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What’s the difference between Tax Avoidance and Tax Evasion?
When talking tax, the Media and some politicians often talk of policies that are asking taxpayers to “pay their fair share.”
Much of our public politics is emotive, referring to vague gestures and good intent. Someone once said “talk is cheap” and that’s true, because when tax policies come to be converted into firm legislation, the terms cannot be loose or vague.
Tax Legislation is a body of rules which lays out;
Rates of Tax
Tax Bands and Allowances
The nature of Income or Assets to which tax will be applied
Approved exemptions to Tax
In a nutshell, that’s it, and this seems a straightforward basis for agreed levels of taxation.
The difficulty we have is that individuals, when privately organising their affairs within a free society, do not adhere to the vague gestures and good intent exhorted in public. We all engage in minimisation of tax, and there are two general methods. One is legal and one is illegal.
Tax Avoidance
Tax avoidance is legal and is the use of the tax legislative rule book, to minimise your tax. Ironically, this is often facilitated by HM Government encouraging business investment or personal saving. There is tax relief at a rate of 100% on qualifying plant and equipment bought for your business. There is tax relief on pension contributions and total tax exemption on savings put into Individual Savings Accounts (ISAs). There are more esoteric tax reliefs for investments in high risk businesses (the SEED scheme).
And, if the rule book says you will pay 40% above a certain level of income, is there not an incentive to reduce your taxable profits by buying that new machine?
Or if you can convert your income from a company into being called a loan, and that is not specifically outlawed in legislation, would you not be economically irrational not to do it?
It is often these areas – the matters that are not stated in legislation – that provides intellectual motivation to find new means of legal avoidance. As a species, we are fated to always extend our ability and taxation rules are no exception.
Tax Evasion
Tax evasion is illegal and is the wilful application of errors and non-declarations to your Tax Returns. It’s clearly very different from tax avoidance, and occurs when traders, business, companies and individuals hide their income, falsify expenditure, make incorrect allowance claims or conceal assets.
No professional tax advisor will engage in, or assist, tax evasion.
Summary
Contact us for a consultation if you require further explanation.
Norman Elliott FCA
18 English Street Downpatrick BT30 6AB
18 Bachelors Walk Lisburn BT24 8UB
