HMRC probing tax avoidance scheme

A tax avoidance scheme reportedly used to legally shelter £168 million from the exchequer is being investigated, HM Revenue and Customs has confirmed.

The Jersey-based K2 system allows wealthy individuals to pay around 1% tax using legal methods, according to an investigation by the Times.

The paper said it worked by transferring salaries from mainland investors into a Jersey-based trust, which gave back the money to investors in the form of loans, which are not subject to income tax.

HMRC said it is looking into the system and could look to challenge it.

"This scheme (K2) was already under investigation by HMRC. If, as is alleged, it depends on the use of loans, it will not work. HMRC are looking into this," a spokesman said.

"If the scheme does work technically, HMRC will challenge it in every way available to them. Government does not intend anyone, no matter who they are, is going to get away with paying less than they should."

The Times said an undercover reporter posing as a £280,000-a-year IT consultant contacted several tax avoidance specialists.

It said that Roy Lyness, of Peak Performance Accountants, told them he could cut a hypothetical tax bill from £127,000 to £3,500 using legal methods, meaning a tax rate of 1.25%.

The newspaper quoted him as saying: "It's a game of cat and mouse. The Revenue closes one scheme, we find another way round it. It's like a sat-nav. I'm driving to Manchester, get a message saying there's a smash at Stoke, press this button to reroute. That's all we do with tax avoidance. The Revenue puts a block in, we just go round the block."

Mr Lyness also runs Lyness Accountancy Practice, based in Birmingham, according to its website. In a section under "tax avoidance", it says: "It is important to recognise tax evasion is illegal - if you indulge in tax evasion you will go to prison."