Tax avoidance refers to the legal use of loopholes in tax laws to reduce liabilities. Though legal, it’s often seen as aggressive and can attract scrutiny from HMRC. Here’s an overview of common tax avoidance schemes in the UK:
1. Income Shifting & Dividend Splitting
Business owners allocate shares to family members in lower tax brackets to reduce the overall tax burden by paying dividends to those individuals.
Objective: To minimize income tax and national insurance contributions.
2. Offshore Trusts & Companies
By transferring assets to offshore entities in tax havens, individuals avoid paying UK taxes on income or capital gains.
Objective: To reduce UK taxes on profits and inheritance by exploiting favorable tax regimes abroad.
3. Employee Benefit Trusts (EBTs)
Companies used to avoid tax by paying employee bonuses through trusts, which would offer loans to employees, often without repayment.
Objective: To defer or avoid income tax and national insurance contributions on bonuses.
4. Capital Gains Tax (CGT) Allowances
Taxpayers structure income as capital gains, benefiting from lower tax rates and allowances such as Business Asset Disposal Relief.
Objective: To pay less tax by treating income as capital gains.
5. Artificial Losses & Deductible Expenses
Some businesses create artificial losses through complex structures, inflating expenses to reduce taxable income.
Objective: To lower taxable profits with artificial deductions or losses.
HMRC’s Response:
HMRC has introduced several measures to combat tax avoidance:
- General Anti-Abuse Rule (GAAR) to counter abusive schemes.
- Disclosure of Tax Avoidance Schemes (DOTAS) to ensure early detection.
- Targeted Anti-Avoidance Rules (TAARs) to prevent misuse of tax laws in specific cases.
Penalties for Tax Avoidance
While tax avoidance is legal, HMRC can impose penalties, demand repayment of avoided taxes with interest, and damage a company’s reputation if they find the schemes abusive.
In conclusion, while tax avoidance may reduce tax liabilities, HMRC’s increasing scrutiny and ethical concerns make aggressive schemes risky. Taxpayers should ensure their practices align with both legal and ethical standards.
Ensure compliance and legal safety with the expert team of TMG Pitchers as we help you break down the complexities of UK Tax.
