Is there a difference between tax avoidance and evasion?  Does it matter ?  They may seem similar, but they are different concepts with different implications. In this weeks I Hate Numbers podcast I look at the difference between tax avoidance and tax evasion.  Furthermore I throw in some relevant examples.

Tax Avoidance

This is where taxpayers use legal methods to minimize their tax liability. These methods are often complex and involve taking advantage of tax loopholes, deductions, and credits to reduce taxable income. Tax avoidance is a common practice among individuals and businesses, and it is not illegal. However, it is often viewed as unethical as it can result in a lower tax revenue for the government.

An example of tax avoidance in the UK is using tax reliefs to minimize taxable income. For instance, a business may choose to invest in qualifying investments such as research and development or renewable energy to claim capital allowances and reduce tax liability. Another example is the use of offshore tax havens, which allow individuals or companies to reduce their tax burden by exploiting the differences in tax laws between countries.

Tax Evasion

Tax evasion, on the other hand, is an illegal practice of not paying taxes that are legally required. This can take various forms such as under-reporting income, inflating expenses, failing to declare income, or failing to register for tax. Tax evasion is a serious offense, and the government has the power to prosecute individuals or companies found guilty of tax evasion.

An example of tax evasion in the UK is failing to declare income from offshore assets. The UK government has been cracking down on this practice, and in recent years, it has targeted individuals who have not declared income or gains from offshore assets, including bank accounts, property, or trusts.

Summary and conclusion

In summary, the key differences between tax avoidance and tax evasion are as follows:

• Firstly, avoidance is a legal way of minimising your tax.  However,  tax evasion is illegally not paying taxes that are due.
• Secondly, tax avoidance can use complex strategies such as deductions, credits, and tax shelters to reduce tax payments.  However, tax evasion hides or under-declares taxable income.
• Lastly, tax avoidance is often viewed as unethical, tax evasion is a criminal offense that can result in prosecution.

You need to understand the difference between tax avoidance and tax evasion.  They have different legal implications.  Tax avoidance is legal, we all do it in varying ways.  However, many see aggressive tax avoidance as unethical.  Conversely, tax evasion is a criminal offence that can lead to prosecution, fines or even imprisonment.

That’s why we offer professional tax and accounting services to individuals and businesses.  Furthermore. contact us today for help and support on tax, accounts, and managing business finances.

Now, let’s talk about the fabulous resources we’ve cooked up for you.  Log in to your client portal (think of it as your secret recipe book) and find the Tax Return Checklist, or select this link .   It’s a complete list of ingredients we need to whip up your perfect tax return.  Fancy tapping into some extra FREE I Hate Numbers resources about UK tax and business, you have blogs ,  videos and podcasts to browse through

Do you know the difference between tax avoidance and tax evasion? The difference, according to Dennis Healy, ex-chancellor of the exchequer, is the thickness of a prison wall. Tax avoidance is a perfectly legal practice, though with some, it's a morally questionable practice. Tax evasion is a definite no-no, and that is a criminal offense. In this week's I Hate Numbers

Podcast, I'm going to go through and explain the differences between avoidance and evasion, and give you some examples of how they work, and share some tips as to how we avoid getting into hot water, getting into trouble, getting the potential criminal prosecution levied against us for tax evasion. I don't want that for you.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to another weekly episode of I Hate Numbers. This is the podcast that's there to improve your financial awareness, help you and your business make more money (who doesn't want that?), reduce the stress and anxiety that you have by dealing with business and finance, and for you to have the business life that you aspire to.

What's not to love about that? Let's crack on with the podcast. Now, tax avoidance involves arranging your financial affairs in such a way that you reduce and minimise your tax liability. All perfectly acceptable, all perfectly enshrined in the letter of the law, and enshrined with practice. Now, for most of us, at one level, tax avoidance could be claiming the allowances that we're entitled to, whether those are personal allowances or capital allowances, taking advantage of tax-planning opportunities, whether that's how we remunerate ourselves through our business, whether it's dividends, salary, or combination with benefits in kind thrown in, whether we invest in tax efficient products like ISIS or pensions,

those are all examples of tax avoidance and that is perfectly acceptable. A different level, a UK company may use a tax-efficient structure like a holding company where it might be based in a low-tax territory to reduce their liability. There may be a mechanism of what's called transfer pricing. So, typically a coffee company, no names given, may locate their head office in one jurisdiction, trade with other parts of the world, and by the transfer-pricing mechanism they set,

will shift profits from a high-tax-paying country to a low-tax-paying country. Now, that's perfectly legal. It may be controversial, it may be morally unacceptable to some, but having said that, tax and morals don't always sit very comfortably together. Using offshore tax havens is another example of tax avoidance

where we're shifting profits around the world. That's probably a tactic beyond the reach for most business owners, but it's still a tactic that exists. Now, although it's not illegal, it is the subject of much public debate, and it does, understandably, get people very hot under the collar thinking that is unfair, but don't confuse morals and not acceptable with something that's illegal.

