Contrary to popular belief, there is actually a distinct difference between tax avoidance and tax evasion. It’s very rare for a month to go by without a story splashed across the news regarding some big name business or celebrity who has been publicly shamed for doing one or the other. But what is the difference between the two?
Well one massive difference is that tax evasion is illegal, while tax avoidance is legal (well, to a certain extent anyway). In its most simplistic form, there are plenty of people whose financial actions may be labelled as ‘tax avoidance’. Putting your savings into an ISA for example is one of the more commonplace methods people use to ‘dodge’ paying income tax. However, there are many occasions where this is taken to the extreme, and this is known by HMRC as ‘aggressive tax avoidance’. It is in these cases where after an investigation, HMRC may order a guilty party to pay back any tax that’s been avoided.
This is different to tax evasion, where someone uses illegal practices to avoid tax. These illegal practices include things such as not declaring all of your income, not filing a tax return, hiding your assets, and using fake offshore accounts- something which we have been hearing a lot more of recently. In these cases, the punishment is a lot more severe. People who have been found guilty of this can expect lengthy prison sentences, as well as to be named and shamed by HMRC too.
Unsurprisingly, this is an area where HMRC are making great strides, with many new measures being introduced to help crackdown on tax evasion. In fact, it was announced in the Spring Budget this year that HMRC has secured £140 billion in tax revenue from organisations and individuals who had been found to be using underhand tactics to avoid tax.
Despite having claimed back such an astronomical amount, distinguishing between what is and isn’t legal is a difficult job for HMRC, there are many grey areas to contend with. This is because each case is unique, so a thorough investigation is always required in order to rule out any illegal conduct.
If you need any advice regarding paying tax, get in contact with us. We’re happy to help.