Tax avoidance is the act of dodging taxation law without actually breaking it. The company K2, used by comedian Jimmy Carr, works by transferring salaries from mainland investors into a Jersey-based trust which then gives the money back to investors in the form of loans.
Loans are not subject to income tax.

Jimmy Carr used the aggressive, but legal, scheme to protect some £3.3 million a year, a Times investigation uncovered. He is said to be one of more than 1,000 beneficiaries who shelter some #168 million from the taxman each year using K2.

HMRC has confirmed that it is looking into the workings of an offshore tax avoidance scheme used by a number of wealthy individuals - as part of the Government's high profile clampdown on individual tax avoidance which is estimated to cost the Treasury #4.5bn each year.

The Times newspaper, which ran a high profile story on tax avoidance today, says that the K2 scheme enabled participants to pay as little as 1% tax on their earnings, instead of the 50% many would pay under standard PAYE conditions.

Almost £160m is believed to be sheltered from the UK tax authorities each year via the scheme, which boasts comedian Jimmy Carr as a significant member.

Roy Lyness from Peak Performance Accountants told a reporter from the Times that a hypothetical tax bill could be slashed to a mere 1.25% via the scheme, which has an estimated 1,100 members.