Tax Avoidance Schemes: New and Existing Criminal Penalties

Income tax and national insurance contributions are required to be paid by every eligible person in the UK as they perform important functions within the running of society. This is why tax avoidance scheme efforts to avoid making these payments are such a severe act.

As a result, certain activity is outlined as against the law, leading to penalties being designed for those who decide to make use of a tax avoidance scheme, or other tax evasion efforts.

This has led to the UK government announcing a change in the penalties for those using a tax avoidance scheme. The change was outlined in the 2023 budget, stating:

“The government will double the maximum sentences for the most egregious cases of tax fraud from 7 to 14 years and will consult shortly on the introduction of a new criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme. The government is also investing a further £47.2 million to improve HMRC’s capability to collect tax debts, including supporting those who are temporarily unable to pay.”

With these incoming changes resulting in much harsher sentences and extreme efforts to tackle tax avoidance schemes, it’s essential to remain on top of the legal landscape surrounding these types of crimes and activities. Keep up to date with DPP Law and our breakdown of tax avoidance schemes, along with the new and existing criminal penalties:

  • Tax avoidance schemes VS tax evasion
  • Is tax avoidance legal in the UK?
  • What are examples of tax avoidance schemes?
  • What is the penalty for tax avoidance?
  • How far back can HMRC investigate tax avoidance?

Tax Avoidance Schemes VS Tax Evasion

A tax avoidance scheme is very different from tax evasion in the UK. Whilst both are ways that are used to reduce tax liabilities, they are different in terms of legality and intent.

The difference between the two is the intent behind the actions, rather than the amount of tax or national insurance not paid. The methods used within tax avoidance schemes usually include taking advantage of tax deductions, credits, and exemptions.

Fundamentally, tax avoidance schemes are (mostly) compliant with the law and for those involved, the intent is usually to minimise tax liability. However, tax evasion is an illegal activity and for many involved, it is done to avoid paying any taxes they owe. This is usually involving activities such as claiming false deductions, hiding taxable assets, and not reporting income.

Is Tax Avoidance Legal in The UK?

Tax avoidance is legal in the UK, so much so that there are several tax avoidance schemes that people can take advantage of. However, they can be too good to be true, as HMRC is cracking down on tax avoidance schemes. Those who find themselves in breach of the law through these schemes can be expected to pay out a hefty sum in disputed tax, interest, and any tax avoidance penalties.

It is a very fine balance between tax avoidance being legal and the efforts behind avoidance becoming illegal.

What are Examples of Tax Avoidance Schemes?

Tax avoidance schemes in the UK are designed to reduce the amount of tax owed by individuals and businesses while staying within the bounds of the law. Some common tax avoidance schemes in the UK include:

Umbrella Payroll

An umbrella payroll is a tax avoidance scheme that is relatively common in the UK. This scheme is designed to divide a payment through the payroll. This means that a smaller portion of the overall sum will be processed as a payment that is subject to PAYE. Meanwhile, the larger, more taxable amount, will be processed as a payment from a different account and be referred to as something separate from a wage, such as a loan or investment payment.

This is then not subject to PAYE, meaning the person involved in the activity can avoid paying the actual amount of tax that would’ve been owed had the money not been involved in a tax avoidance scheme.

Disguised Remuneration Schemes/Loan Schemes

Another type of tax avoidance scheme is disguised remuneration schemes or loan schemes. These can be structured in several ways, but fundamentally they claim to replace taxable income with payments that cannot be subject to income tax or National Insurance contributions.

For example, having a wage paid through a loan from an employee benefit trust would not result in taxation or as much taxation. However, if someone uses one of these schemes after 5th April 2019, they will still have to pay a loan charge. This resulted in charges on unpaid tax on all outstanding disguised remuneration loans made since 1999.

Job Board Schemes

Job board schemes are another tax avoidance scheme and toe the line between legal and illegal activity. The general idea involves a company paying their staff or clients a small (taxable) wage, whilst topping it up with ‘credits’ for a job board. The credits can then be traded in for tax-free cash, avoiding paying the actual tax liabilities.

What is The Penalty For Tax Avoidance?

The UK government is becoming increasingly harsher in its penalties for those found guilty of tax avoidance activities that have broken the law. The main aim of this crackdown is to deter people from entering legal arrangements to avoid tax payments by blurring the line between legal and illegal activity and making the punishment not worth the risk.

Financial Penalties

The financial penalties for those who have broken the law by using tax avoidance schemes can vary, depending on the severity of the activity and the amount of tax that has been unpaid.

This can include paying the interest on the underpaid tax, along with the amount of tax that wasn’t paid. HMRC may also decide that the taxpayer is also liable for the legal costs required to come to the conclusions on the penalties.

Loan Charges

For those who were found to be using a disguised remuneration scheme, HMRC will implement a loan charge. This is done by adding together all of the outstanding loans and taxing them as one income for the year.

Custodial Sentence

For the cases of tax avoidance that have crossed the line into tax evasion, those involved can be found guilty of tax evasion which is a criminal offence. If found guilty, taxpayers may face imprisonment of up to seven years and other serious penalties.

As of the new government budget in 2023, custodial sentences and other penalties will also be implemented for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme.

How Far Back Can HMRC Investigate Tax Avoidance?

In the UK, HM Revenue and Customs (HMRC) has the authority to investigate the tax affairs of any individuals and businesses they suspect may not be complying with tax laws. However, the amount of time HMRC can investigate depends on the circumstances involved within the case.

Generally speaking, HMRC can investigate tax affairs up to four years from the end of the tax year in question. For example, for the tax year ending on April 5th, 2023, HMRC can investigate until April 5th, 2027.

However, if HMRC suspects deliberate tax evasion, or fraud or the taxpayer has failed to notify chargeability to tax, then the time limit for investigation can be extended to 20 years. This is known as the “20-year rule.”

It’s worth noting that HMRC may also open an investigation into earlier tax years if they believe there is a connection between those years and the current year under investigation. This is known as “discovery assessment” and can extend the time limit for investigation.

Get In Touch With DPP Law

Whether you’re unsure about the existing or upcoming legal legislature surrounding tax avoidance and tax evasion in the UK, it’s important to be in touch with legal professionals for support.
Honesty and accuracy are always beneficial in any financial decision, however, if things go sideways or you’re presented with a situation you aren’t too sure of, get in touch with DPP Law as soon as possible.
Our team has extensive experience, with the knowledge and specialists required for any tax avoidance or evasion case. Speak to one of our experts today to find out how DPP Law can support you.