The Difference Between Tax Avoidance and Tax Evasion

tax avoidance and tax evasion

It happens to be a time-consuming process for self-employed individuals and small businesses when they will have to file tax returns by the end of every tax year. Considering the situation, there are several schemes that offer to reduce tax bills through multiple ways of tax avoidance and tax evasion. They claim to simplify the complicated process of tax returns. If you are the one who is planning to sign up for one such scheme, you are going against the law. This is because you are trying to pay less amount than is mentioned in your tax bill.

However, whatever the case is, it is imperative to understand the difference between tax avoidance and tax evasion and what are the types of tax schemes that you should trust. This comprehensive guide will help you in this regard as we have got you covered with the most frequently asked question. This involves the discussion of whether tax evasion is illegal in the UK, what is the penalty of tax in the UK and what is the role of schemes related to tax avoidance.


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What is the Difference Between Tax Avoidance and Tax Evasion?

The schemes that are known with the name of tax avoidance and tax evasion are designed in a way that they claim to help people for the sake of reducing their tax bills. However, such schemes are not viewed positively by HMRC. When it comes to the law, a tax avoidance scheme is a claim to be within the law and rules of tax and that is the prominent difference from the design of a tax evasion scheme. However, HMRC still says that the scheme of tax avoidance is not designed according to the true spirit of the tax law.

Another important point to know here is that the mistakes in the tax returns that we call genuine like missing the tax deadlines and miscalculations are considered to be a part of the tax avoidance plan. When it comes to the point of tax evasion scheme, acts like inaccurate details provided to HMRC or delays in the payment of tax bills deliberately are inappropriate ways to pay a reduced amount than the actual tax bill. A few such examples are listed below:

  1. When you do not declare all the goods to HMRC to underestimate the value and pay less tax amount.
  2. Claiming the business expenses that are not genuine and the whole process of claim is false.
  3. The documents you have provided to HMRC are false.


How is Tax Evasion an Illegal Action in the UK?

Tax evasion is considered to be equivalent to tax fraud in the UK. If HMRC doubts that your business is involved in any of such illegal acts, you will observe an investigation from HMRC. Once you are proven to be guilty, you will have to face hefty amounts of fines as a penalty and even a prison sentence in this regard.


What is the Penalty for Tax Evasion?

The maximum penalty or punishment that one has to go through is a hefty amount to pay as a fine or seven years of prison if the person is found guilty by the provided proof in the investigation from HMRC. It does not matter whether the tax evasion is related to income tax or VAT. Sometimes people are involved in providing false documents to HMRC, the penalty for such cases is a maximum duration of six months or an amount fine of £20,000 to be maximum.

Cheating in the public revenue case is considered to be the most severe case of tax evasion in the UK. People who are found involved with this kind of fraud can even be punished with a lifetime prison and unlimited amounts in form of fines and other penalties.


The Sign Keys of the Tax Avoidance and Tax Evasion Schemes

Before business plans to join a tax scheme, there should be a consultation with a tax advisor or relevant expert because there are high chances for the scheme to follow illegal ways to reduce your tax bills. If the investigation comes in that case you will have to struggle with hefty fines and other penalties. Such schemes often tell you that they are approved by HMRC and genuinely legitimate as they are following the tax law, however, you need to be very careful before opting for any such scheme as a business. A few points are outlined that you must be focused on before opting for any tax scheme:

  1. You need to be alert if they claim that your take-home salary will be increased after you take the scheme.
  2. If you’re making payments to them that do not make any sense according to your understanding, get in touch with a trustworthy expert to get to know things and verify the process.
  3. If you are being offered any extra amount of money that’s not included in your salary, this explains that the amount of money is not being taxed and you are trapped.


The Bottom Line

Now that we have gathered a fair amount of information about tax avoidance and tax evasion in the UK, we can bring the discussion towards wrapping up. It is suggested that before opting for any kind of scheme, you must talk to a professional to avoid being trapped by fraud. We hope these few minutes of reading will help you to develop a better understanding of the differences between tax evasion and tax avoidance in the UK.


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Disclaimer: All the information provided in this article on tax avoidance and tax evasion in the UK, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.