What is Tax Avoidance
Tax avoidance involves bending the tax rules to try to gain a tax advantage that was never intended. It usually involves contrived transactions that serve no real purpose other than to artificially reduce the amount of tax that someone has to pay. It is not the same as effective tax planning but is often promoted as such.
Tax avoidance does not pay, as most schemes do not work. People who use tax avoidance schemes can end up paying not only the tax they should have paid, but also interest and potentially a penalty. This is on top of the fees they paid to the person or business offering them the scheme. Everyone is legally responsible for their tax affairs and for paying the correct amount of tax even if they get someone else to do it for them.
Not paying the right amount of tax also means that our vital public services like schools and hospitals don’t get all the money they should. Don’t get caught out by tax avoidance.
If you are worried about being caught up in a scheme, follow our quick guide to help you spot a tax avoidance scheme and learn what to do when you are offered one.
Stop, challenge, protect
Stop – take time to check what you are signing up for
Do not be rushed into signing contracts or agreements. Often those selling avoidance schemes will try to avoid explaining what the scheme is about. Ask them to explain it clearly.
Do not sign up to anything you are uncomfortable with or do not understand. You are responsible for your tax affairs, so make sure you know what it is and what it means.
Remember – you do not have to sign there and then. If you are unsure, seek professional independent advice.
Challenge – if it looks too good to be true, it almost certainly is
Look out for any of the following signs:
A scheme that allows you to keep more of your income than you would expect
Be wary as you could be avoiding tax and not paying the full amount of Income Tax and National Insurance contributions (NICs) on your income. When you see such offers, bear in mind the basic rate of Income Tax is 20% and you also need to pay NICs on top.
Some or all the payments you get are said to be non-taxable
These payments may not appear on your payslip and could be described as loans, annuities, bonuses, shares, fiduciary receipts, credit facility, capital payments/advances or something similar. These payments are no different to normal income, so you need to pay Income Tax and NICs on them.
The scheme is ‘approved’ by HMRC
You may be told the schemes are safe and compliant or approved by HMRC. This is not true, HMRC does not approve schemes.
Only part of the total payments you received are taxed as income
If you are employed this is often close to the national minimum wage, even though you are actually receiving much more than that for the work you do.
Being offered an ‘enhanced’ scheme
You may be offered a choice between a standard or an ‘enhanced’ scheme, which may be described as more tax efficient. The enhanced version is likely to be tax avoidance.
Being asked to sign more than one contract
You may be asked to sign more than one contract or agreement – this is sometimes a sign of a tax avoidance scheme.
If you can’t see how your income will be paid
If your employment contract or agreement does not state how your income will be paid, or provide a breakdown of all deductions to be taken from your income, this could be a sign of a tax avoidance scheme.
Being offered a cash bonus
You may even be offered a ‘cash bonus’ if you recommend the scheme to a friend. Consider why you are being offered this incentive; it may not be as it seems.
Protect yourself and others – HMRC is here to help so report tax avoidance schemes to us
Report a scheme, or the person or the business offering you the scheme.
You can do this anonymously if you prefer. Use the Report Tax Fraud Online form and make sure you enter the words ‘Contractor campaign’ in the ‘Other information’ section.
You can also phone HMRC on 0800 788 887 – if you’re outside the UK, phone +44 (0)203 080 0871.
If you think you are in a tax avoidance scheme and want to leave it, email HMRC at firstname.lastname@example.org. We know that people can sometimes make mistakes, so we’ll help you get on the right track.
For further information you can read tax avoidance: getting out of an avoidance scheme on GOV.UK.
You can use HMRC’s online calculator to check if you are paying the correct amount of tax. When inputting your income in the online calculator, please make sure you also include any payments you are receiving that may be described as non-taxable, such as loans.
If you are concerned about a scheme you are considering joining or currently using, get independent professional advice. If you are on a low income you could also contact a tax charity such as TaxAid.
This guide has been published to support HMRC’s Tax avoidance – don’t get caught out campaign.