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Tempted by tax avoidance?

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As we cope with rising living costs and more of us start up our own businesses or invest in properties, the tax man is never far behind. But when it comes to tax avoidance schemes, are there any that are actually above board or are they best left alone?

The difference between tax avoidance and tax evasion

Following the recent announcement that the Government has begun a crackdown on schemes which attempt to exploit tax loopholes, it’s important to understand the difference between tax avoidance and tax evasion.

Tax avoidance is legal, unlike tax evasion – yet in most cases tax avoidance is still seen as unethical and abusing the rules. Tax avoidance is where you legally exploit the tax system to reduce your current or future tax payments. For example, through tax deductions, establishing an offshore company in a tax haven, or claiming personal and family expenses as a deduction from your business income.

Tax evasion is where you escape paying taxes by failing to declare the true state of your business to tax authorities. However, in both cases the Government is losing out on billions of pounds every year (the tax gap in the 2010 to 2011 financial year was estimated to be a whopping £32 billion – 6.7 per cent of the total tax that HMRC estimates were due).

The Government is now looking at ways to prevent evasion and avoidance, resulting in legislation that aims to minimise the scope for tax avoidance. For example, the General Anti-Abuse Rule (GAAR), which is aimed at deterring and preventing artificial and abusive tax avoidance schemes.

Tax planning

This term is slightly different to avoidance and evasion because according to Money Saving Expert Martin Lewis, it’s where you “organise your finances in such a way as to take advantage of state-encouraged schemes, which are designed to encourage you to act a certain way with the incentive of paying less tax”. For example, putting money into an ISA, which was set up to encourage people to save or invest without the interest being taxed.

Safe tax schemes?

These include the following:

• Pensions – allowing you to invest tax-free to encourage you to save money for your retirement.

• Enterprise Investment Schemes (EIS) / Seed EIS – tax advantages for those investing in start-up or smaller companies.

• Charity donations – you’ll get relief from Capital Gains Tax when you give any asses to a charity or Community Amateur Sports Club (CASC) or sell any asset to a charity of CASC for less than its market value

• Income Tax relief – this is a tax on your income whereby you can lower your tax bill if you give land or buildings in the UK or qualifying shares to a charity or sell these to a charity at less than their market value

• Uniform tax rebates – a tax allowance you can claim from the Government to help you claim back if you wash or launder your own work uniform.

• Childcare vouchers – allowing you to pay for a portion of your childcare costs from your salary before tax.

Tax avoidance stressed businessman

Tax investigation

If you enter into a tax avoidance scheme then you need to be prepared to be investigated by HMRC (also known as a compliance check or tax enquiry). Just because a scheme has been claimed as being legal, you shouldn’t assume that it will be seen that way by the courts.

Unfortunately, even if a scheme is deemed as avoidance rather than evasion, you can still get into a lot of trouble and there are likely to be penalties plus the repayment of tax. It’s up to your accountant to help you comply with legal tax obligations, to pay the tax due and to give tax advice. No one wants to pay more tax than is absolutely necessary, but you also don’t want to end up signing up to a tax scheme that exploits tax rules.

Warning signs

With such a fine line between tax avoidance and tax evasion, what should you be looking out for if you’re approached by a firm or tax adviser that promises to save you thousands of pounds?

HMRC has advice to help you decide whether you are being offered good tax advice or whether you are being sold a tax avoidance scheme. Here are some of the warning signs for you to be aware of:

• it sounds too good to be true and cannot have been intended when Parliament made the relevant tax law (for example, some schemes promise to get rid of your tax liability for little or no real cost, and without you having to do much more than pay the promoter and sign some papers)

• the tax benefits or returns are out of proportion to any real economic activity, expense or investment risk

• the scheme involves arrangements which seem very complex given what you want to do

• the scheme involves artificial or contrived arrangements

• the scheme involves money going around in a circle back to where it started

• the scheme promoter either provides any funding needed to make the scheme work or arranges for it to be made available by another party

• offshore companies or trusts are involved for no sound commercial reason

• a tax haven or banking secrecy country is involved

• the scheme contains exit arrangements designed to side-step tax consequences

• there are secrecy or confidentiality agreements

• upfront fees are payable or the arrangement is on a no win/no fee basis

• the scheme has been allocated a Scheme Reference Number (SRN) by HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime.

 

 

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About Julia Faulks

About Julia Faulks

Julia Faulks is a content editor and journalist with 11 years' experience writing and subbing editorial for a number of publications. Now a mother herself, she has turned her hand to writing content for parents as well as young people and likes nothing more than turning long and complicated copy into something that everyone can understand.

Website: Julia Faulks

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