Sometimes, it is difficult to understand why many people don’t seem to put as much effort into making profits as they do into trying to avoid paying tax.

Tax avoidance is a red rag to a bull as far as HM Revenue and Customs (HMRC) are concerned. They have recently issued a bulletin outlining their stance that avoidance schemes used principally by company directors to avoid Income Tax and National Insurance Contributions by means of using capital advances and mutual share ownership schemes are ineffective and their use will not only fail to produce the tax saving sought but will also lead to potential tax penalties for the user.

The way such tax planning works is to divide the payments made into two – a nominal salary and a ‘capital advance’ involving a loan, which in practice is never intended to be repaid. Various offshore share transactions are then carried out by the employer. These produce paper gains for the employees that are then used to extinguish the loans.

The bulletin states that HMRC will launch a tax investigation into anyone using such schemes.

If you are tempted to take advantage of what are often complicated schemes with the intention of avoiding tax on regular income, be very careful. A note on this issued by the Institute of Chartered Accountants in England and Wales states starkly, “These types of schemes are never approved by HMRC and employers and employees are likely to end up paying additional tax and interest and may be subject to penalties.”