Tax avoidance vs tax evasion sounds like a simple legal-versus-illegal distinction, but there is an important third concept in the middle: legitimate tax planning.

Using an ISA, contributing to a pension or claiming a relief exactly as Parliament intended is tax planning. Tax avoidance goes further and tries to gain a tax advantage that was not intended. Tax evasion is different again: it means deliberately not paying tax that is legally due.

Understanding those differences matters because the financial and legal consequences can be very different.

About this episode

There is an old line that the difference between avoidance and evasion can be measured by the thickness of a prison wall.

It gets the point across, but modern tax language needs a little more care than that.

In this episode, we look at tax avoidance vs tax evasion, why tax planning should not automatically be labelled avoidance, where aggressive arrangements can cause problems and what to do if income has not been declared correctly.

Tax planning is not the same as tax avoidance

Let's start with the bit that often gets muddled.

There is nothing wrong with arranging your finances sensibly and using tax reliefs for the purpose they were designed for.

Examples of legitimate tax planning can include:

• claiming allowable business expenses
• claiming capital allowances where you qualify
• saving through an ISA
• making eligible pension contributions
• using available personal allowances and reliefs
• choosing an appropriate mix of salary, dividends and benefits where the rules permit it

These things may reduce the tax you pay, but HMRC does not automatically regard them as tax avoidance.

The key question is whether you are using the rules in the way Parliament intended.

What is tax avoidance?

HMRC describes tax avoidance as bending the rules of the tax system to obtain a tax advantage that Parliament did not intend.

It can involve complicated or artificial transactions that exist mainly to produce a tax result rather than for a genuine commercial reason.

This is where things become less comfortable than ordinary tax planning.

An avoidance arrangement may be structured to appear to fit the wording of legislation while producing a result that goes against the purpose of those rules.

HMRC has a range of anti-avoidance powers, including the General Anti-Abuse Rule, or GAAR, which can be used against abusive tax arrangements.

So saying that tax avoidance is simply "legal tax planning" is too broad.

Some arrangements may not amount to criminal tax evasion, but HMRC can still investigate, challenge and counteract them.

What is tax evasion?

Tax evasion is much clearer.

It involves deliberately failing to pay tax that is legally due.

Examples can include:

• hiding income
• deliberately failing to declare taxable income
• inventing expenses that never existed
• inflating business expenses to reduce taxable profit
• deliberately failing to register for a tax when registration is required
• concealing taxable offshore income or gains

If someone takes a cash payment and deliberately leaves it out of their records so that no tax is paid on it, that is very different from making a legitimate pension contribution or claiming a proper business expense.

Tax evasion is illegal and can lead to tax assessments, penalties and, in serious cases, criminal prosecution.

Tax avoidance vs tax evasion in simple terms

Tax planningTax avoidanceTax evasion

Uses tax rules and reliefs as intended

Tries to obtain a tax advantage Parliament did not intend

Deliberately avoids paying tax that is legally due

Legitimate

Can be challenged and counteracted by HMRC

Illegal

Often part of normal financial planning

May involve artificial or contrived arrangements

May involve hidden income, false claims or false records

Where does aggressive tax planning fit?

This is where the line can start to look blurry.

An arrangement may be presented as tax planning but rely on unusual steps, artificial transactions or loopholes designed mainly to produce a tax advantage.

The more contrived the arrangement becomes, the further away it moves from straightforward tax planning.

The GAAR exists specifically to deal with abusive tax arrangements.

One of the things HMRC considers is whether an arrangement can reasonably be regarded as a reasonable course of action under the relevant tax rules.

That is why it is dangerous to assume that something must be safe simply because somebody says there is technically a piece of legislation supporting it.

Examples of tax evasion

The examples are often much more straightforward.

Imagine a trader who takes £5,000 in cash from customers but deliberately records only £2,000.

Or somebody who receives rental income but intentionally leaves it off their tax return.

