If you are moulding the tax rules to mitigate or avoid the taxes you owe, you are doing tax avoidance. There are a lot of ways to do it. Usually, taxpayers do fake transactions to attain tax benefits. To prevent tax avoidance, HMRC’s Fraud Investigation Service (FIS) may open a Code of Practice 8 (COP 8) investigation against the persons who are underpaying taxes or are using one of the tax avoidance schemes to reduce their tax liabilities.
Though tax avoidance is legal, yet if done intentionally to get a tax advantage, it breaks the spirit of the law. Once HMRC finds that you are doing tax avoidance, you would be liable to pay all the due taxes, interest and penalties you owe. Most of these schemes are ineffective and individuals who are involved might pay more than they owe, adding penalties to their bills.
Let’s see how to identify whether you use a tax avoidance scheme, the consequences of tax avoidance and the common tax avoidance schemes.
Ways to Identify Tax Avoidance Schemes
According to HMRC, these are the red flags that may indicate you are having one of the tax avoidance schemes. These signs may also show that you are offered to join one:
1) The Scheme Sounds too Good to be True: You may find some schemes that claim to lower your tax burden for little or almost no cost. These schemes will ask you to pay a small sum and sign a few documents to avail of the benefit.
2) Promises Huge Benefits: Typically, the benefits you get from the scheme will be shown way more than the cost of the scheme to you. The scheme promoter will assure that your investment will have no or very small risks.
3) Loan Payments: Certain schemes, specially designed for contractors, will provide all or some of your payments in the form of loans that you will not be responsible to pay back. This payment is routed through a chain of trusts, companies, and partnerships. And they will tell you that they are doing it to save you from taxes.
4) Circular Cycle: The money of the scheme will rotate in a circular form. It goes back to where it started from, or some similar artificial arrangement.
5) HMRC has Given it a Scheme Reference Number (SRN): It means that HMRC has recognised your arrangement and has got the signs of tax avoidance and is investigating it. Your promoter will provide you with the SRN and will put it in your tax return. Bear in mind that having an SRN does not mean HMRC’s approval of the scheme. As HMRC doesn’t approve any of the tax avoidance schemes.
6) HMRC’s Concerns about the Scheme: There are few tax avoidance schemes that HMRC is looking after. HMRC may challenge other schemes too that involves tax avoidance in any form.
Consequences of Tax Avoidance
Once HMRC carries out (COP 8) investigation and found you as part of any tax avoidance scheme, it may:
- Take legal action against you
- Ask you to do an upfront payment of the tax you avoided through an accelerated payment notice (the upfront amount you owe within 90 days)
- Consider you as a high-risk taxpayer and scrutinise all your future tax affairs.
You may face prosecution due to this. Therefore, we recommend you seek professional help from our chartered accountants to be on the safe side. Speak to one of our experts to avoid HMRC investigation!
Common Tax Avoidance Schemes
Here are the most common schemes that may lead to Code of Practise 8 (COP 8) investigation by HMRC:
- Disguised remuneration schemes
- Umbrella Payroll Schemes
Here is the list of tax avoidance schemes from 2010 – 2018, that HMRC looks after:
|Avoidance using Gift Aid
|Avoiding Income Tax on pay
|Business Premises Renovation Allowances schemes
|Capital Gains Tax: Entrepreneurs’ Relief tax avoidance scheme
|Contractor tax: loan schemes can cost you more
|Contrived employment liabilities and losses
|Disguised remuneration trust schemes: misleading advertising
|Disguised remuneration: a Supreme Court decision
|Disguised remuneration: job board avoidance scheme
|Disguised remuneration: re-describing loans
|Disguised remuneration: schemes claiming to avoid the new loan charge
|Disguised remuneration: tax avoidance using annuities
|Employee Bonus Schemes: Growth Securities Ownership Plan tax avoidance and similar schemes
|Employee bonuses: tax avoidance scheme involving Restricted Securities
|Employer-Financed Retirement Benefits Scheme
|Employment Allowance avoidance scheme: contrived arrangements caught by existing rules
|Employment Benefit Schemes using fettered payments
|Gift Aid with no real gift
|Gift Aid with no real gift
|Gold bullion schemes
|Goodwill: companies acquiring other businesses, carried on prior to 1-Apr-2002 by a related party
|Interest Relief avoidance schemes
|Investments to obtain trade loss reliefs – ‘sideways loss relief’
|Managed service company legislation
|Misleading claims from tax avoidance scheme promoters
|Pay-as-you-earn (PAYE) and National Insurance (NI) contributions, Inheritance Tax and Corporation Tax: using trusts and similar entities to reward employees
|Pensions schemes: artificial surplus
|Plan Green – car benefit scheme
|Property business loss relief schemes
|Share Loss Relief schemes
|Stamp Duty Land Tax avoidance
|Stamp Duty Land Tax avoidance
|Stamp Duty Land Tax avoidance: no human rights breach in avoidance challenge
|Stamp Duty Land Tax avoidance: update
|Stripped bond tax avoidance schemes
|Taxing the rewards for work done for a UK based employer
|Transitional relief on investment growth: withdrawal date changed
|Value added tax (VAT) contrived schemes used to obtain exemptions for sporting or educational training/supplies
|Value added tax (VAT): artificial leasing
|Value added tax (VAT): supply splitting tax avoidance schemes
|Contractor loan schemes: misleading advertising
|Stamp Duty Land Tax avoidance: misleading advertising
To check the most recent schemes from 2019-21, click here.
Quick Sum Up
To sum up the discussion, you have now understood that HMRC discourages all types of tax avoidance schemes. Though many of the schemes are legitimate and legally adhere to the legislation, yet don’t follow the spirit of the law. Therefore, HMRC may take severe action, from getting back the avoided tax, charging interest and penalties till the prosecution. If you want to resolve your tax affairs, contact HMRC or seek help from a tax professional.
Disclaimer: This blog is just for the basic information on the topic.