Tax Avoidance

Tax avoidance describes the use of the tax rules to gain a tax advantage that Parliament never intended, without technically breaking the law. HMRC explains that tax avoidance involves bending the rules of the tax system to try 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 that advantage, and involves operating within the letter, but not the spirit, of the law. This distinguishes tax avoidance from tax evasion, which involves dishonesty, but HMRC nonetheless actively challenges avoidance schemes and warns that most tax avoidance schemes simply do not work, leaving those who use them liable to pay much more than the tax they tried to avoid, including penalties.

HMRC lists warning signs of avoidance schemes, including arrangements that sound too good to be true, schemes that pay workers through loans or other payments they are not expected to repay, promised benefits out of proportion to the cost of the scheme, money moving in a circle or other artificial arrangements with no genuine commercial purpose, and misleading marketing claims such as suggesting a scheme is 'HMRC approved'. Such claims are misleading because HMRC does not approve tax avoidance schemes; it may instead issue a scheme reference number to an arrangement it is investigating as having the hallmarks of avoidance, which a user is expected to declare on their tax return, though the absence of a reference number does not mean an arrangement is not avoidance.

Someone who thinks they may be in an avoidance scheme is encouraged to withdraw and to settle their tax affairs with HMRC, and can seek independent advice from a qualified accountant or tax adviser who is a member of a professional body regulating its members' standards.