The terms “tax avoidance” and “tax evasion” are sometimes used interchangeably, but they refer to unique scenarios with drastically different legal implications. The differences essentially boil down to legality, with a few additional asterisks.

One is legal and frowned upon, while the other is a criminal offence that can land individuals and associated parties in hot water.

This in-depth guide will clearly define tax avoidance and tax evasion, explain the key differences between them, and outline the risks and potential repercussions associated with each from the perspective of HM Revenue & Customs (HMRC).

What is Tax Avoidance? 

Tax avoidance involves legitimate ways for individuals and businesses to arrange their financial affairs in a tax-efficient manner within the boundaries of the law. It’s when the HMRC tax system itself is exploited to reduce one’s tax liabilities while still staying compliant.

Tax avoidance itself employs HMRC-approved methods to minimise one’s tax liabilities by making use of allowances, deductions, reliefs, credits, and exemptions provided by legislation.

Common examples of tax avoidance strategies include:

• Contributing to tax-advantaged pension plans or ISAs
• Claiming as many business expense deductions as you’re entitled to
• Transferring income or assets to a lower-taxed spouse
• Structuring property ownership to reduce capital gains tax (CGT) obligations
• Offsetting losses against taxable income
• Deferring taxes through allowances for investment purposes

Contrary to popular belief, tax avoidance is not illegal, nor does it involve concealing information from HMRC. Rather, it’s another way to describe ways that companies can lawfully bend the rules of the UK tax system to gain an advantage.

At this time of writing, with the UK General Election looming on the 4th of July 2024, both Labour and the Conservatives have set out ambitions to clamp down on tax avoidance as part of modest tax and expenditure plans. Therefore, it’s worth paying close attention to the tax landscape in the coming weeks and months.

What is Tax Evasion? 

Tax evasion is a criminal offence involving deliberate misrepresentation, omission, or concealment to illegally reduce tax liabilities owed. A person is complicit in tax evasion if they lie about the true state of their financial affairs.

Common examples of tax evasion include:

• Deliberately underreporting income sources on tax returns
• Failing to report income at all
• Fabricating false business expenses or deductions
• Hiding assets, investments, or money offshore
• Money laundering
• Misreporting personal expenses as tax-deductible business expenses
• Falsifying records or accounting documents
• Tax fraud or making misleading statements to HMRC

How Does Tax Evasion Differ From Tax Avoidance?

A key distinction between avoidance and evasion is the intent to deceive. Tax avoidance takes advantage of legal opportunities and avoids deception, while evasion involves outright fabrication and covering up information from HMRC. Those found guilty of tax evasion can face significant financial penalties and even prison time.

Many tax avoidance schemes that are marketed towards the wealthy or those with large portfolios of assets have been heavily criticised, with many having been shut down by HMRC in recent years.

The Criminal Finances Bill 2016-17 introduced new penalties to crack down on financial crime, two of which were pertinent to tax evasion (but not tax avoidance). In simple terms, companies can be liable for failing to prevent the facilitation of tax evasion, with tax advisors who are complicit in helping their clients evade tax potentially facing fines. Furthermore, HMRC will be forthcoming about naming and shaming any companies found to be involved in tax evasion schemes.

Tax Planning Considerations 

With differing legal repercussions at play, walking the line between tax avoidance and evasion has become increasingly challenging.

It’s no doubt that everyone wants to minimise their tax bill legally and within reason. However, there is such a thing as going too far with your arrangements which risk you being challenged by HMRC as overstepping your reasonable boundaries.

There’s no easy way to guarantee whether HMRC deems your specific tax planning arrangements too aggressive. However, the level of disclosure and transparency in your tax returns and relief applications will no doubt play a part. Provided you exercise your rights within the confines of UK law, and disclose all income eligible for income tax, CGT, or any other tax, then this will be less likely to trigger their alarm bells.

The most proactive solution of all is to seek professional tax advice from an experienced accountant like Hamlyns. Our tax experts can not only submit tax returns to HMRC on your behalf, but we have a firm understanding of the increasingly complex UK tax system which means that any potential misunderstandings go out the window. We can also ensure you take advantage of all eligible relief and allowances to minimise your tax burden.

Penalties for Tax Avoidance and Evasion 

With tax evasion schemes firmly in the crosshairs, HMRC has taken an increasingly hard-line stance.

HMRC will often seek to prosecute tax evasion cases where the taxpayer does not cooperate, evidencing a criminal offence. The Crown Prosecution Service will typically only pursue prosecutions for tax evasion if a case is in the public interest.

Not only will HMRC publicly disclose penalised tax evaders and scheme operators, but also individuals and companies who profiteered from or contributed to these crimes. Those found guilty of cheating taxpayers can be subject to fines and prison time, depending on the severity of the crime.

In contrast, HMRC will generally only pursue tax avoidance investigations where they believe tax legislation and regulations were not followed. HMRC will seek to deny any tax advantages that it considers to be unfair and will no doubt challenge aggressive tax planning or avoidance schemes.

HMRC’s Contractual Disclosure Facility and Code of Practice 9 allow taxpayers to voluntarily correct their tax behaviours and mitigate potential penalties they face. Those who are proactive and cooperative may see reduced penalties and more lenient sentencing in favour of those who refuse.

Proactive and HMRC-Compliant Tax Advice

Given the complexities and risk factors associated with both tax avoidance and evasion, seeking professional guidance from an experienced tax specialist is crucial.

The chartered accountants at Hamlyns serve as trusted advisors to ensure full compliance and optimised tax positions for individuals and businesses alike.

Our tax planning services evaluate your specific situation in detail to implement legal tax minimisation strategies tailored to you. We leverage our expertise across all areas of income tax, capital gains, VAT, duties, and all tax legislation to maximise tax efficiency and cash flow while operating within the letter of the law.

Should HMRC ever open an inquiry, investigation, or legal challenge, our team also provides comprehensive tax investigation advice and representation services. We respond decisively to protect your interests and ensure fair tax treatment.

For any tax planning, avoidance, evasion, or compliance concerns, put your trust in the reputable and highly qualified tax experts at Hamlyns. Schedule a consultation with our team to get the proactive tax advice you need to make informed decisions.