Tax Avoidance vs Tax Evasion

What is the difference between tax avoidance and tax evasion?

Understanding how tax evasion and tax avoidance compare is key to avoiding landing yourself in hot water or worse, committing a criminal offence.

However, the simple difference between the two is the legality behind the actions.

To make sure you have all of the details so you can better understand tax avoidance vs tax evasion, our expert team of experienced tax solicitors who work at the forefront of tax law have fully explained all of the differences and are available to support you.

What is tax avoidance?

Tax avoidance is defined as the action in which an individual or a business exploits the existing tax system legally. This, can be through means such as establishing an offshore company in ‘tax havens’, in which less tax has to be paid in comparison to the company’s actual home base.

Tax avoidance can look like other actions too, including keeping money in savings accounts such as an ISA to avoid having to pay income tax on any earnings. Other people may also choose to keep their savings out of a bank account and invest them into a pension scheme instead.

What is tax evasion?

However, tax evasion is much different.

Tax evasion is when individuals or businesses deliberately decide to commit a crime and allow illegal actions to take place to avoid paying tax. This is much easier to define, as to have committed tax evasion, there has to have been a clear decision to willfully commit a criminal offence to evade taxes. This is a serious crime and can result in fines, penalties and even jail time if a person is found guilty of tax evasion.

What is the difference between tax avoidance and tax evasion?

Whilst there are clear guidelines that distinguish tax avoidance vs tax evasion, there can be a fine line between the two if you’re looking to avoid paying tax without committing a criminal offence.

If the person or business who has gone to efforts to avoid paying tax through tax avoidance schemes, savings accounts or other methods has lied or hidden key data, figures and facts, this can then be deemed a criminal offence. For example, putting money aside into a savings account to lower a tax bill is legal however, if assets or information are concealed, this becomes tax evasion.

Is my business evading tax or avoiding tax?

Being crystal clear on how your business operates and handles tax payments, tax returns, tax rates, and tax liabilities are absolutely essential to ensure you’re staying on the right side of the law.

The examples below will help you to narrow down the difference between tax avoidance and evasion:

Tax evasion examples

• Concealing/withholding/supressing key information from government institutes such as HMRC
• Underdeclaring business earnings/receipts

Tax avoidance examples

• Placing your residence in a low-income tax rate country
• Setting up a company and paying dividends instead of an income
• Gifting family members assets when you’re still alive to avoid inheritance tax

The penalties for tax evasion can vary

Of course, sometimes it can be difficult to distinguish between tax avoidance vs tax evasion, and some individuals and businesses can end up on the wrong side of the law as a result.

The penalties for tax evasion can vary, depending on how aggressive the tax evasion was, the amount of tax that was evaded and the amount of time it had gone on for. For those found guilty of tax evasion, the courts can order you to repay the tax and any interest accrued and issue further penalties, including jail time.

DBT and Partners can support you through tax evasion allegations

Having experts on your side is the best way to build the strongest defence against an allegation in order to get the most desirable result possible.

It can be difficult to understand the difference between tax evasion and avoidance, so if you’re facing an allegation, the legal jargon and complex processes can become confusing and difficult to navigate. Instead, rely on DBT & Partners, and get in touch to access the very best professional legal support.

As a niche law firm providing fraud and tax services from offices in London, Birmingham and Liverpool, you’ll be with the very best solicitors, legal counsel and expert accountants.