Everyone has heard about tax avoidance and tax evasion but very few of us understand the differences and the potentially extreme consequences of getting involved in one of these schemes.

At Solution Loans, we’ve put this article together to let you know what tax avoidance is, what tax evasion is, what to do if you think you may be involved in a scheme and the potential legal consequences. We’ve included a list of hallmarks of schemes to look for as well as details of three of the most common tax avoidance schemes.

The UK Government has put a lot of resources into clamping down on both tax evasion and tax avoidance. HMRC, which oversees the collection of taxes, has referred increasing numbers of cases of both evasion and avoidance to the Crown Prosecution Service, making 1,135 referrals in 2015/16.

What’s the difference between tax avoidance and tax evasion?

One of the key areas of confusion is the difference between tax avoidance and tax evasion.

Simply put tax evasion is completely illegal and is the name given to the practice of not paying taxes by not reporting income or by reporting expenses not legally allowed. This kind of activity is basically a form of fraud that could land you in prison and with very hefty fines. Between 2017 and 2018, the average prison sentence for tax evasion increased from just over three years to four years as the government continued their clampdown.

Tax avoidance is bending the rules, exploiting loopholes and using complex company structures to minimise tax liabilities. A hallmark of many of these schemes is that they involve money leaving businesses and going through a series of transactions either through other businesses or intermediaries that are unnecessary and then coming back again.

So, is tax avoidance legal?

The short answer is, it depends. These schemes often work within the letter of the law but not its spirit. The Government, specifically HMRC, are working hard to ensure these schemes don’t work and either involve a lot of work that comes to nothing or is actively penalised when HMRC take those involved to court and recover the money for the treasury.

Why would I get taken to court for involvement in a tax avoidance scheme?

HMRC set up something called the Disclosure of Tax Avoidance Schemes (DOTAS). This makes anyone involved in or promoting a Tax Avoidance Scheme disclose it to HMRC. Each known tax avoidance scheme has a number that must appear at the top of your tax return. HMRC take a dim view of anyone failing to disclose a scheme. If you’re just the business using such a scheme, penalties start from £5,000. If you’ve devised the scheme and fail to report it the penalties can be up to £1 million.

What can I do if I’m involved in tax evasion?

If you’re involved in tax evasion then you should stop immediately and consult a lawyer and reputable accountant about what to do next.

How do I know I’m involved in a tax avoidance scheme?

HMRC publishes a list of known schemes here. As mentioned above, if a scheme is complex and involves multiple businesses for no reason other than to avoid tax then this is likely a Tax avoidance scheme. Other things to look for are:

  1. It sounds too good to be true (i.e. for no real effort or reason you avoid paying tax)
  2. There is no real economic activity or risk involved (such as an investment)
  3. The scheme consists of money going around in a circle through other businesses or intermediaries
  4. A third party or the scheme’s promoter provides funds to make the scheme work
  5. Known tax havens are involved
  6. Offshore companies are involved (or offshore trusts)
  7. There are confidentiality requirements

What are some specific examples of tax avoidance schemes?

Tax avoidance schemes come in a huge variety of different shapes and sizes. Here are three examples:

Job board tax avoidance scheme

This is one of the more common tax avoidance schemes. It is used by contractors to avoid paying tax and national insurance contributions.

Job Board Tax Avoidance Scheme

Land Tax & Stamp Duty tax avoidance scheme

This scheme was used to avoid Land Tax and Stamp Duty by abusing rules on gifting and unlimited companies.

Land Tax & Stamp Duty Tax Avoidance Scheme

The Gift Aid tax avoidance scheme

This scheme was a high-profile one-off involving a charitable trust set up to help avoid tax via gift aid. The charity involved was shut down by the Charity Commission. The scheme famously involved cycling pro Bradley Wiggins.

Gift Aid Tax Avoidance Scheme