Her Majesty’s Revenue and Customs has publicly named and shamed the directors of companies that have promoted tax avoidance schemes and warned that customers who have used them should leave the schemes and consult a tax accountant or potentially face a significant tax bill in the future.
In a press release on Gov UK, 15 companies and their directors were directly named, an unprecedented step only possible after HMRC were granted the power to name companies, directors, shareholders and company officers suspected of promoting tax avoidance schemes.
They also provided help and advice to people who may have been unsuspecting parts of these schemes and what they can do to avoid large tax bills and additional fees going forward.
What Is A Tax Avoidance Scheme?
The concept of tax avoidance is to use rules and aspects of the tax system in ways that were not expected by legislators and whilst following the letter of the law, tend to operate with somewhat dubious legality, and in some cases break the law.
There are many ways in which this is attempted, as the name and shame list shows, but they can often involve officially paying a salary equal to the national minimum wage and the rest of their pay as an advance or loan not expected to be paid back, although the specifics depend between schemes.
This is often obfuscated as a payroll processing service or umbrella company, sometimes through mixing legal payroll methods and tax avoidance.
Tax avoidance should not necessarily be confused with tax evasion, which is illegally trying to avoid paying taxes through fraud and deliberate misrepresentation.
At the same time, however, tax avoidance often works in grey areas, and if HMRC believes that a person has not paid the amount of tax they should, they will be expected to pay it back, with interest and potential penalties depending on the circumstances.
Spotting And Avoiding Tax Avoidance Schemes
As with many complex aspects of financial law, one of the best ways to avoid being part of a tax avoidance scheme is to step back, read through every document provided and request clear explanations over obfuscation and overblown promises.
There are a few telltale signs besides simply sounding too good to be true or relying on outright deception.
However, the biggest sign is the obvious promise that you get to keep more income than you would expect, given the 20 per cent base rate of income tax, national insurance contributions and often other payments such as student finance on top of this.
A clear red flag for a potential avoidance scheme as well is if your deductions are not clearly itemised, or if there is a discrepancy between the money on the payslip and the money that enters your bank account.
Sometimes these are explained as bonuses, annuities, capital payments, loans you are not expected to pay back or another obfuscating term. In practice, these payments still require income tax to be paid on them.
No tax scheme is approved by HMRC, so this appearing in marketing material or a consultation is a clear sign of an avoidance scheme, especially if there are multiple tax schemes described as more or less efficient.
As well as this, being asked to sign more than one contract, whilst not always a direct sign of tax avoidance, it is unusual and the contracts should be looked through before signing.