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The distinction between tax avoidance and tax evasion or tax planning is mostly one of legality. Let’s admit it: just hearing the term “taxes” may cause a lot of anxiety in most individuals. As things stand, avoiding taxes is completely legal, but stepping over the line into dodging taxes may result in severe fines and punishment, and the former can easily become the latter.

The difference between Tax Evasion and Tax Avoidance

How can you spot the difference between tax evasion and tax avoidance or tax planning? Before we describe these words, which differ in certain ways, it’s important to note that both actions are deemed tax fraud by specialists.

Tax evasion and avoidance or tax planning, and other kinds of non-compliance are common among all taxpayers and taxes. Tax evasion, tax avoidance, tax non-compliance, and tax planning are described as follows by the HM Treasury:

Tax Evasion

It is an illegal activity that occurs when individuals or corporations knowingly fail to report or account for their debts. It includes the hidden economy, in which someone conceals taxable activities from HMRC. Tax evasion is always criminal, even if tax avoidance is not. This practice involves omitting, concealing, or misrepresenting facts to decrease the amount of tax a person or corporation pays. It might entail omitting income from your self-assessment tax return to lower your tax burden, or, in more serious situations, concealing assets from HMRC or creating fictitious offshore accounts. Tax evasion is a criminal offense that may lead to you being prosecuted, receiving exorbitant fines, being identified and shamed by HMRC, being barred from conducting a business, and possibly serving time in prison.

Tax Avoidance

Tax avoidance is deviating from the norms of the tax system to obtain a tax benefit that Parliament never planned. It often entails fabricated, fake transactions that have no other purpose than to provide this benefit. It entails following the letter of the law but not the spirit of the law. Most tax avoidance methods are ineffective, and individuals who employ them may wind up paying far more than the tax they were attempting to avoid, plus penalties. There is a lot of legal ambiguity here, and individuals stating that tax avoidance is always permissible may have entrenched interests – in other words, these are people and companies that want to sell you their services. Given the intricate structure of the tax system, as well as the fact that the government is devoting a significant amount of time, money, and resources to combating tax evasion, most reputable financial advisors will advise you to avoid it.

Tax non-compliance

Tax non-compliance is when you don’t get your taxes straight the first time, regardless of the cause. It encompasses tax evasion, avoidance, and other actions such as thoughtless errors or inaccuracies on your tax return.

Tax planning

Tax planning is not tax avoidance; it is the use of tax benefits for the aim for which they were designed. Claim capital investment tax relief, save in a tax-free ISA, or save for retirement by paying to a pension scheme are all examples of legal tax planning.

When the laws of the tax system are purposefully twisted to achieve a benefit that was never meant to be accessible, this is known as tax avoidance. It usually entails convoluted arrangements created solely for the aim of avoiding taxes. Tax avoidance schemes, for example, frequently advertise high take-home pay percentages (sometimes as high as 85%), claim to be ‘HMRC approved,’ and pay individuals in the form of loans. On the surface, many ideas appear to be attractive. However, the penalties of entering them may be financially catastrophic, and HMRC is not beyond charging people retroactively if they feel the law has been breached.

With this in mind, a wise approach to your tax problems is to assume that if something appears too good to be true, it probably is.

The role of Tax Planning

Tax planning is entirely legal as long as it is carried out lawfully. It’s the legal procedure of lowering your tax liability. Tax preparation may be as easy as placing money into an ISA, taking benefit of various tax relief, or paying yourself in the most tax-efficient way possible.

What Are The Consequences Of Tax Evasion In The United Kingdom?

Tax evasion may result in hefty penalties and the highest punishment for tax evasion is imprisonment. The typical punishment for tax evasion varies, however below are a few instances of fines that can be imposed:

  • VAT evasion – It carries a maximum penalty of six months in prison or a fine of up to £20,000 in a magistrate’s court. The maximum penalty in a Crown Court case is seven years in jail or an unlimited fine.
  • Income tax evasion penalties – a summary conviction carries a sentence of up to six months in prison and a fine of not exceeding $5,000. In the United Kingdom, the maximum punishment for tax evasion is seven years in jail or an unlimited fine.
  • Defrauding public revenue – Because of the seriousness of the offence, the maximum penalty in the United Kingdom for cheating public income is life in prison or an unlimited fine.
  • False Documentation – HMRC tax evasion fines can range from a penalty of up to £20,000 or up to 6 months in jail if you provide fraudulent documents to HMRC – either in magistrates’ court or as a summary conviction.
  • Smuggling (evasion of duty) – a summary conviction in the United Kingdom can result in a fine of up to £20,000. The maximum penalty in a Crown Court case is seven years in jail or an unlimited fine.

The role of the UK Government

The UK Government takes tax evasion very seriously. Hundreds of initiatives have been implemented by the government in the UK to tackle tax evasion and tax avoidance. Hundreds of new officers have been employed by HMRC in recent times to combat aggressive tax avoidance tactics and close the tax gap, which is the difference between what should be paid and what is received. The penalties are severe for tax evasion and avoidance. Tax avoidance keeps more money in the hands of the taxpayer, but tax evasion can result in fines and even jail time which is why understanding these concepts are highly crucial.

Whether you use an accountant or not for your tax affairs, ensure that you are on the right side of the law.

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