Now, there are situations where tax avoidance can cross that very blurry line into aggressive tax-planning where people, lawyers, and accountants will get together to take advantage of what I call loopholes in the tax system to get an unfair advantage. There may be very gray areas here. If you do it with intent, knowing that you are actually breaking the law, knowing there's no substance to your commercial transaction, then you are gravitating towards the area of evasion, and that is definitely something that's not just morally questionable, but also potentially illegal.

Now, tax evasion on the other hand is illegal. It is that thickness of the prison wall syndrome, and this is where we understate income or don't disclose it, we overstate expenses, non-existing in the first place, or they're much lower than we declare. It could be a trader that doesn't charge VAT for a cash job.

It could be somebody who's earning money, but not declaring it. Those are all examples of tax evasion and tax evasion occurs at different levels. We falsify expenses, we falsify claims. We claim the things that we haven't expensed with a direct outcome of being that, tax liabilities are reduced if not hidden.

And tax evasion is a criminal offense, not just in the UK, but also in most jurisdictions around the world. The consequences of that can be very heavy penalties. In some cases, if you are guilty of tax evasion, the penalties can be equivalent to as much as the tax itself, and in really severe cases, fines, imprisonment, and a criminal record will follow.

In my experience, in over 28 plus years, most people who understate their income, who do things on a very naughty side when we make them do voluntary declarations, financial consequences tend to prevail more than punitive penalties like prosecution. Now, with tax evasion, taxpayers are deliberately failing to report their income in order to reduce tax liability.

So, that covers things, as we said, from falsification of expenses, claiming for things that haven't actually occurred, and again, it occurs at different levels of taxpayers. Now, if we come back to this example of what the difference is between avoidance and evasion, and we might naturally ask the question, why does it matter?

Tax avoidance is perfectly legal, and that's planning to actually arrange your affairs such that you reduce, mitigate your tax liability, that is perfectly fine. Claiming allowances, making claims that are perfectly legitimate. Now, they will blur over, that does create some heated conversations to some people, and in my experience, it's going to be a bigger spotlight on the tax avoidance and tax evasion because there is a tax gap that the UK is experiencing,

the difference between the tax that should be collected and the tax that is actually collected. That tax gap will put more pressure on the authorities to spend more resources, especially when it comes to digital businesses, those businesses that are trading online, without necessarily declaring their income.

If you do something that looks like a business, feels like a business, that you are not declaring that income, then you are in a potential very difficult situation. If you're deliberately not declaring it, and by the way, if you are a business that's generating over a thousand pounds worth of sales on an annual basis, you have a responsibility, a legal one, to report that accordingly.

In my experience, HMRC are increasing the spotlight on increasing the scrutiny, checking on what's happening in the digital space, checking returns coming in. They have access to an incredible level of information from a variety of sources, from banks, from digital platforms, from online shops who have to report what's going on here, and therefore, it becomes a very problematic area that if you do decide to deliberately avoid declaring income, then you could face a very nasty shock once you're caught.

Now, my opinion would be, folks, as we come to this conclusion of this very short podcast, is that if you are in a situation. That you have not declared your income, you've under-declared tax and you've done it innocently, you've got yourself into a bit of a hole, you need to make what I call a voluntary declaration. Always being on the front foot to declare the understated income, to make adjustments accordingly, will always count in your favor and always mitigate any potential penalties that you have.

Those people who might have second homes and not declare the rental income on that property. Again, if your rental income is typically over a certain level, you have a responsibility in legal terms to declare that income to HMRC. Now, by all means, check what you're entitled to. Speak to your advisors, speak to your accountant, and find out what you're legally entitled to, and make sure you claim what you will.

Now, tax doesn't leave us from the moment we're born to the moment we leave this earth, but what we need to make sure is that we actually comply within the spirit of the law, within the letter of the law. We need to make sure we're doing the right thing. If we are caught, that could be financially painful, and also you could be having a very poor diet

of prison food in a worst-case scenario. Folks, I hope this has some resonance for you. I hope this made that distinction clearer. Avoidance, perfectly fine. Evasion is a definite no-no. If you have any questions to ask them, by all means, please drop me a line. Check out the contact details via the show notes, and until next week, folks, I'll see you on the other side.

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