Tax Avoidance vs. Tax Evasion
The terms 'tax avoidance' and 'tax evasion' are often used interchangeably, but they are legally very different. This guide explains the crucial distinction.Understanding the difference is key to managing your tax affairs correctly and staying on the right side of the law.
What is Tax Evasion?
Tax evasion is illegal. It is the act of deliberately misleading or hiding information from HMRC to reduce a tax liability. This includes actions such as:
- Not declaring all of your income.
- Claiming for expenses that you did not actually incur.
- Hiding assets or investments offshore.
Tax evasion carries severe penalties, including large fines and potentially a criminal conviction and prison sentence.
What is Tax Avoidance?
Tax avoidance is legal, although often frowned upon by HMRC. It involves using legal loopholes and tax legislation in a way that it was not originally intended in order to minimise a tax bill.
HMRC actively challenges tax avoidance schemes and can introduce new legislation to close them down. Engaging in such schemes can be risky, as if they are defeated by HMRC in court, you could be left with a very large tax bill plus interest.
Responsible tax planning, such as using ISAs or making pension contributions, is not considered tax avoidance.