Tax avoidance vs tax evasion: What you need to know

Tax avoidance and tax evasion are sometimes confused and used interchangeably. Whilst the terms avoid and evade are similar linguistically, they stand for very different concepts legally.  Both are ways used to pay less tax however, tax avoidance is legal whereas tax evasion is illegal. This article will discuss the two concepts and tell you all you need to know.

Tax avoidance

Tax avoidance is the legitimate minimising of tax but can run into a more grey area of ‘aggressive tax avoidance.’

There are many ways in which an individual or company can avoid paying taxes. For example, an ISA (Individual Savings Account) is a legal way through which people avoid paying income tax, as all savings in an ISA are tax free. Businesses and sole traders can avoid tax by claiming expenses to reduce their tax bill.

More adventurous tax avoidance can start to become a grey area and should be treated with caution; if it sounds too good to be true it probably is, as the old saying goes. If you are worried or would like to learn more about staying on the legal side of tax avoidance whilst reducing your tax bill, do get in touch with our tax partner Robin Stevenson, using the contact details at the bottom of this article.

If you wish to learn more, you can follow the link below to HMRC’s tax avoidance page.

https://www.gov.uk/guidance/tax-avoidance-an-introduction

Aggressive tax avoidance

Aggressive tax avoidance refers to schemes and loopholes in the law, that when used do not comply with the intended spirit of the law. They are widely viewed as unethical and may fail when challenged by HMRC.

New EU legislation that coming in to force in July 20201 which introduces the possibility that lawyers and accountants will face penalties if they fail to report aggressive tax avoidance schemes.  Despite the UK’s imminent departure from the EU, the UK government is expected to implement similar measures.

Here is a list of tax avoidance schemes currently under investigation by HMRC:

https://www.gov.uk/government/collections/tax-avoidance-schemes-currently-in-the-spotlight

Investigation

If HMRC decides to check your tax position, it may decide to launch a tax enquiry.  A tax enquiry could cost you a lot of money in fees alone, even if you don't owe any tax. The very thought of an HMRC enquiry can be daunting but, in the event, that you are chosen for investigation we can help you at every step of the process. Do get in touch if you are worried about this scenario and download our leaflet below to learn more about the cover that we can provide.

Swindells Tax Investigation Insurance leaflet with Croner Taxwise

CLICK LINK BELOW TO DOWNLOAD

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HMRC’s information on tax avoidance: https://www.gov.uk/guidance/tax-avoidance-an-introduction

Tax evasion

Tax evasion is the use of illegal practices to pay less tax. This can include:

• Not reporting all of your income
• Not filing a tax return
• Hiding taxable assets from HMRC
• Using fake offshore accounts

Tax evasion is a criminal offence, with penalties ranging from fines to prison.  You could also be ‘named and shamed’ by HMRC impacting you and your business’ reputations.

To learn more about the state of play with tax evasion you can read more below from the Chartered Institute of Taxation:

https://www.tax.org.uk/state-play-tax-evasion-and-avoidance

If you are worried about your tax position or need advice and guidance on legally reducing your tax bill, please do contact our tax partner Robin Stevenson using the contact details below:

Robin Stevenson - Tax Partner

Email: robins@swindellsaccounting.co.uk

Tel: 01825 763 366

You can find out more about tax by using our tax resources pages online by following the links below:

Tax Calendar:

https://www.swindellsaccounting.co.uk/resources/?op=/resources/tax-calendar

Tax Rates & Allowances:

https://www.swindellsaccounting.co.uk/resources/?op=/resources/tax-rates-and-allowances

Tax Calculators:

https://www.swindellsaccounting.co.uk/resources/?op=/resources/online-calculators