When it comes to fulfilling your tax obligations, adhering to the law is non-negotiable. Many have tried to sidestep their tax duties in the past, only to face severe consequences when the taxman eventually caught up. However, with strategic tax planning, you can legally optimize your tax payments.
In essence, if you’re hiding details from tax authorities or neglecting to pay the tax you owe, you’re likely veering into tax evasion territory.
On the other hand, if you strategize your tax payments and aim to reduce the amount you owe while adhering to the rules, you’re simply practicing legitimate tax avoidance.
This distinction is subtle, and it’s crucial to consult experts to ensure you remain compliant with HMRC regulations.
Diving deeper into the distinction:
Let’s consult the Oxford English Dictionary:
Avoid: 1. steer clear of or abstain from. 2. deter from occurring.
Evade: 1. elude or dodge. 2. sidestep a direct response to (a query) 3. dodge paying (tax, duty).
While the definitions seem closely related, the key lies in the concept of evasion. While you can’t legally dodge a tax you owe, you can legally sidestep certain tax obligations through prudent financial planning. However, it’s essential to ensure your actions remain within HMRC’s guidelines.
The Official Stance:
Consecutive governments have been proactive in addressing tax avoidance, sealing off exploitable gaps and schemes that manipulate tax regulations. This includes strategies employed by renowned celebrities and illicit operations that lure contractors with inflated take-home pay promises through unauthorized expense claims.
But what’s the legal stance on tax evasion and tax avoidance?
HMRC provides extensive information on tax avoidance schemes, aiming to protect individuals from falling prey to deceitful advisors. Their definition of tax avoidance is: “Tax avoidance involves bending the tax rules to try to gain a tax advantage that was never intended. It usually involves contrived transactions that serve no real purpose other than to artificially reduce the amount of tax that someone has to pay. It is not the same as effective tax planning but is often promoted as such.”
In essence, legitimate tax planning, like claiming all permissible expenses and utilizing all available tax allowances, is acceptable. However, seeking an unintended edge is not.
HMRC has also been proactive against disguised remuneration schemes that purport to bypass Income Tax and National Insurance contributions. Such schemes usually involve a loan or payment from a third party that’s unlikely to be repaid. The Loan Charge, introduced to address these schemes, became effective on 5th April 2019.
The Core Difference:
Tax avoidance means being transparent with tax authorities about your strategies to reduce your tax liabilities (i.e., “this is my approach to minimizing my tax, and here’s why it’s lawful”). In contrast, tax evasion typically involves covert tactics that contravene regulations to lessen your tax burden.
Evasion is a clear violation, such as not declaring income or claiming deductions for non-existent or non-deductible expenses.
If you’re ever presented with a scheme to reduce your tax liabilities, it’s imperative to consult experts. At Count, our team of specialists is ready to guide you, ensuring you and your business remain compliant.
A word of caution: If an offer seems too advantageous, it likely is!