Perhaps somebody claims £10,000 of business expenses when only £4,000 was actually spent.

Those are not clever tax-planning strategies.

They involve deliberately providing an incorrect picture of the income or expenses so that less tax is paid.

What if you forgot to declare income?

Making a mistake is not automatically the same as deliberately committing tax evasion.

You may have misunderstood the rules, forgotten about some income or discovered that an earlier return was wrong.

If you realise you have taxable income that has not been declared, deal with it.

HMRC's current guidance says you should tell them as soon as possible. Contacting HMRC before they approach you may also be taken into account when they consider your case.

Depending on the circumstances, that might involve amending an existing Self Assessment return or making a disclosure for an earlier year.

The important thing is to get back on the front foot rather than hoping the problem disappears.

Digital businesses are not invisible

One point from the original episode is even more relevant now.

Online businesses, platforms, banks and digital payment systems create records.

If you run something that looks like a business, generates income like a business and operates like a business, do not assume the income becomes invisible simply because the transactions happen online.

Tax compliance still applies.

If you need to complete a return, our guide to completing a Self Assessment tax return explains the wider process.

How to stay on the right side of HMRC

1. Declare your income. Do not deliberately leave taxable income out of your records or return.
2. Keep proper records. Your numbers should have evidence behind them.
3. Claim genuine expenses and reliefs. Use the rules you are entitled to use.
4. Be cautious with aggressive schemes. A complicated structure does not automatically make a tax advantage acceptable.
5. Ask what the commercial purpose is. Be wary if an arrangement seems to exist mainly to manufacture a tax saving.
6. Get competent advice. Especially before entering unusual tax arrangements.
7. Correct mistakes. If income was missed or a return was wrong, deal with it sooner rather than later.

FAQs

What is the difference between tax avoidance and tax evasion?

Tax avoidance generally involves arrangements designed to obtain a tax advantage that was not intended by Parliament. Tax evasion involves deliberately failing to pay tax that is legally due and is illegal.

Is tax avoidance legal?

It is more complicated than simply saying yes. Tax avoidance is not the same thing as tax evasion, but HMRC can investigate and counteract avoidance arrangements. Abusive arrangements can also fall within the General Anti-Abuse Rule.

Is tax planning legal?

Yes. Using legitimate allowances, reliefs and tax-efficient products for the purposes intended by the legislation is normal tax planning.

Is hiding cash income tax evasion?

If taxable income is deliberately hidden so that tax is not paid, that can amount to tax evasion.

What should I do if I forgot to declare income?

Correct the position as soon as possible. Depending on the circumstances, you may be able to amend a tax return or make a disclosure to HMRC.

Episode Timecodes

• 00:00 - Tax avoidance vs tax evasion
• 01:31 - Tax planning and reducing tax legally
• 02:10 - More complex tax structures
• 03:24 - When avoidance becomes aggressive
• 04:00 - What tax evasion looks like
• 05:04 - Deliberately failing to report income
• 05:43 - Why the distinction matters
• 06:31 - Digital businesses and undeclared income
• 07:29 - Correcting undeclared income
• 08:23 - Staying within the rules

Related episodes and guides

• How to Complete a Self Assessment Tax Return
• 5 Tax Return Mistakes to Avoid in Self Assessment
• Self Assessment Tax Returns

Key takeaway

The important distinction is no longer simply "avoidance is legal and evasion is illegal".

Legitimate tax planning means using reliefs and allowances as they were intended.

Tax avoidance seeks a tax advantage that Parliament did not intend and may be challenged by HMRC.

Tax evasion involves deliberately not paying tax that is legally due and is illegal.

Claim what you are entitled to, plan sensibly, keep proper records and do not confuse clever-looking arrangements with good tax planning.

Further Support

If you are unsure whether a tax arrangement is legitimate planning, need help correcting undeclared income or want support with your tax position, you can contact us for an initial chat.

You can also explore our free online business calculators for practical tax and business support.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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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.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.