The primary distinction between tax avoidance and tax evasion is one of legality. As things stand, simply avoiding tax is perfectly legal, but crossing the line into tax evasion can result in hefty fines and prosecution, and the former is very easy to turn into the latter.
What exactly is tax evasion?
Tax avoidance is the legal use of the tax system to reduce tax liabilities, such as establishing an offshore company in a tax haven. Simply put, it means paying as little tax as possible while still adhering to the law.
Putting your money in an Individual Savings Account (ISA) to avoid paying income tax on the interest earned by your cash savings, investing in a pension scheme, or claiming capital allowances on items used for business purposes are all examples of legitimate tax avoidance.
What constitutes tax evasion?
Tax evasion occurs when a person or company illegally avoids paying taxes. Typically, this is accomplished by concealing the true state of their affairs from tax authorities.
Examples of common tax evasion include:
- Failure to notify HMRC of tax owed, such as business profits
- Keeping business off the books by conducting transactions in cash with no receipts
- Keeping money, stocks, or other assets hidden in an offshore bank account.
The UK government intends to change the public's perception of tax evasion as a minor offence by enacting a slew of civil and criminal measures.
One of these measures is to pursue companies and professional advisors who assist their clients in tax evasion. As a result, businesses may now be held liable if they fail to prevent an associated person (an employee or anyone else acting on its behalf) from facilitating tax evasion. This is true even if the company was unaware of the associated person facilitating tax evasion.
The line between avoidance and evasion is thin. Many tax avoidance schemes devised by accountants and marketed to the wealthy have been heavily criticised and, in some cases, shut down by HM Revenue & Customs (HMRC), who argue that these schemes amount to tax evasion.
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Famous Penalties for Tax Evasion
Jimmy Carr, Gary Barlow, Starbucks, Google, and Amazon are just a few of the names that have been mentioned in the media in connection with tax avoidance and evasion schemes.
In the case of Jimmy Carr, he came under fire after it was revealed that he was involved in the K2 Scheme, a tax avoidance scheme in which the wealthy paid less than 1% tax, costing the government £168 million.
Similarly, pop star Gary Barlow, along with many other celebrities, invested in Icebreaker, a scheme that purported to find funding for creative projects in the music industry and offer a return to investors, but instead generated losses. After pouring £66 million into the scheme, Barlow, two of his Take That bandmates, Mark Owen and Howard Donald, and the band's former manager, Jonathan Wild, repaid more than £20 million to HMRC.
They were penalised because HMRC deemed their tax avoidance scheme to be "aggressive." If you go up against HMRC and lose, the courts may order you to repay the tax, interest, and any penalties they deem appropriate.
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