Paying tax is no one’s favourite job – so many people do what they can to reduce their bill either with tax planning, avoidance and even evasion!
Most taxpayers will give HMRC what they are owed without thinking about it. But others will try to minimise their liability, which is perfectly reasonable. As long as you’re not breaking laws.
What is tax planning, avoidance and evasion?
With careful tax planning, you can minimise tax liability legally. Tax avoidance isn’t illegal but isn’t simple. Tax avoidance is, quite simply, illegal.
That’s in a nutshell, but here’s what you need to know about tax planning, evasion and avoidance. Make sure you know the difference and beware any fake tax schemes.
Tax planning
Tax planning is a way of planning your tax affairs within the boundaries of the law.
It involves checking your income, restructuring finances and investments which take advantage of minimising costs.
For example, pension plans provide a way to divert income into a saving scheme for the future without having to account for tax immediately. You will pay tax later, but you can reduce your tax liability right now using this scheme.
This example is all about personal tax planning but business owners and companies can also use corporate tax planning. Such planning includes implementing tax-efficient accounting policies, the best tax-efficient structure for the business and reviewing profit extraction.
Getting an expert to review your tax planning will help you reduce your liability. And you’ll be doing it without having to worry about falling foul of the law.
Tax avoidance
While tax avoidance isn’t illegal, it’s a lot more complicated than tax planning. That’s because your tax adviser needs to take advantage of loopholes in tax laws.
Beware that there are many tax avoidance schemes but some unscrupulous organisations try to lure businesses into fake schemes.
For example, we recently reported on a ‘tax avoidance scheme’ around GDPR. But it’s fake because claiming that you are putting money aside for a possible GDPR fails to meet HMRC rules. This blog explains more.
If you have been offered access to such schemes or you are trying tax avoidance without an expert, our advice is to talk to your accountant. Comedian Jimmy Carr is one of the best known people to have used a tax avoidance scheme which turned out not to be within the law. He paid back what he owed but it shows just how fine the line is between legally sound schemes and fake schemes.
Tax evasion
We know, now, that tax avoidance is not illegal – but tax evasion certainly is! Evading tax is to deliberately and dishonestly not pay the tax you owe to HMRC. That includes income tax, VAT, custom duty and excise duty.
If you’re evading tax you’ll end up being investigated. And if you’re found guilty, you could face financial penalties, a criminal record or even imprisonment. The courts are toughening up sentences for tax evasion, such is the seriousness of the issue. So if you’re thinking of evading tax, it’s wise not to if you value your freedom!
What to do about tax?
Using a chartered accountant who understands tax is the first step to paying the right amount and within the law. For information, contact our team today.