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HMRC’s advice on spotting tax avoidance schemes

Julian Ball

Julian Ball | Legal Director

Friday 15th Jul, 2022

A brief background to tax evasion

It’s HMRC’s role to exercise the ‘care and management’ of UK taxes and this responsibility has been enshrined in law for generations. However, it is also every taxpayer’s right to pay only the taxes which are due under the law and it is this tension which has resulted in legal conflict over the years. Although we have moved on from 17th century window tax to a more sophisticated personal income tax system, there are still disagreements about the interpretation of tax law.

Most people understand that deliberately understating income, not declaring it to HMRC at all and creating false documents to support such activities, is considered a criminal offence which we know as tax evasion. Less well understood is the attempt to avoid or reduce one’s tax liabilities by means of entering into tax avoidance schemes. These appear at first sight to be legitimate ways in which a taxpayer can lawfully reduce his/her exposure to UK tax. Such schemes have historically relied upon tortuous legal arrangements, often involving overseas ownership structures, to circumvent the wording of UK tax legislation.

For the past 30/40 years there has been a move away from a strict interpretation of a tax law which may allow a legal loophole to be used to avoid tax, to a consideration of what Parliament actually intended in passing its tax laws. This changing approach, together with significant Government funding of HMRC to tackle ‘tax avoidance’ has led to the exposure and demolition in the Courts of a myriad of avoidance schemes.


Recent HMRC tax avoidance issues

Contractors are likely to have read, or perhaps even, unfortunately, been involved in HMRC’s long-running and ultimately successful pursuit of many employment schemes involving the payment of a small taxable salary and the use of an arrangement to pay the balance of remuneration by way of loan repayments.

Whatever the pros and cons of HMRC’s approach to the recovery of tax due under these failed ‘disguised remuneration’ schemes, there is no doubt that the personal and financial distress for many has been severe. Highlighting the risks which contractors and others face in using tax avoidance schemes or arrangements has become a priority compliance issue for HMRC. They would far rather have taxpayers side-stepping these schemes than themselves having to become embroiled in years of litigation and bad publicity in chasing the recovery of tax from those duped into using them.


The HMRC ‘Don’t Get Caught Out’ campaign

Since November 2021, HMRC has been promoting what it calls its ‘Don’t Get Caught Out’ campaign aimed at raising awareness amongst contractors of the risks of becoming involved in tax avoidance schemes. Already possessing the powers to ‘name and shame’ the promoters of tax avoidance schemes, it wants to warn off contractors who might be tempted into such schemes. It is doing this by providing a set of simple online resources, which can be found here.


How to recognise tax avoidance

There is an overview of how to recognise tax avoidance emphasising to contractors that understanding their payment arrangements is an important starting point in being able to assess the risk. It also contains a couple of personal stories from individuals who were caught out as well as a useful description as to how umbrella companies work.


The interactive risk checker

The next online tool provided by HMRC is an interactive risk checker for use by agency workers or contractors working through an umbrella company. Although the questions within it are framed in a binary fashion they give clear alerts which, if applicable to the contractor, need to be followed up with the agency or umbrella company involved.


Payslip guidance

Another HMRC support and guidance publication again aimed at umbrella contractors and agency workers explains how to examine a payslip.

It describes what to look out for on a payslip, what’s there and may be an indication of a tax avoidance arrangement, how a contractor can check if their PAYE and National Insurance deductions are correct. It also gives a comparison of a standard payslip with one indicating the use of a tax avoidance scheme. 


Naming and shaming

HMRC publish details of tax avoidance schemes it comes across in its regular day to day operations in its ‘Spotlight’ articles:


Although covering all forms of tax avoidance schemes readers will see that it is still heavily laden with schemes marketed to contractors. Whilst HMRC insist that it is the responsibility of individual taxpayers to ensure that they do not engage in tax avoidance schemes or arrangements, we do understand that they may need further help and guidance. PayStream’s umbrella company, My Max, was voted the best in the UK at The Contracting Awards 2022 and we are happy to help contractors understand what can be a complex area of employment and taxation. You can get in touch with our team by calling 0161 923 0201 (option 1) or by filling in the form at the bottom of this page.  

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Related article - HMRC enforcement activity is on the rise

A recent HMRC win in the Court of Appeal resulted in an IT contractor having to settle his Income Tax liability following the use of a disguised remuneration tax avoidance scheme. He had entered into an arrangement whereby he worked through an Umbrella company based outside the UK whilst providing services to UK-based financial service companies. The contractor received most of his earnings in the form of loans, which were claimed not to be taxable and were set up through the umbrella company.

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