The difference between Tax Evasion and Tax Avoidance

Contrary to popular belief, there exists a clear distinction between tax avoidance and tax evasion. It's not uncommon to come across news stories each month about prominent businesses or celebrities being publicly criticized for engaging in one or the other. But what exactly sets them apart?

One significant contrast lies in the legality: tax evasion is illegal, while tax avoidance, within certain limits, is lawful. In its simplest form, many individuals engage in financial practices that could be categorized as "tax avoidance." For instance, placing savings into an ISA is a common method to circumvent paying income tax. However, instances exist where this crosses into what HMRC terms "aggressive tax avoidance." In such cases, HMRC, following an investigation, may compel the offending party to repay any evaded tax.

Tax evasion, on the other hand, involves employing illicit methods to evade taxes. These methods include failure to declare all income, non-filing of tax returns, asset concealment, and utilization of fraudulent offshore accounts—an issue that has gained increasing attention lately. Punishments for tax evasion are notably harsher, often resulting in lengthy prison sentences and public exposure by HMRC.

Unsurprisingly, HMRC is actively combatting tax evasion, implementing various measures to curb it. Notably, it was reported in this year's Spring Budget that HMRC has reclaimed £140 billion in tax revenue from entities and individuals employing deceitful tactics to evade tax.

Despite the significant sums reclaimed, discerning the legality of tax practices remains a challenging task for HMRC due to numerous gray areas. Each case demands a thorough investigation to ascertain any unlawful behavior, as nuances vary greatly.

If you need any advice regarding paying tax, get in contact with us. We’re happy to help.