Most businesses and individuals in the UK pay the correct amount of tax in a timely manner. However, a small number avoid paying the correct amount of tax, conducting what’s known as ‘tax avoidance’.
Tax avoidance shouldn’t be confused with tax planning, which uses tax legislation legally, as intended. Using legal methods, an individual or business will plan for the tax year ahead and use legitimate methods to reduce the amount of tax to be paid.
Tax avoidance or tax planning
It is possible to reduce the amount of tax you have to pay by using legitimate methods. For instance, you could minimise the amount of tax you pay on savings by placing them in a tax free Individual Savings Account. You can increase the amount you pay into a pension scheme to reduce your taxable income. It is important to be aware of legitimate tax planning and when you are taking part in a tax avoidance scheme.
If a scheme sounds too good to be true, it probably is. There are warning signs to be aware of, including a scheme which will result in very little tax being paid for minimal effort or cost from you. If you are asked to pay fees upfront, or you are asked to be involved in a complex scheme, you are most likely to be involved in tax avoidance.
A number of schemes are registered with HMRC as Disclosure of Tax Avoidance Schemes and have been allocated a Scheme Reference Number. You can check with HMRC if you are unsure. Being registered with HMRC doesn’t mean that they are approved, however, and you can still be investigated for tax avoidance.
What is being done about tax avoidance schemes?
HMRC has a team of experts ready and waiting to tackle those who try to avoid tax. Joining a tax avoidance scheme can lead to you being classed as a high risk taxpayer, becoming part of a lengthy investigation and paying the tax you should have paid, along with penalties and interest charges.
A promoter of a tax avoidance scheme is legally obliged to inform HMRC of its existence. Taking part in such a scheme could result in HMRC taking you to court, with those accused being cross-examined at Tribunal. The case may be heard in public and the outcome may be published, labelling you as a tax avoider. If you are unsure about any practice to minimise your tax bill, check with HMRC or seek legal advice.
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