21st February 2017
Tax avoidance vs tax evasion
As an accountant, the adage “If it’s too good to be true, it probably isn’t” immediately springs to mind when our clients ask about a scheme a friend or colleague has mentioned. In these situations, it’s essential to understand that tax avoidance and tax evasion are two very separate things.
Tax avoidance is perfectly legal and involves careful long-term financial planning and maximising tax reliefs and exemptions for the best possible outcome. Tax evasion, however, is an unlawful effort to minimise one’s tax liability to circumvent or sidestep tax legislation. Quite often, an attempt at avoidance morphs into evasion as schemes become more complex and evolve around new rules designed to prevent such fraudulent activities.
HMRC introduced the General Anti-Abuse Rules in July 2013 to counteract ‘tax advantages arising from abusive tax arrangements’. Many schemes exist purely to obtain a tax advantage. The Finance Act 2016 expanded on measures by creating the GAAR Advisory Panel to assess schemes and issue binding notices that can be applied to all taxpayers with equivalent arrangements. They can issue a 60% penalty base on the tax lost, name and shame serial tax avoiders and introduce sanctions to limit tax reliefs available.
How to identify tax avoidance schemes
If 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 promoter and sign some papers without really delving into the tax arrangements.
Pay in the form of loans
Some schemes are designed to give some or all of your payment in the form of a loan you’re not expected to pay back. It’s diverted through a chain of companies (sometimes offshore), trusts or partnerships, and you’ll be told this is to save you tax. We often deal with clients who come to us having used one of these arrangements and attempts to contact the promoter often fail as they regularly up sticks or change their name.
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.
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 indicates that 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.
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 that 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 total 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.
Schemes HMRC has concerns about
You can find examples of tax avoidance schemes HMRC is looking at closely here. Even if a scheme is not mentioned, it will still be challenged by HMRC.
The prospect of taking home more money is always seductive. We all feel pressure to earn more and provide a better life for our families. These schemes, however, are not the way to go about this, and we would like to urge everyone to carefully consider and consult their accountant before diving headfirst into the unknown.