Tax avoidance involves exploiting rules to minimise the amount of tax payable, in a way which doesn’t respect the intention of those rules. It’s sometimes confused with tax planning, which is the legitimate use of tax legislation to minimise the amount payable. The terms are often used interchangeably, but they have very different intentions – and outcomes!
What does tax avoidance look like?
This can vary, but it can include things like using complex company structures to separate businesses which would otherwise be linked. This can help a company or group of companies minimise tax by moving profits around or sharing losses.
There are other tactics too, such as disguising income by labelling it as a ‘loan’, and then the other company simply writing it off (which again is good for its own tax bill).
The danger of tax avoidance schemes
It can be difficult to know whether you’re getting good tax advice or being encouraged to join an avoidance scheme! Unfortunately, the result of joining such a scheme may leave you facing HMRC and result in you receiving a much larger bill – with penalties and all manner of legal trouble.
There are some indicators of tax avoidance routes that you should look out for, such as:
- The tax savings seem to good to be true, and it’s suggested you could earn a great deal without paying much tax at all
- The route your payments take to reach you seem extremely complex, and might go through multiple accounts, or multiple companies
- There are charges for joining the scheme, or the scheme has charges that are payable up front
- Transactions are labelled as ‘loans’ or something else which doesn’t reflect their actual nature
- Sales-like tactics to drive urgency for joining – “don’t miss out”
Practical tips for dealing with tax avoidance schemes
The first step is to hit pause! Some schemes are listed by HMRC as ones to avoid (which is ironic, considering they’re involved in tax avoidance), so it’s worth starting there.
It’s also useful to ask yourself if the scheme’s selling points make any real sense in terms of tax law. There are lots of tax allowances and relief schemes which are perfectly legitimite, but the promise of earning many thousands of pounds without paying tax should often be a red flag. You could ask the scheme provider to supply more information, or even the legislation which makes it acceptable.
HMRC and avoidance
HMRC take a very dim view of organised tax avoidance if it’s not in the spirit of the legislation. Some loopholes, such as diguised working, have been closed with the introduction of new rules (IR35 in this case) and this makes the tax system more secure.
Avoidance costs the compliant majority around £5 billion a year, and HMRC is constantly introducing tough new measures to tackle it. If you are unsure about a scheme, or want to find out more about legitimate tax planning, consult a reputable tax adviser.
Check your tax advisor is qualified
The term ‘accountant’ isn’t a protected title in the UK, so anyone can refer to themself as one – which is why it’s crucial to check they’re appropriately qualified!
