Now the 2018/19 tax year is well underway, and HMRC is increasing its efforts for a fair tax system for everyone, are you at risk of a tax penalty for legitimate things you may have done in the past?
As Tax Avoidance And Tax Evasion Are Often Confused, Here’s A Comparison That Also Highlights The Tax Implications For You
The Difference Between Tax Evasion And Tax Avoidance
Tax evasion is the illegal practice of not paying taxes. It’s an offence.
Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities. The aim is to reduce their tax liability. It includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.
Tax avoidance is the legal use of the tax system to reduce the amount of tax payable within the law.
According to HMRC, tax avoidance often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax reduction. It involves operating within the letter, but not the spirit, of the law. Tax sheltering is similar, although it’s not necessarily legal.
How Tax Avoidance Schemes Work
The disclosure of tax avoidance schemes (DOTAS) came into force over a decade ago.
Anyone marketing a tax avoidance scheme must disclose it to HMRC.
The promoter is issued with a scheme number. The tax payer is required to put this number on their tax return to identify which avoidance scheme they’re using.
The fine for failing to disclose a scheme is severe. It can be up to £1 million. The promoter can also face penalties starting at £5,000 for each person who fails to report it.
HMRC has updated the official guidance on tax avoidance schemes and the implications that arise if you avoid paying tax. Here's a summary below.
- It sounds too good to be true: for example, the promise of the removal 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.
- The scheme involves artificial or contrived arrangements.
- The scheme involves money going around in a circle.
- 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 DOTAS number.
You can read the full tax guide from HMRC here.
HMRC On Tackling Tax Avoidance, Evasion And Non-Compliance
In November 2017, HMRC issued a report which highlighted that the UK tax gap – the difference between what is owed and what HMRC actually collects – is one of the lowest in the world.
But it says there’s a minority who try to break the rules, and others who enter into avoidance schemes or aggressive tax planning arrangements which clearly go beyond what Parliament intended.
Since 2010, the government has introduced more than 100 measures that have collected and protected an additional £160 billion of tax revenue.
In a commitment to further action, HMRC says:
The government has consistently acted to tackle aggressive tax planning, avoidance, evasion and non-compliance in the tax system and has already made game-changing strides in tackling the problem. Users of tax avoidance schemes can no longer hold onto their money whilst their tax liabilities are disputed.
Read the full tax report, which lists all the measures that have been taken since 2010.
It's well worth a read, for if you’re involved with any of them, either because you've taken part in a tax avoidance scheme or simply unwittingly, be aware HMRC may come knocking on your door for some money!
Pension Tax Loopholes That Could Be Closed Soon
Reported in FTAdviser this year are a couple of pension loopholes that might soon become a thing of the past.
People who wish to make large pension contributions in later life aren’t affected by the Lifetime Allowance limit or the Annual Allowance limit. It’s suggested that many could make large pension contributions and as a result, pay less in Income Tax than would have been due as an Inheritance Tax charge.
It also reports that some financial advisers are suggesting their clients artificially create up to three pension pots of £10,000 to take advantage of the ‘small pots lump sum rules’. It effectively boosts their Lifetime Allowance limit by £30,000, potentially saving £16,500. It is, however, considered to be aggressive tax avoidance and is in breach of HMRC tax rules.
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