Tax avoidance

What is tax avoidance?

Tax avoidance is applying tax legislation in a way that inappropriately obtains a tax advantage. Tax avoidance can involve the misuse of tax reliefs and allowances or the re-characterisation of a transaction. Tax avoidance involves transactions which are undertaken primarily to claim a tax advantage and not for genuine business reasons. Tax avoidance often involves contrived, artificial transactions that serve little or no purpose other than to gain a tax advantage.

Advisors and promoters may tell you ways to reduce your tax bill. You must consider whether you are being given efficient tax advice, or if you are being sold a tax avoidance scheme.

If you are unsure if what you are doing is tax avoidance, you should ask yourself the following questions:

  • Is the end benefit too high in comparison to the real economic risk you are taking?
  • Does the proposal seem complex, given the business aims you have?
  • Do you have difficulty understanding the proposed structure or transaction?
  • Do you have difficulty identifying the commercial reasons behind the structure or transaction?
  • Does the transaction involve unusual items, without a clear reason, such as the use of:
    • tax havens
    • circular flows of funds
    • offshore companies.
  • Does the fee being charged appear high for what you thought was a simple transaction?
  • Is the manner in which the fee is being charged unusual? 
  • Is the promoter trying to impose unusual confidentiality conditions and not providing copies of written advice?
  • Is the promoter unwilling to discuss the transaction with your accountant or business advisor?
  • Do you think Revenue would challenge the scheme if they became aware of it?
  • Has the promoter offered you insurance against the structure being challenged by Revenue?

This list of questions above is not exhaustive. If you have answered yes to any of the questions, then you may be involved in tax avoidance.

The promoter may provide you with a transaction number from Revenue. This number will have been provided to the promoter after they made a Mandatory Disclosure. This does not mean that Revenue approves of the scheme, or that it is not a tax avoidance scheme. For further details about Mandatory Disclosure, please see the page entitled 'Mandatory Disclosure Regime' in this section.

If you are tempted to use a tax avoidance transaction, you should think carefully about the costs involved such as:

  • the possible disruption caused by having to deal with Revenue enquiries
  • potentially lengthy litigation
  • and
  • the prolonged uncertainty over the outcome you may face as a result.

Next: What to do if you think you are engaged in tax avoidance