- As an individual or business
seeing part of your hard-earned money disappear
from sight in the form of taxation
isn't something that always sits well with most of us.
As a result, some people will go to great lengths
to reduce their tax bill
and in some extreme cases,
try to avoid paying tax altogether.
Today, we're looking at the conflicting subject
of tax evasion versus tax avoidance.
In this video we will cover,
the difference between tax avoidance and tax evasion.
What is a tax avoidance scheme
and should you use one?
And finally tax evasion.
What could happen if you evade paying what you owe.
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In simple terms, tax avoidance
is legally arranging your tax affairs
to ensure only the minimum amount of tax is paid.
Tax avoidance works within the letter of the law
and takes many different forms.
As an example, some of the most simple forms
that you as a taxpayer have access to include:
Holding assets such as shares in your spouse's name
to make use of their capital gains tax allowances.
Selling off assets before the end of the tax year
to make use of unused allowances.
Holding cash savings in an ISA
so that any interest generated is free from taxation.
And finally using tax relief, such as entrepreneur's relief,
now known as business asset disposal relief
to pay less capital gains tax legitimately.
These examples are very common
and as the majority of you have access
to these avoidance measures,
they tend to be looked at as sensible tax planning
and a perfectly legal.
Now there are also tax avoidance schemes
which we'll talk about later on in the video,
which despite being technically legal
can still be challenged by HMRC through what is known
as GAAR, the general anti-abuse rule
which was introduced in the Finance Act of 2013.
Tax evasion on the other hand,
also described as tax fraud
is illegal and could end up resulting
in the criminal act of paying less tax than is legally due.
Examples of tax evasion could include,
understating income or overstating expenses deliberately,
or the complete emission of income
or other information to HMRC.
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As some laws can be subject to interpretation
it's become more and more common
that third parties will design tax avoidance schemes
aimed at individuals or businesses
with the sole purpose of pay less tax.
Now let's be clear here,
general tax avoidance that's sensible tax planning
and abuse and artificial tax avoidance schemes
can be looked upon as two separate things.
Although these tax avoidance schemes
do their best to stay within the letter of the law,
they are usually manipulating the law
in a way that was not intended to be possible.
The GAAR or general anti-abuse rule
aims to counter these artificial
or abusive tax avoidance schemes.
If you are taking part in a tax avoidance scheme
you are expected to disclose the details
of the scheme to HMRC,
normally through your self-assessment tax return.
If you do not disclose the use of a scheme
and it later found to have been taking part
then you could be subject to harsher penalties.
HMRC defines a tax avoidance scheme in the following way:
A tax avoidance scheme involves bending the rules
of the tax system to gain a tax advantage
that parliament never intended.
It often involves contrived, artificial transactions
that serve little or no purpose
other than to produce this advantage.
It involves operating within the letter,
but not the spirit of the law.
So should you use a tax avoidance scheme?
Well, in order to answer this
you need to make an informed decision.
HMRC maintain a list of known tax avoidance schemes
on their website under their Spotlight section.
Click on the link in the description box below
to go and have a look at some of these.
If you are approached by a third party
or discover a tax avoidance scheme,
it's always advisable to read HMRC view on it
under the Spotlight section.
Even if the scheme is not listed on the HMRC website,
they will expect you to disclose the details to them
if you have entered into and participated in the scheme.
Now it's not to suggest that all tax avoidance schemes
are out of the question,
as sometimes there is a very fine line
between avoidance schemes and those HMRC would claim
as abusive under GAAR.
We suggest you follow these four general rules
to reduce your risk of being caught up
in an artificial or abusive tax avoidance scheme.
Number one, if the promoter of the scheme
insists it's HMRC approved then be suspicious.
HMRC never approves any schemes.
Check out HMRC's Spotlight
and if the scheme is listed on their website
then you should make your own informed judgment.
Number two, if the promoter suggest
you don't have to declare the scheme,
even if it's not listed on HMRC's Spotlight section
again, be suspicious.
Perhaps this would be the opportunity
to get a second opinion from a professional advisor
such as an independent accountant or tax advisor.
Number three, round in circles.
Where the aim is to move your money
round in a circle
with it ending up back where it started,
this can also be an indicator of a tax avoidance scheme.
And finally, number four, if it sounds too good to be true.
Spotlight 33 contractor loan schemes
was such an example where promoters
were promising that a contractor could take home
90% of their income.
Many contractors unfortunately fell for this
and happily received up to 90% of their income
as take home pay.
Eventually HMRC caught up with the scheme
and clamped down on it,
including recovering retrospective taxes
from thousands of contractors who had used the scheme,
which was quite a sting.
If you're in doubt or believe you are currently in
or have historically entered into an abusive
tax avoidance scheme, and need further help,
we always suggest you seek an independent
professional opinion from a qualified accountant
or tax advisor.
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Tax evasion if proven can have serious consequences.
HMRC have a fraud investigation service, the FIS
a department that employs over 4,000 people,
but firstly, it has to be investigated.
And for civil cases, HMRC operate under the following areas:
Code of Practice 9 and Code of Practice 8.
Click on the link in the description box below
to download HMRC version of each.
Don't forget, it's not down to HMRC to decide
whether a tax fraud case is criminally prosecuted.
HMRC job is to make the case for prosecution
through their powers of investigation.
And the decision itself is made
by the Crown Prosecution Service in England and Wales
or the equivalent authority in Scotland
and Northern Ireland.
In other words, you could end up in court
and face the jury.
I hope this video has helped you learn
some of the high level differences
between tax evasion
and tax avoidance and taking you one step closer
to knowing your numbers.
As always let me know in the comments
your thoughts on today's video,
or if there are any other topics you'd like to see us cover
in the future.
Finally be sure to like and subscribe
as this really helps us to get our content out there.
This is Matthew Schouten for the Accounting and Tax Academy.