The Difference Between Tax Avoidance And Evasion

Tax avoidance and tax evasion, sound similar but one is illegal and one is not.

There are very big differences between tax avoidance and tax evasion, both with different meanings and different consequences. In 2019/20, it was estimated that there was a £1.5 billion financial loss from tax avoidance and a £5.5 billion loss from tax evasion in the UK.

If you are a business owner, you will have to pay tax. However, some business owners try to use illegal methods to avoid paying it. In recent years, HMRC has secured billions of pounds in additional tax revenue, with a higher grip on tax avoidance, evasion and non-compliance.

But what even is tax avoidance? Are the differences between tax evasion and avoidance? What are the penalties for tax fraud in the UK?

What Is Tax Avoidance?

Tax avoidance is bending the tax system rules to take a tax advantage. The advantage can be the use of legal methods with the goal of reducing taxable income or tax owed. This can involve artificial transactions that create an advantage while serving no other purpose.

The majority of tax avoidance schemes do not work, with most ending up having to pay much more than the tax they tried to avoid, through fines and penalties.

What Is Tax Evasion?

Tax evasion is using illegal methods to conceal income or information from HMRC. Tax evasion will result in prison time, fines as well as penalties. The culprit will find ways to deliberately avoid having to pay a true tax liability.

By failing to pay the right amount of tax, criminal charges may be issued. However, it must be determined that the taxes were avoided wilfully by the taxpayer.

What Is The Difference Between Tax Avoidance And Tax Evasion?

Both are methods of avoiding having to pay taxes, however, there is a big difference. Separating tax avoidance and tax evasion into two separate elements, we could say that one is hiding and the other is lying.

Tax avoidance is structuring your accounts to pay the least amount of tax possible, where tax evasion is lying on your tax form to avoid paying.

What Are Examples Of Tax Avoidance?

There are ways to legally reduce your tax bill. Some of these include:

• Tax software – Using take software or having a tax advisor will help you discover different legal options for tax avoidance.
• Learning about deductions – Take the time to learn about different credits and deductions that are available.
• Property appeal – Speaking to your local municipality to lower the value of your property can see your real estate taxes lower.
• Holding assets – By choosing to hold any capital assets for longer than a year, you can benefit from lower, long-term capital gains tax rates.

What Are Examples Of Tax Evasion?

Here are a few examples of how it may look like.

Not reporting income from illegal services and all-cash businesses

One of the most common ways that people evade tax is by running cash businesses and taking money from the cash register without reporting the income.

It can also come from illegal activities including prostitution or drug dealing. These activities must also be reported on tax returns.

Paying people under the table

Every wage that is given out is required to be reported on your tax return. If you are unsure whether a certain employee needs their wage reporting, then you should contact HMRC.

Avoiding overseas income

Those who work outside of their country or have rental properties abroad are often impacted by this. Even if you have a property abroad, it still needs to be reported if any income is made. Just because it is outside the country doesn’t mean it won’t be reported.

Using cryptocurrency

There aren’t any secret backdoors or ways around the tax by using a cryptocurrency. Even though they are new, there are rules and requirements in place. Cryptocurrency transactions are taxable, with taxpayers sometimes forgetting their holdings have increased in value.

What Are The Penalties For Tax Evasion In The UK?

In the UK, the penalty for tax evasion can be extremely severe. From financial penalties all the way to prison sentences. In some cases, there are both financial and criminal punishments.

Most cases of tax evasion are dealt with through HMRC’s civil procedures. HMRC only prosecute those who have evaded tax if there is evidence of the criminal offence, as well as being in the best interest of the public.

What Are Examples Of Punishments For Tax Evasion?

There are various penalties for tax evasion in the UK, with more serious punishments for higher levels of fraud. Below is a guidance to some of the UK penalties.

Providing HMRC with false documentation	Providing false documentation to HMRC can result in a maximum penalty of a £20,000 fine or a six-month prison sentence.
Income tax evasion	Tax evasion for income tax has a six-month prison sentence, as well as fines of up to £5,000.   In more serious cases, sentences of up to seven years in prison can be given. Sentences can also be increased to unlimited fines if the evaded tax cannot be paid by the taxpayer.
Evasion of duty	The maximum UK sentence is a fine of up to £20,000 for a summary conviction. For Crown Court cases, there can be a maximum sentence of seven years in prison or an unlimited fine.
VAT evasion	The maximum prison sentence for VAT evasion is six months in the magistrate’s court. There can be fines of up to £20,000, with substantial cases of VAT evasion sent to the Crown court.   These can have prison sentences of up to seven years and unlimited fines.

How Does HMRC Investigate Tax Evasion?

The HMRC fraud team will investigate accounts that show inconsistency with tax returns, as well as any suspicious activity surrounding accounts. By using their database known as ‘Connect’, HMRC can utilise their data-gathering powers, gathering information from apps including Apple, Amazon and Airbnb.

HMRC also works with numerous other investigating and criminal enforcement agencies to find and catch tax evaders. For offshore tax evasion, international law enforcement agencies work with HMRC to locate British citizens that are illegally moving money offshore to avoid UK tax laws.

How To Avoid Facilitating Tax Evasion

You’re putting yourself at a huge risk of unlimited penalties for not having the right procedures in place to prevent tax evasion in your business. With new laws coming into place, 76% of senior decision-makers in British businesses aren’t aware of these changes. So, what can you do to avoid tax evasion?

Provide Training To Staff

When running a business, you need to ensure that all staff know the rules about tax evasion, what they need to watch out for, how to comply as well as understand when they should raise any concerns.

This can be done through training, allowing employees to understand the violations of the law, with tests to see if the knowledge was taken on board. There are plenty of e-learning products available.

Knowing High-Risk Areas Of Your Business

There are types of companies that pose a higher risk of tax evasion than others. This can include those with complex tax planning structures, companies based offshore, customers with unsubstantiated sources of wealth and difficulties establishing beneficial owners are at risk.

Every company is at risk of aiding tax evasion, so we recommend conducting a risk assessment. This way, you can identify any individuals who might be at a higher risk of tax evasion through their actions.

Third-Party Management

To avoid working with those who may be involved in tax evasion, third parties and customers need to do their due diligence and get the required information.

This can be through a monitoring and screening process to manage customer tax compliance status.

Make Sure Employees Understand The Difference Between Tax Avoidance And Tax Evasion

We covered earlier the difference between the two, with one being legal and one being illegal. You must ensure your employees understand this. Through training, you can teach your staff to recognise when evasion is being used, rather than avoidance.

Report All Suspicious Activity

Your employees should not feel worried or scared to report knowledge or suspicion of tax evasion. Through your company’s whistle-blowing hotline, they should feel safe and assured they are doing the right thing.

There should be proper procedures are in place so that reports are dealt with in the correct manner, attended to promptly and passed on to relevant authorities when appropriate.

What Are The New Tax Evasion Offences?

These new offences make relevant bodies (such as corporates and partnerships) fully criminally liable for failing to prevent the criminal facilitation of tax evasion. This applies to both UK and overseas tax evasion.

However, it must be stated that even though senior management may not have known about, participated in or even suspected anything, they will be held criminally liable.
So, to conclude, it is of the utmost importance to understand there is a huge difference between avoiding tax and evading tax. You must ensure employees recognise this too. Be careful, spotting red flags and reporting any suspicious activity.