Tax Avoidance vs Tax Evasion - Understand the difference

Tax Avoidance vs Tax Evasion are terms that you will have undoubtedly heard over the course of your business journey, however, understanding the differences between tax avoidance vs tax evasion can mean the difference between only paying the minimum amount of tax legitimately, and ending up in hot water for tax fraud.

HMRC Code of Practice Link:
https://assets.publishing.service.gov...
https://assets.publishing.service.gov...

HMRC Spotlights:
https://www.gov.uk/government/collect...

⏱️ Time Stamps:
0:57 - The difference between tax avoidance and tax evasion
2:51 - What is a tax avoidance scheme and should I use one?
6:29 - What could happen if you evade tax?

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It is perfectly legal to arrange your tax affairs in a way that enables you to pay the minimum amount. This is called Tax Avoidance. In this video we briefly go over some of the ways you can do this, such as holding assets in a spouses name, disposing of assets with a tax year to make use of allowances or even holding cash savings in an ISA to keep them free from taxation.

However, tax evasion is illegally trying to pay less tax than is owed, this could be done by understating or overstating expenses or earnings to HMRC or evening the complete omission of details from HMRC.

As some laws are open to interpretation, many third parties often create Tax Avoidance Schemes which, while operating to the letter of the law, do not operate in the spirit of the law, as described by HMRC. If you are taking part in one of these schemes you must let HMRC know, usually through your self assessment return. HMRC keeps a list of the schemes they are currently investigating in the spotlights section of their website. We've put together 4 tips to help you work out if you may be in one of these schemes are running the risk of potential difficulties from HMRC further down the line.

1. If the scheme insists it's approved by HMRC you should be suspicious. HMRC simply does not approve any schemes.
2. If the scheme suggests you do not have to declare it to HMRC you should again be suspicious as you are legally required to inform HMRC if you are participating in a tax avoidance scheme, usually through your self assessment tax return.
3. If the aim of the scheme appears to be to make your money go round in circles and end up where it started, you should be wary of this.
4. If it sounds too good to be true, it genuinely is. In the video we go over an example where contractors were told they could take home up to 90% of their pay, which ultimately was caught up to by HMRC and repayable.

We hope this video has helped you understand the key difference between tax avoidance vs tax evasion and has taken you one step closer to knowing your numbers. Make sure to subscribe for our upcoming videos on self assessment tax returns, bounce back loans, director loan accounts and many more useful topics to empower the next generation of business owners.

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