What is tax avoidance?
"Tax avoidance is 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.
But tax avoidance is not the same as tax planning, which involves applying tax legislation in the way it was intended - for example saving in an ISA (Individual Savings Account) where you don't pay tax on the interest. You can find out the sorts of activity that HMRC may consider as avoidance from the leaflet 'Tempted by tax avoidance'."
HMRC - Disclosure of tax avoidance schemes
Detecting tax avoidance early is a key strand in HM Revenue & Customs' (HMRC’s) anti-avoidance strategy.
The Disclosure of Tax Avoidance Schemes (DOTAS) rules enable the government to react quickly to close loopholes by changing the law, sometimes within days of the disclosure being made. The DOTAS rules mean that HMRC can immediately put resources in place to conduct intensive investigations into avoiders’ tax returns, and so far they have helped to protect billions of pounds of tax.
HMRC regularly reviews the DOTAS rules to make sure that they reflect changes in the market for tax avoidance schemes. Tax avoidance scheme promoters have to give HMRC early information about schemes which fit certain 'hallmarks'. The promoter also has to provide HMRC at quarterly intervals with details of any clients who have used their avoidance scheme.
In addition, anyone using a tax avoidance scheme that falls within the DOTAS rules has to tell HMRC about it, usually by including a Scheme Reference Number (SRN) on their tax return, or on a special form, if they don't complete a return.
This along with the information from the promoter allows HMRC to identify tax avoiders. Promoters and users who do not comply with the DOTAS rules face substantial penalties. HMRC never approves tax avoidance schemes.
The fact that a scheme has been disclosed and has been given a reference number simply means that a promoter has complied with their obligations under the DOTAS rules. Every six months HMRC publishes statistics showing the number of disclosures made under these rules.
You can find other related information from the links below:
- Rules for disclosure of tax avoidance schemes
- Guidance on the disclosure of tax avoidance schemes
- Legislation for the disclosure of tax avoidance schemes rules
- Forms to disclose tax avoidance schemes
- Withdrawn Scheme Reference Numbers
- Disclosure statistics
"Effective tax advice by a tax professional should nowadays not only address the ways of how not paying more tax than necessary and evaluate associated tax risks of implementing such tax planning schemes (rate level of tolerance on a risk scale), but should also take in consideration the impact of such planning on the reputation of the company if it becomes public knowledge and that means anticipate actions of the authorities to truly qualify as a trusted business tax advisor."
Richard H. Cornelisse
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.