Tax avoidance – how does it work?

Street sign pointing to Fiscal Paradise
Written by Alan Davidson
Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller "Achieve Your Business Vision". With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.
April 7, 2015

Tax avoidance can be a tricky subject. No business owner wants to pay more tax than required, but at the same time we have to acknowledge that paying tax is a natural part of doing business. In this article we will go through what HMRC has said about the matter, and how business owners should regard tax avoidance.

What is tax avoidance?

Tax avoidance includes all activities that are meant to lower your tax bill. This includes everything from claiming tax reliefs to participating in tax saving schemes. As accountants, one of our primary jobs is to regularly help our clients lower their tax bills by claiming allowances and reliefs they might not have been aware of. It’s simply about avoiding paying tax that you shouldn’t be paying in the first place.

Tax avoidance vs tax evasion

Tax evasion is an illegal activity where you lie and try to hide money, accounts and transactions to avoid paying taxes. Tax evasion can be penalised with substantial charges and jail time.

Tax avoidance can include anything from tax reliefs to tax avoidance schemes, and the line between avoidance and evasion can be thin. The main difference is that tax avoiders don’t try to purposely lie to HMRC regarding their transactions and incomes in order to evade their tax bill. They are simply using laws and regulations to their benefit to avoid overpaying when they don’t have to.

However, when tax avoidance is mentioned in media, they are rarely talking about tax reliefs and allowances. Rather, they are discussing people who use schemes or avoid paying their tax bills when they arrive. This is where tax avoidance can border on tax evasion and become a legal matter.

Is tax avoidance illegal?

Tax avoidance is in itself legal. In fact, we recommend that all business owners consider strategies that minimise their tax position based on current law and best practice. There is a large number of taxpayers in the UK who pay too much tax because they failed to claim allowances and reliefs available. Your accountant should be able to help you out, and we encourage you to seek out information that could benefit you.

Tax avoidance sometimes involves using schemes that operate within the letter, but not the spirit of the law. It can technically be done in a legal matter, however the line to tax evasion can be easy to cross. Many people that try to use tax saving schemes find that they end up having to pay way more tax than the amount that they try to avoid, including penalties, and we therefore do not recommend our clients to use tax avoidance schemes. HMRC has also discouraged tax payers from abusing tax schemes, and rather recommend that business owners simply pay the taxes that they are due.

Examples of tax avoidance

There are many different types of tax avoidance. We often help our clients avoid large tax bills, for instance by using pension schemes, EIS tax reliefs, R&D relief, and other allowances and reliefs available.

You can’t avoid tax forever

HMRC has released multiple statements to inform us that they are serious about clamping down on the minority of business owners that are using tax saving schemes to avoid tax that they are actually due. They are encouraging business owners to stay away from these schemes. So called serial tax avoiders are asked to contact HMRC to square up and pay what they are owed to put their past behind them and save their reputation.

If you need help sorting your tax affairs out, contact your accountant and arrange a meeting. The sooner you get started, the better.

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