You hear about it in the news: some celebrity, multinational corporation or super-rich person has been caught red-handed, trying to cheat the system. Which always leads to discussions, new changes in law and crackdowns.
Following recent crackdowns, the Treasury estimated the annual cost to the Exchequer at £700m, which set to rise to £1.2bn by 2022-23.
It’s true that many people dislike paying taxes, but taxes are simply the law. And there’s a fine line between tax avoidance and tax evasion. Both terms are often used interchangeably, but they are very different concepts.
We’re here to demystify the two terms for you.
Will you be surprised if we tell you that almost every business owner engages in tax avoidance in one way or another? This is because tax avoidance is a legitimate way of minimising taxes. A business can protect some of its hard-earned cash by claiming business expenses, or when individuals pay in money in their legal, tax-free Individual Savings Accounts (ISA). These tax deductions lower your business tax bill.
If you’re avoiding tax too ‘aggressively’, HMRC may become suspicious and launch an investigation, which may end up forcing you to pay all owed tax.
For example, your business starts claiming expenses on things which aren’t used, or appropriate for the company.
Tax evasion, on the other hand, is not about playing within the rules. It’s about using illegal means to avoid paying taxes. These include not reporting income or expenses, underreporting income, not filling tax returns, using fake offshore accounts or simply not paying tax owed at all!
Tax evasion is a criminal offence comes with serious penalties, and may even land you in prison!
The most severe penalties that you can be charged for are deliberately misleading HMRC, then taking steps to hide or attempt to hide the fraudulent activity.
Although trying to pay less tax is legitimate in many instances, in some cases mistakes happen, and you might be using strategies considered illegal – strategies you were unaware you were practicing.
The obvious answer here is, in order to avoid being charged with tax evasion or avoidance, you should know the income, corporation and employment tax laws. And also, not try to deliberately commit fraud.
Always keep excellent records of all income and expenses, and always seek the help of a professional. Why not join the gang and avoid the hassle of doing your own taxes?