don’t pay the tax and National Insurance contributions you owe. HMRC wins around 8 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 scrutinise 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.

Contact HMRC to settle your tax affairs on:

If you’ve been given a Scheme Reference Number

You must tell HMRC about schemes that fall within the disclosure rules. If you don’t you could be liable to a penalty up to £5,000.