Tax Avoidance and Tax Evasion

Published by Rana Zubair posted in Resources on 19 March 2023

Tax avoidance is not tax evasion. Companies and individuals may lawfully navigate the tax system without legal penalties.

What is tax avoidance?

Tax avoidance is the lawful exploitation of the current tax system by a person or a company.

Creating an offshore corporation in a “tax haven,” where less tax is due than in the firm’s real home base, is one way to do this.

Tax avoidance can look like other actions too, including keeping money in savings accounts such as an ISA to avoid having to pay income tax on any earnings. Other people may also choose to keep their savings out of a bank account and invest them into a pension scheme instead.

What is tax evasion?

Tax evasion refers to when individual or company knowingly choose to do something unlawful and let it to happen to avoid paying taxes. This is considerably simpler to establish since tax evasion requires a clear determination to deliberately conduct a criminal offence to avoid paying taxes. Tax evasion is a severe offence that carries fines, penalties, and possibly prison time if the offender is proved guilty.

What is the difference between tax avoidance and tax evasion?

Although there are guidelines that clearly separate tax avoidance from tax evasion, there may be a thin line between the two if you want to avoid paying taxes without breaking the law.

If an individual or company takes steps to evade paying taxes using tax avoidance schemes, savings accounts, or other means while lying or concealing crucial information, numbers, and facts, it may considered a criminal offence. For instance, placing money in a savings account to reduce tax payment is lawful, but hiding assets or information constitutes tax evasion.

Is it possible that my company is engaging in tax evasion or tax avoidance?

To avoid getting in trouble with HMRC, it’s crucial to have a firm grasp of all aspects of taxation, including but not limited to, Tax payments, Tax returns, Tax rates, and Tax obligations.

The examples below will help you to narrow down the difference between tax avoidance and evasion:

Tax evasion examples:

Hide, suppress, or hide crucial data from government agencies like HMRC.
Earnings or money received that are not being fully reported.
Taking Disguised remuneration

Tax avoidance examples:

Becoming resident in a low-income tax rate country
Entering an arrangement only with the intention of saving tax
Taking Disguised remuneration
Exceeding the threshold of gift money / asset to family members to avoid inheritance tax

Are there penalties for tax evasion?

Some individuals and companies get in trouble with the HMRC because they misunderstand the difference between tax avoidance and tax evasion.

If HMRC finds you guilty of tax evasion, they may compel you to return the tax and any interest that has accumulated, as well as impose further penalties up to 100% of the tax lost to HMRC, including prison time. The penalty for tax evasion might vary based on how aggressive the evasion was, how much tax was avoided, and how long it went on for, whether it was in the UK or overseas.

HMRC has now powers to publicly name the directors of tax avoidance promoting companies.