How to avoid the blurred lines between tax avoidance and tax evasion

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Many people would happily admit to being confused by tax avoidance and tax evasion, and knowing what is legal and what isn’t. We all take part in some tax avoidance at some stage in our lives, as tax planning is completely legitimate, but how far should you go before it becomes tax evasion?

Tax planning

Most people take the necessary steps to minimise their tax bill at the year end. For instance, opening an Individual Savings Account (ISA) so that you don’t pay tax on the interest received from your savings is perfectly acceptable. However, abusing loopholes in the law may not be viewed favourably by HMRC officials.

If HMRC doesn’t condone the method you have used to reduce your tax bill, you could end up paying the tax you avoided – and the interest and penalties in addition.

Tax evasion

Evading payment of tax is illegal and you could end up in prison if you are found guilty of it. Examples of tax evasion include deliberately not declaring all your income, not completing a tax return and hiding any assets that are taxable.

Being found guilty of tax evasion can result in up to 10 years in prison. A well-known method used to evade payment of tax is keeping money in offshore bank accounts so you don’t have to pay tax on it. In these cases, you are breaking the rules purposely so you don’t have to pay tax on your income.

Tax avoidance schemes

You may have come across tax avoidance schemes designed to reduce the amount of tax you pay. You may be wondering what the difference is in one of these schemes and an ISA, but HMRC is clamping down on those who sign up to these tax avoidance schemes and the promoters.

Promoters of tax avoidance schemes could be named and shamed by HMRC, in addition to facing a criminal conviction. According to HMRC, there are some things a scheme promoter won’t tell you. Your scheme will never be approved by HMRC, no matter what the promoter says.

Many of the schemes don’t work, which means you will have completed a tax return with incorrect information, facing a fine from HMRC. You could end up being publicly humiliated if your name is publically associated with tax avoidance.

There are many facts the scheme promoter won’t reveal to you. If you want to take part in legitimate tax planning, consult your accountant as part of your outsourced accounting services.