How to spot a tax avoidance scheme

There will be some contractors that, quite understandably, will be attracted by the lure of high income retention offered by a number of tax avoidance scheme promoters. Many of these schemes use offshore trusts, partnerships, etc and rely on the wording contained within double taxation treaties or seek to exploit loopholes in the legislation. Tax Counsel approval provides apparent reassurance of the scheme’s credibility. Before getting involved in such a scheme, however, freelancers should carry out their own research otherwise it could end up costing them their business and much more.

HMRC’s website devotes a section to tax avoidance entitled ‘Spotlights’ which features schemes that HMRC consider risky and about which there is a need to warn potential users. They will often be schemes that have already been disclosed to HMRC and given a Scheme Reference Number (SRN). Just because a scheme has been issued with a SRN does not mean that HMRC either approves the scheme or accepts that the scheme achieves its intended tax advantage. Needless to say, those schemes that appear in ‘Spotlights’ can expect to be challenged by HMRC and the users of such schemes enquired into.

‘Spotlights’ offers some useful guidance to taxpayers as to tax planning that they should be wary of as follows:

• It sounds too good to be true.
• Artificial or contrived arrangements are involved.
• It seems very complex given what you want to do.
• There are guaranteed returns with apparently no risk.
• There are secrecy or confidentiality agreements.
• Upfront fees are payable or the arrangement is on a no win/no fee basis.
• The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
• The scheme is said to be approved by HMRC.
• Taxation of income is delayed or tax deductions accelerated.
• Tax benefits are disproportionate to the commercial activity.
• Offshore companies or trusts are involved without any sound commercial reason.
• A tax haven or banking secrecy country is involved without any sound commercial reason.
• Tax exempt entities, such as pension funds, are involved inappropriately.
• It involves exit arrangements designed to sidestep tax consequences.
• It involves money going in a circle back to where it started.
• Low risk loans to be paid off by future earnings are involved.
• The scheme promoter lends the funding needed.

Although the inclusion of one of the above features does not necessarily mean that tax avoidance is involved, the more features that are present, however, will give HMRC cause to challenge and investigate. It always makes sound commercial sense therefore to consult a reputable tax adviser before putting your livelihood on the line.