What is tax avoidance?
The definition of tax avoidance from HM Revenue and Customs (HMRC) 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.”
Tax is a mandatory financial charge imposed by the government to fund public expenditure. As Benjamin Franklin once said “nothing can be said to be certain, except death and taxes”. Everyone needs to pay their tax, but no one wants to pay more tax than they should. However, entering into a tax avoidance scheme to try to save money can prove to be more expensive than just paying the tax you owe. As the HMRC says “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.”
The HMRC have issued their policy on this matter via the General Anti-Abuse Rule (GAAR) which will help you understand and recognise abusive tax avoidance schemes.
How to identify tax avoidance schemes
The HMRC offers lots of advice on how to identify and avoid tax avoidance schemes. If you’re worried you might be in one of these schemes or are being offered to join one, read the below guidance from the gov.uk website highlighting some of the warning signs:
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 (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.
The HMRC spotlights give information of tax avoidance schemes they are aware of and that you should avoid.
New tax avoidance and evasion measures
The government has also introduced some new measures to help combat tax avoidance and evasion. These measures, announced in the Spring Budget 2017, include:
Qualifying recognised overseas pension schemes (QROPS)
The government will introduce a 25% charge on transfers to QROPS. This charge is targeted at those seeking to reduce the tax payable by moving their pension wealth to another jurisdiction. Exceptions will apply to the charge allowing transfers to be made tax free where people have a genuine need to transfer their pension, including when the individual and the pension are both located within the European Economic Area.
VAT: fraud in the provision of labour in the construction sector
The government will consult on options to combat missing trader VAT fraud in the provision of labour in the construction sector, in particular, applying the reverse charge mechanism so the recipient accounts for VAT.
HMRC are actively monitoring National Insurance Employment Allowance compliance following reports of some businesses using avoidance schemes to avoid paying the correct amount of NICs. The government will consider taking further action in the event that this avoidance continues.
For some free and impartial advice on the changes introduced by the government download our Spring Budget 2017 Summary for a complete look at the details of the Budget. Our full summary focuses on the issues likely to affect you, your family and your business.
How can I save money on tax?
So, as we can see, tax avoidance schemes are inadvisable. The best approach to take when it comes to saving money on tax is to ensure you don’t end up paying more tax than you owe, or incur any unnecessary interest and penalties from the HMRC for late tax payments.
Careful tax planning to ensure you are paying the right taxes and meeting deadlines is key to preventing any additional charges. Choosing a reputable and reliable accountant will help to keep your tax affairs in order and can take the stress out of meeting your tax commitments.
Why choose Baker Watkin?
At Baker Watkin LLP we are committed to providing the best accountancy and business advisory service. And because you are an individual and every business is different, our services are tailored to meet the needs of our clients. We can help you with tax planning and tax returns, and offer help and advice on business and personal tax.
Find out more about our range of services here.