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What is Aggressive Tax Avoidance?

The Institute of Chartered Accountants of England & Wales (ICAEW) has recently produced a helpsheet for its members titled, 'Aggressive Tax Avoidance Schemes – What You Need To Bear In Mind'.

Although the document is designed to advise chartered accountants about professional conduct and their duties to their clients it also features a section on identifying aggressive tax avoidance schemes that will be equally useful to freelancers who may be contemplating or tempted by the lure of what some of these schemes are offering.

The helpsheet provides some useful opening background as to what is tax evasion and what is tax avoidance:

Tax Evasion
'Is illegal and involves breaking the law; for example, hiding income or assets by failing to disclose information to the tax authorities, or attempting to take advantage of tax deductions for which the taxpayer is not eligible….'

Tax Avoidance
'Is legal. Tax is a question of law and it's the Governments job to decide what legal tax planning arrangements it wishes to prevent. The scope for tax avoidance is increased by extremely complex tax systems that unintentionally create legal loopholes and potential anomalies in the tax law.'

Identifying Aggressive Tax Avoidance Schemes
Accountants are advised to form a judgement about any particular arrangements and consider whether it could be a tax avoidance scheme that may fail when challenged. Contractors should also take the same stance before committing themselves to promises of untold riches by firstly seeking professional advice.

HMRC spotlights page lists a number of typical characteristics of aggressive and, even perhaps, artificial tax avoidance schemes:

  • It sounds too good to be true.
  • It involves artificial or contrived arrangements.
  • It seems very complex for what you want to do.
  • There are guaranteed returns with apparently no risk.
  • There are secrecy or confidentiality agreements.
  • Upfront fees are payable or the arrangement is on a no-win-no-fee basis.
  • The scheme is said to be vetted by a top lawyer or accountant but no details of their opinion are provided.
  • The scheme is said to be approved by HMRC (it doesn't follow that this is true).
  • Taxation of income is delayed or tax deductions accelerated.
  • Tax benefits are disproportionate to the commercial activity.
  • Offshore companies or trusts are involved for no sound commercial reason.
  • The involvement of professional trustees is claimed to guarantee success.
  • A tax haven or banking secrecy country is involved for no sound commercial reason.
  • Tax exempt entities such as pension funds are involved inappropriately.
  • It contains exit arrangements designed to side-step tax consequences.
  • It involves money going in a circle back to where it started.
  • It involves low-risk loans to be paid off by future earnings.
  • The scheme promoter lends the funding needed.
  • There's a requirement to take out insurance against the failure of the tax planning to deliver the tax benefits.

 

The ICAEW warns that although an adviser may not agree with all the characteristics identified by HMRC above (e.g. reasonable tax planning may well result in the taxation of income being delayed or tax deductions accelerated), the presence of one or more of these characteristics usually highlights the potential risks involved with a particular scheme and alerts the adviser (and also freelancer) to proceed with caution.

By Andy Vessey

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2 thoughts on “What is Aggressive Tax Avoidance?”

  1. Paul Hillyard

    The ICAEW is up to it’s neck in this. It’s easy to define aggressive tax avoidance, it’s where the tax payer attempts to subvert “the Will of Parliament”.
    For example, pension payments are specifically given tax relief to encourage the self employed to save for their old age. Capital allowances are given on vehicles and equipment.
    To use these measures and plan your tax affairs to include these reliefs is not tax avoidance, Parliament intends and encourages us to use these methods.
    If I can define “aggressive tax avoidnace” why can the Institute of Chartered Accountants not?

  2. Michele

    I think it’s simply some badly marked tax examination papers from the 1990’s.
    This historic problem has now evolved and HMRC and others are now trying to avoid embarassment. Hope it’s just tax and not other financial papers.
    I think the question in exam papers in 2013 should be what is an artificial scheme and what is an example of good tax planning?

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