Tax Schemes, Avoidance and Evasion

We all want to save money, and paying less tax is often the first place we look. Let’s be frank, no one enjoys paying tax! But of course it’s the law, it’s part of running a business and something we all have to do.

Minimising your tax liability is about using the correct reliefs, structures and planning prudently for the future.

However often that line gets blurred by so-called tax schemes that crop up from time to time.

At RJF we always advise to avoid all tax schemes that don’t have HMRC clearance but clients will often still come to us with the latest avoidance idea…

What is tax avoidance?

Tax avoidance, in its most basic form, is when you bend the rules that are in place within the tax system, all to find a legitimate way of minimising the tax that you payout. This rule-bending may be legal, but it still isn’t always seen as being moral and HMRC will often view the practices and calculations that are part of this to be contrived and artificial.

Some examples of tax avoidance include:

  • Tax deductions
  • Using incorporation to adjust business structure
  • Having an offshore company in a tax haven zone
  • Using a tax scheme such as reward cards

Many high profile celebrities were caught up in tax schemes involving things like films and dealing with used cars. Ultimately several years later HMRC ruled against many of these schemes meaning anyone using them had to pay back tax owed.

Tax avoidance vs tax evasion

It’s worth noting the difference between the two. Tax evasion is illegal and this is something that is not part of a grey area. Tax evasion is when you do not pay tax, when you do not report your income, not making a payment for any taxes that are owed. All of these things are illegal and they can mean that you end up in trouble with the law.

Some of the main examples of tax evasion include:

  • Deliberately underpaying your tax
  • Failing to file your tax returns
  • Underreporting your income

Obviously, tax evasion is a serious matter and can result in very serious consequences.

Tax avoidance, however, can often seem like a good idea at the time, many companies claim to setup the latest schemes which will reduce your tax bill. On paper, they may look legitimate but if HMRC rules against these in the future you will be liable to pay the tax plus interest and a potential fine. (Don’t forget these companies charge you to use these schemes anyway so you’ll be hit twice if HMRC rules against it later)

We always recommend to our clients that they steer clear of these types of schemes. We are happy to look into them on behalf of clients but our advice is nearly always the same.

The best, legal and safest way to pay less tax is to do it correctly, above board, using approved reliefs, structures and strategies that a good accountant will know about.

At RJF we specialise in startup and scale-up businesses – we’ll handle all your tax affairs and ensure your business is structured in the most tax-efficient manner possible.