A lot of people confuse tax avoidance and tax evasion. It can be a dangerous mistake to make!
As the former British Chancellor of the Exchequer Denis Healey said once:
“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.
What can’t be stressed enough is that the two terms – and the actions each entails – are definitely not the same thing.
- Tax avoidance involves using whatever legal means you choose to reduce your current or future tax liabilities.
- Tax evasion means doing illegal things to avoid paying taxes. It’s the Al Capone path to financial freedom.
I’ve never evaded taxes, I don’t condone it, and I couldn’t tell you how it’s done.
Tax avoidance is another matter. As the tax have risen in the Western countries to pay down public debt, it makes sense for business to do what they can to reduce their tax burden without overly compromising other aspects of their lives.
The United Kingdom and jurisdictions following the UK approach (such as New Zealand) have recently adopted the evasion/avoidance terminology as used in the United States: evasion is a criminal attempt to avoid paying tax owed while avoidance is an attempt to use the law to reduce taxes owed
There is, however, a further distinction drawn between tax avoidance and tax mitigation. Tax avoidance is a course of action designed to conflict with or defeat the evident intention of Parliament.
Tax mitigation is conduct which reduces tax liabilities without “tax avoidance” (not contrary to the intention of Parliament), for instance, by gifts to charity or investments in certain assets which qualify for tax relief. This is important for tax provisions which apply in cases of “avoidance”: they are held not to apply in cases of mitigation.
I suspect this is largely a courtroom debate, caused by the Revenue looking to close down schemes of dubious legality created by planners for wealthy individuals.
So if I have to pull back my thoughts on where we started from, in very simple terms, tax avoidance is legal, but tax evasion is illegal and you risk prosecution for breaking the law.
However, in some sophisticated cases the Taxman has been trying to blur the boundaries and claim some forms of tax avoidance are illegal.
A few examples will show the difference…
• The most common example of Tax Evasion amongst small businesses is making cash sales and not putting this money into your bank account or recording it in your accounting records, so the tax man will never know about it, or so you think!
• A slightly more thought out example, may be making up some forged purchase invoices. You write out the cheques to pay them with the name of the fictitious supplier on the cheque stub but it’s actually made payable to you and goes into a secret offshore account. Again, this is tax evasion and is illegal.
• Choosing to run your business as a Limited Company rather than as a sole trader in order to benefit from lower rates of tax paid by Limited Companies is an example of tax avoidance and is legal.
But it’s not always black and white, there are grey areas…
This may be because the law itself is in question or the facts of your particular case are in question. It often arises that HMRC may interpret something in one way, surprisingly to their advantage, but the accountant and the taxpayer may interpret it differently.
Please remember that HMRC do not make the law of the land and they often can get it wrong. Be prepared to stand up for your rights if necessary and don’t be bullied by them.
You should fight HMRC on technical grounds, but you need to be very sure of your facts and the law. If you can’t come to an agreement with HMRC, the matter normally ends up before the first tier Tax Tribunals who are an informal independent Tax Court to decide the matter. Many accountants don’t like going to the tribunal but they shouldn’t be afraid to go if they have a reasonable argument.
HMRC know it costs you money in accountants’ fees to argue with them and you may back down as the tax saved is not worth it after paying your accountant. In these situations look at getting your accountant to work on a no win, no fee basis for you if you aren’t already covered for Tax investigation issues.
The good news is that this is something we offer as standard within our accounting package which means you never have to worry about HMRC investigations.
So if you are looking for accountants who aren’t afraid to challenge HMRC and fight your corner when you are right plus offers complete peace of mind for any HMRC investigation then get in touch with us. Please visit www.apjaccoutnancy.com or call 020 8931 0165.