Tax Avoidance Fines: How much will tax avoidance cost me?

Let’s take a look at an example of tax avoidance fines: On earnings of £120,000 per annum over 3 years?

About £200,000 if you use an avoidance scheme based somewhere like Belize. Or about £150,000 if you pick the Isle of Man or similar. Obviously you will already have paid some tax and about 10% of your contract value to the scheme provider.

Offshore Non Compliance

Offshore non-compliance is expensive, make no bones about it!

The penalties which apply to Income Tax and Capital Gains Tax will be incurred for:
1. Failure to notify – you don’t tell HMRC you have income that may be taxable
2. Inaccuracy in a return – where your Self-Assessment return is incorrect
3. Failure to file a return on time – where your Self-Assessment return is late

Penalties & Tax Avoidance Fines

These penalties / tax avoidance fines are linked to the tax transparency of the territory in which the income or gain arises. Where it is harder for HMRC to get information from another country, the penalties for failing to declare income or gains arising in that country are higher.

There are three levels of penalty:
1.Where the income or gain arises in a territory in ‘category 1’; the penalty rate is the same as the standard penalty – up to 100% of tax
2. Where the income or gain arises in a territory in ‘category 2’; the penalty rate is 1.5 times the standard penalty – up to 150% of tax
3. Where the income or gain arises in a territory in ‘category 3’; the penalty rate is double standard penalty – up to 200% of tax

Belize comes under category 3 – just thought we’d mention it as Belize seems to be a popular newcomer with offshore scheme providers.

So, what other penalties will you face for not paying the correct amount of tax?

HMRC calculate penalties as a percentage of the additional tax due. This will be calculated when the inaccuracy is corrected. The additional tax due is called the potential lost revenue. HMRC measure the potential lost revenue differently where the inaccuracy results in an overstated loss.

The penalty rates for inaccuracies can be:
1. Up to 30% of the potential lost revenue if the inaccuracy is careless
2. Up to 70% of the potential lost revenue if the inaccuracy is deliberate
3. Up to 100% of the potential lost revenue if the inaccuracy is deliberate and the person attempts to conceal it

On top of all that you will also probably be charged interest from the time at which HMRC (see HMRC penalties) considered the unpaid tax to be due. So the take home pay may be less, but working via a compliant umbrella will help you sleep easy at night!