Tax Avoidance vs Tax Evasion

You will have to pay tax if you start your own business. Income tax, National Insurance contributions, Corporation Tax, VAT, tax on corporation share dividends, and Capital Gains Tax are all examples of taxes.

We'll go through why it's important to pay your taxes, what happens if you don't, and how to define each term so you can comprehend the nuanced differences between tax avoidance and tax evasion.

What are the differences between Tax Avoidance and Tax Evasion?
Tax evasion is the illegal concealment of income or information from HMRC (HM Revenue & Customs). Tax evasion entails taking advantage of the system to lower the amount of money you owe in taxes. It can be difficult to tell where one finishes and the other begins.

What is Tax Fraud?
You may have come across this term before and now have a better idea of what it means. Tax fraud is a broad word that encompasses a wide range of criminal activities, including: 
  • VAT is not charged when it is required;
  • VAT is charged or PAYE tax is deducted from employee wages but not paid to HMRC;
  • misrepresenting information on tax returns in order to minimise one's tax liability;
  • neglecting to record any payments made to yourself or your employees to HMRC. 

Smuggling items that are subject to excise duty, customs duty, or VAT into the UK is also considered tax fraud. Another kind of tax fraud is failing to register for VAT when it is required.

What are my tax obligations?
Any tax owed to HMRC must be collected and paid by businesses and their owners. When illegal actions are used to avoid paying tax, failure to do so might result in fines or more severe sanctions. 

Business owners want to maintain their companies as tax efficient as possible, which simply means adhering to the rules in order to reduce their tax payments and increase their profits. Effective tax preparation can help you save money on taxes while staying within the rules. 

However, some organisations and individuals go to great lengths to reduce their tax payments, which can lead to tax avoidance, if not outright tax evasion, claims. According to the most recent official figures, tax avoidance costs the UK government £1.8 billion per year, whereas tax evasion costs £5.3 billion.

What can HMRC do?
HMRC strives to ensure that the legislation and rules governing direct and indirect taxes, as well as other regimes for which it is responsible, are followed to the letter. 

A criminal inquiry is reserved for circumstances when HMRC needs to convey a strong deterrent message or the conduct involved is such that only a criminal consequence is suitable. 

HMRC can impose harsh penalties for tax evasion, such as unlimited fines and up to seven years in prison, as well as the requirement to pay up to 200 % of the entire tax payable. 

The Criminal Finances Act 2017 makes it a criminal crime in the UK for a company to fail to prevent its workers or "related individuals" from helping tax fraud when it was first implemented.

How to avoid Tax evasion?
It is critical that we all pay our fair share of taxes into the system. Although tax avoidance is not technically criminal, tax evasion is, they are both used to attain the same goal. 

Any of the following, for the avoidance of doubt, could find you in hot water with the IRS for tax evasion: 
  • Underreporting or failing to record your company income;
  • Using cash payments to conduct business 'off the books';
  • Using an offshore company bank account to hide money, stocks, or other assets;
  • Personal spending is being reported as tax-deductible company expenses;
  • Using company property for personal gain without justification.

For some who find the taxation process and its laws complicated and intimidating, evading your tax obligations can be attractive. As professionals in this field, we strongly advise you to approach us with any business or accounting questions so that you can avoid making mistakes with your tax requirements, which could result in serious consequences for your company. 

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