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Identifying tax avoidance schemes

Tax avoidance encompasses moulding the tax system rules to attain tax advantage. It involves a lot of artificial transactions that usually have no other purpose other than taking advantage of the tax system. Usually, tax avoidance schemes do not merely work in a simple manner and can result in paying more than the tax amount actually payable.

Identifying tax avoidance schemes
In this article we cover:
  1. What is tax avoidance
  2. How to identify tax avoidance schemes?
  3. If you enter into a tax avoidance scheme
  4. If you think you might be in a scheme
  5. If you have been assigned a scheme reference number

What is tax avoidance?

Tax avoidance is the practise of bending the laws of the tax system in order to obtain a tax benefit that Parliament did not intend.

It often entails contrived, false transactions with little or no purpose other than to produce this advantage. It involves adhering to the letter but not to the spirit of the law. Most tax avoidance schemes are ineffective, and individuals who employ them may wind up paying significantly more than the tax they tried to avoid, including penalties.

How to identify tax avoidance schemes?

Here are some warning signs that you may be involved in or being offered to join a tax avoidance scheme

  1. It appears to be too good to be true -

    It most likely is. Certain schemes promise to reduce your tax bill at little or no cost to you. They will claim that all you have to do is to pay the scheme's promoter and sign a few papers.
  2. Loans as payment -

    Certain schemes targeted at contractors involve providing you with a portion or all of your money in the form of a loan that you are not required to repay. It is routed through a chain of companies, trusts, and partnerships, and you will be informed that this is done to save you tax.
  3. Huge benefits -

    The benefits of the scheme appear to be disproportionate to the amount of money generated or the cost to you of the scheme. The promoter of the scheme will claim that there is very little danger associated with your investment.
  4. Circular in nature -

    As per the scheme, money is circulated in a circle back to its origin, or some similar artificial arrangement is used.
  5. Assigned a scheme reference number by HMRC -

    This is where HMRC has determined that the arrangement has the signs of tax avoidance and is conducting an investigation. Your promoter would have provided you with a Scheme Reference Number (SRN), which you must mention on your tax return. Having an SRN does not imply that the scheme has been approved by HMRC. HMRC does not approve tax avoidance schemes..

Along with HMRC’s direction on understanding tax avoidance, it aims to caution against adopting tax avoidance schemes. Below mentioned are schemes HMRC is aware of:

Date Scheme
5-Aug-10 Avoidance using Gift Aid
23-Aug-11 Avoiding Income Tax on pay
4-Nov-13 Business Premises Renovation Allowances schemes
14-Sep-16 Capital Gains Tax: Entrepreneurs’ Relief tax avoidance scheme
7-Jul-16 Contractor tax: loan schemes can cost you more
5-Aug-10 Contrived employment liabilities and losses
25-Oct-17 Disguised remuneration trust schemes: misleading advertising
29-Sep-17 Disguised remuneration: a Supreme Court decision
17-Mar-17 Disguised remuneration: job board avoidance scheme
10-Aug-17 Disguised remuneration: re-describing loans
2-Dec-17 Disguised remuneration: schemes claiming to avoid the new loan charge
14-Feb-17 Disguised remuneration: tax avoidance using annuities
3-Feb-16 Employee Bonus Schemes: Growth Securities Ownership Plan tax avoidance and similar schemes
27-Dec-13 Employee bonuses: tax avoidance scheme involving Restricted Securities
5-Aug-10 Employer-Financed Retirement Benefits Scheme
29-Jun-15 Employment Allowance avoidance scheme: contrived arrangements caught by existing rules
17-Apr-13 Employment Benefit Schemes using fettered payments
20-Jul-13 Gift Aid with no real gift
5-Aug-10 Gift Aid with no real gift
6-May-16 Gold bullion schemes
5-Aug-10 Goodwill: companies acquiring other businesses, carried on prior to 1-Apr-2002 by a related party
23-Oct-15 Interest Relief avoidance schemes
5-Aug-10 Investments to obtain trade loss reliefs - 'sideways loss relief'
29-Mar-18 Managed service company legislation
5-Feb-16 Misleading claims from tax avoidance scheme promoters
5-Aug-10 Pay-as-you-earn (PAYE) and National Insurance (NI) contributions, Inheritance Tax and Corporation Tax: using trusts and similar entities to reward employees
5-Aug-10 Pensions schemes: artificial surplus
14-Feb-13 Plan Green - car benefit scheme
26-Nov-12 Property business loss relief schemes
11-Jan-13 Share Loss Relief schemes
11-Jan-13 Stamp Duty Land Tax avoidance
5-Aug-10 Stamp Duty Land Tax avoidance
20-Aug-15 Stamp Duty Land Tax avoidance: no human rights breach in avoidance challenge
12-Jun-13 Stamp Duty Land Tax avoidance: update
12-Jun-13 Stripped bond tax avoidance schemes
6-Nov-12 Taxing the rewards for work done for a UK based employer
31-Aug-16 Transitional relief on investment growth: withdrawal date changed
5-Nov-13 Value added tax (VAT) contrived schemes used to obtain exemptions for sporting or educational training/supplies
5-Aug-10 Value added tax (VAT): artificial leasing
26-Jun-17 Value added tax (VAT): supply splitting tax avoidance schemes
14-Feb-18 Contractor loan schemes: misleading advertising
21-Mar-18 Stamp Duty Land Tax avoidance: misleading advertising

If you enter into a tax avoidance scheme

If you are suspected of engaging in a tax avoidance scheme, HMRC will conduct a thorough investigation into your tax affairs and may also:

  1. Require you to pay the tax you are trying to avoid in advance -

    You may receive an accelerated payment notice in the form of the tax bill. This is an obligation to pay the full tax amount or National Insurance contributions determined by HMRC in advance and within 90 days.
  2. Take legal action -

    You may find yourself in court if you do not make timely payments of your tax and National Insurance contributions. Around nine out of ten avoidance cases heard in court are won by HMRC. If you lose, you may face life-changing bills, including legal fees in addition to the tax you owe, penalties, and growing interest.
  3. Consider you a high-risk taxpayer -

    This means that HMRC will now conduct a thorough examination of your whole tax affairs, not simply your use of the avoidance scheme.

If you think you might be in a scheme

HMRC has dedicated teams to assist you in paying what you owe and resolving your tax affairs. The sooner you contact HMRC; the lower your interest payment will be. If you don’t want to contact HMRC, we can communicate with HMRC on your behalf too.

If you have been assigned a scheme reference number

You are required to inform HMRC about schemes that are subject to the disclosure rules. If you do not, a penalty of up to £5,000 may be imposed.

If you would like to speak with a specialist adviser and want to know more about the identification of tax avoidance schemes, please contact dns right now on 03330886686, or you can also e-mail us at info@dnsaccountants.co.uk.

About the author
Blog Author

Siddharth Agarwal
I am currently pursuing to become a chartered tax advisor and joined DNS in 2014. With more than 7 years of experience in advising owner managed businesses, I deal with a wide spectrum of tax issues, both for company and personal tax. My expertise cover owner managed business taxation issues, company re-organisations, property taxation and succession planning.

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