The majority of businesses and individuals in the UK pay the correct amount of tax, and do so in a timely manner. A small minority don’t, taking part in either tax evasion or tax avoidance. This contributes to the tax gap, which is the difference between the amount HMRC expects to collect and the actual amount collected.
There are other reasons for the tax gap aside from evasion and avoidance, like not taking reasonable care, errors, criminal attacks taking place on the tax system and non-payment of tax.
What is tax avoidance?
Tax avoidance is often confused with tax planning, although it is not the same thing at all. Avoidance of tax usually involves a false transaction and is conducted to gain a tax advantage that was not the original intention of the legislation. Tax planning maximises the benefits of legislation, like tax free Individual Savings Accounts. Some people may take part in a tax avoidance scheme, not realising that they could be challenged by HMRC. Following an investigation, they will end up paying the correct amount of tax plus any penalties and interest that might become due.
New legislation has been introduced to deal with those who promote aggressive and contrived avoidance schemes; namely the General Anti-Abuse Rule (GAAR). Although tax avoidance schemes are generally operated within the law, they are not conducted as they were originally intended by parliament.
What is tax evasion?
Tax evasion is the deliberate non-payment of tax owed. Businesses and individuals may achieve this by claiming more expenses than they incurred, not declaring all their income and other methods. HMRC has launched a number of campaigns aimed at groups the organisation believes are a risk. These campaigns invite individuals and businesses to come forward to declare and pay the correct amount of tax owed. In return, HMRC will lower the penalty charges. HMRC has also launched a tax evasion hotline, which members of the public may use to inform the organisation of potential evasion of tax.
Task forces have also been created by HMRC, operating around the UK and aimed at the areas of evasion deemed to be most at risk, like tobacco and alcohol. Deliberate defaulters may also be named and shamed when tax at risk is more than £25,000. A Monitoring Serious Defaulters team also operates, scrutinising those who evade tax for five years.
If you are involved in a tax avoidance scheme that you believe may not be approved by HMRC, seek professional advice immediately.
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