The words tax avoidance seem to have been used with increasing frequency recently. But what exactly does they mean?
HMRC define tax avoidance as an attempt to exploit legislation to gain a tax advantage that was never intended. This often involves artificial transactions that serve little or no purpose other than to produce a tax advantage. So what is the difference between tax avoidance and good old fashioned tax planning. Well it seems to come down to the intended purpose of the legislation. Whereas tax avoidance is gaining an advantage that wasn’t intended, tax planning involves applying tax legislation in the way it was intended.
As accountants we are often contacted by companies promoting tax avoidance schemes with the promise of large savings. However read the small print and normally somewhere there is a disclaimer saying that there is no guarantee the scheme will stand up if challenged by HMRC. There is a good reason for this – most of them don’t!
HMRC will challenge tax avoidance schemes and if necessary pursue them through the courts. They published their strategy for tackling tax avoidance in March 2011 in the document ‘Tackling Tax Avoidance’ explaining the core element in more detail. You can download the document here