Tax avoidance is the process of reducing the amount of tax paid, or increasing the efficiency of a client’s tax profile, through legal means. Tax evasion is reducing the amount of tax paid through illegal means. However, regulation is moving in the direction of encouraging tax compliance in the ‘spirit’ of the law as opposed to the letter of the law. While some tax avoidance schemes are technically legal, they may be unethical in the broader sense of each entity’s obligation to pay their fair taxes.
Tax avoidance itself therefore can be split between the pursuit of honest tax efficiency and the exploitation of loopholes in the law. One of the ways that this is being enforced is through the use of unique tax avoidance scheme reference numbers. If using a tax avoidance scheme, a client or their adviser must provide HMRC with the code of the scheme they are using. If the code doesn’t exist for the scheme they’re trying to use, they can request one from HMRC which may or may not be approved. This helps HMRC to gain some control over the exploitation of loopholes in the system, allowing some schemes to continue while rejecting others. HMRC have effectively made it illegal to use a scheme that doesn’t have a scheme reference number, thereby effectively filling any loopholes in the law.
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