There’s a huge number of Brits paying too much tax, even though they don’t have to, but being smart about how you pay tax can sometimes seem a bit scary. News headlines declaring tax scandals crop up from time to time, so we might be familiar with the terminology but although they sound similar, tax avoidance and evasion are far from alike. To make sure all your tax saving is above board, we explain what these two terms really mean.
What is tax avoidance?
Put simply, tax avoidance is the practice of minimising your tax liability through legal means. Legal tax avoidance practices include using an ISA or a pension scheme to save money on your long-term savings.
Other types of tax avoidance are seen as an abuse of the tax system, even though they’re legal. The kinds of practices seen in the Panama Papers leaks showed that although using legal tax havens might not indicate illegal activity, many still consider them immoral, and out of sync with the government’s intentions.
Aggressive tax avoidance
‘Aggressive tax avoidance’ is something of a grey area. Though frowned on by the government, the case must be heard in court. This is to decide whether the avoidance is manipulating the law in a way that doesn’t represent the government’s intentions towards tax.
Due to the uncertainty surrounding tax avoidance, you should get a legal opinion before you go ahead. If HMRC find an individual to be aggressively tax avoiding, they may have to pay back all the tax they owe plus interest.
What is tax planning?
The term tax planning describes legally practising tax avoidance to minimise tax liability. Careful tax planning allows you to take advantage of opportunities which minimise your tax bill in a way that is legal.
ISAs and pensions are both ways of tax planning. They both help you save money in a way which the government encourages with tax-free thresholds. Effective tax planning will mean more money in your pocket, either for investing or for spending.
The difference between tax planning and tax avoidance is that tax avoidance always increases your tax risk. Tax planning either reduces it, or does not increase your tax risk.
Unlike tax avoidance, tax planning is the practice of minimising tax liability with no intention of deceit. Some practices of tax avoidance have been found to have the intention to deceive.
Similarly, tax mitigation is also the practice of reducing tax in a way that is consistent with the law and the policy behind legislation.
What is tax evasion?
At the other end of the spectrum is tax evasion. Tax evasion is when a party is neither compliant with the law regarding their tax payments, nor with the spirit of the policy.
Tax evaders have the intention to deliberately break rules surrounding their tax payments in order to avoid paying the full amount of tax they owe.
This may be either a misrepresentation or a concealment of the true state of affairs to tax authorities. Tax evasion is an offence prosecutable by HMRC.
Examples of not paying the full amount of tax include; failing to file a tax return, failing to declare full income and hiding taxable assets.
Still not sure about tax evasion and avoidance? Speak to one of our advisors on 020 3355 4047, or use the Live Chat button screen.
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About The Author
I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.