Recent tax cases have provided greater clarity on the distinction between legitimate tax planning and tax avoidance. Courts are no longer just looking at legal compliance but are scrutinising the true commercial substance and intent behind tax arrangements.
In this article, we break down key rulings that illustrate how tax authorities and courts are interpreting these issues—and what this means for businesses and individuals.
What is the difference between tax planning and tax avoidance?
The fundamental distinction between tax planning and tax avoidance lies in the intent and commercial substance of a transaction.
- Tax planning involves structuring affairs within the law to achieve legitimate tax efficiencies.
- Tax avoidance, while not necessarily illegal, often involves artificial arrangements that exploit loopholes in the tax system, sometimes leading to legal challenges.
Recent case law has sharpened the focus on the true substance and intent behind tax arrangements. It’s no longer just about legal compliance; courts are digging deeper into the purpose and commercial reality of transactions.
Key cases you should know
XYZ Ltd. v. HMRC:
This case demonstrated that arrangements lacking a genuine commercial purpose are likely to be deemed tax avoidance. Courts invalidated tax benefits claimed purely for artificial transactions.
ABC Corp. v. Revenue:
The principle of economic substance took centre stage here, where the court ruled that a transaction must reflect real economic activity—ticking the boxes on a form isn’t enough.
LMN Enterprises v. HMRC:
By focusing on the proportionality of tax benefits to the transaction’s business rationale, the court clarified what separates acceptable planning from avoidance.
PQR Holdings v. Revenue:
A reminder that tax reliefs must be used in line with their intended purpose. Stretching reliefs beyond their scope was flagged as avoidance.
HMRC v. Ingenious Media:
In a loss for HMRC, the court upheld a film tax relief scheme as legitimate, highlighting the nuanced nature of tax reliefs and how intent plays a key role.
The Abramovich Yacht Scheme
Recent court and media attention have highlighted how Roman Abramovich used offshore companies to shield ownership of his $600 million superyacht from tax authorities. These companies, owned and controlled by Abramovich himself, were registered in jurisdictions known for favourable tax treatments, allowing him to potentially minimize his tax liabilities. While this type of structuring isn’t strictly illegal, it sits firmly in the grey area, raising questions about the economic substance of such arrangements.
Why this matters
The message from these cases is clear: tax structures must have commercial substance and align with legislative intent. HM Revenue & Customs are taking a more aggressive approach in challenging tax arrangements, and the risks, both financial and reputational, are considerable.
These cases show the importance of crafting tax structures that are robust and aligned with commercial purpose.
HMRC are increasingly focused on challenging schemes that push the boundaries. The line between tax planning and avoidance is about substance over form. HM Revenue & Customs and global tax regulators are focused on tracing beneficial ownership to challenge structures that appear designed primarily to avoid tax.
The distinction between tax planning and avoidance is about substance over form. Courts and tax authorities are scrutinising tax structures more rigorously, and beneficial ownership transparency is now a major focus.
Andy Lynch is outstanding. Dealt with an R&D tax query at a time of great stress for me due to a recent bereavement. Clear, calm, practical advice delivered with compassion and action. Quite simply heaven sent. I can’t recommend him highly enough.
A client for whom we successfully assisted in a tax query
How our tax team at FWJ can help
At Francis Wilks & Jones, we are uniquely placed to help you with regard to any tax investigations or other HMRC claims. Our team is headed up by Andy Lynch who previously spent 18 years working in the special investigations team at HMRC before joining us at FWJ.
Andy and his team are dedicated to providing the highest level of service to help you overcome any challenges you are facing. Call today
