What is Tax Avoidance

What is Tax Avoidance?

What is Tax AvoidanceWhat is Tax Avoidance, Tax Evasion, Tax Fraud? What does it all mean? It can be quite confusing to be honest. All things concerning tax are a jumble at the best of times, but now you can say you know all about tax avoidance! Well, kinda. We’ll try our best to explain it.

There have been quite a few issues regarding Her Majesty’s Revenue & Customs (HMRC) in the news recently. It seems the super rich, celebrities and even politicians like to avoid tax. And who can blame them? If you think you can outsmart the HMRC would you take the risk? Even those super do-gooders such as Gary Barlow and Take That have been avoiding paying tax.

Tax avoidance is a way in which people with a lot of income can avoid paying a lot of tax to HMRC. It’s a way of bending the rules to deliberately con the tax man, and it often includes artificial transactions that serve little or no purpose but to avoid paying tax. Tax avoidance is completely legal, however immoral in the eyes of a lot of the UK public (who can blame them to be honest). This is not to be confused with Tax Evasion, which is illegal in the UK and means that those avoiding tax do not pay tax at all. Those only avoiding tax wish to pay the least amount that they can without getting into trouble with HMRC.

Jimmy Carr has been in the media a lot for his tax evasion plans in recent years. He paid low tax in 2013 by using a scheme known as K2. K2 is based in Jersey, and around 1100 wealthy British use K2 to shelter £168m a year from UK income tax and National Insurance. It works by members redirecting their income and earnings into the K2 trust. The trust then offers free or low interest loans to users which are not paid back. This scheme insures that users pay as little as 1% tax on their earnings, clever huh. Carr has been quoted saying at a stand-up show that he only pays what he has to and nothing more.

Schemes like K2 are not completely uncommon in the UK, and they’re known as Offshore Employee Benefit Trusts (EBT’s). Other schemes include Payments in Kind. Banned in the mid-90’s, people used this type of scheme to avoid using currency, and trading in commodities (gold and diamonds, for example). There’s also the Offshore Tax Haven scheme. If your money is based offshore then technically you don’t have to pay UK income tax.

Tax avoidance currently costs the average UK taxpayer £4bn a year, and HMRC investigate a lot of people who tend to use these schemes in case they can catch them out. If HMRC takes a scheme or individual to court, said individual could end up paying a lot of due tax.