Probably we couldn’t find a business owner who wouldn’t like to pay less tax and get more profit. While effective tax planning can help you achieve that, some activities can lead to getting into trouble for tax avoidance or even tax evasion. Today, let’s take a look at how these two terms differ and what consequences you might suffer if you were found guilty of any of them.

Tax avoidance

Tax avoidance is the act of arranging your finances in a way to minimize your tax liability. That means that you’re still operating within the law and you pay some taxes but try to exploit the rules and get the advantage that was not intended by the lawmakers in order to pay less of what you owe.   

Interestingly, a lot of tax avoidance schemes tend to be counterproductive and those who get tempted to use them, end up paying even more tax as well as getting in the trouble with tax authorities.

Example

One of the most cited examples is one of avoiding paying employer taxes by masking employees as contractors. In most of such cases, a person works for a company as a normal employee, however, the employer asks them to register as self-employed to avoid paying taxes.

IR35 reform is aimed at fighting such cases.

Tax evasion

Tax avoidance is a bad practice, but you’re still operating within the law. However, tax evasion is an attempt to avoid paying tax at all and is considered to be a serious crime. Tax evasion is an illegal underpayment or non-payment of taxes. Usually, it is deliberate and is conducted by the business owner or with their knowledge.

The line between tax avoidance and evasion is a very thin and blurry one. That’s why if in any situation you feel that something is not entirely right, better consult with a tax advisor to make sure you’re not committing a crime.

Example

Getting untaxed income and not reporting it to HMRC falls under tax evasion. For example, if you’re providing certain services and take the payment in cash, without reporting it or issuing an invoice to customers, you’re committing a crime.