What’s the Difference Between Tax Evasion, Tax Avoidance, and Tax Planning? | The Accountancy Partnership (2024)

Tax evasion, tax avoidance and tax planning. They’re all probably terms you’ve heard before, usually in a news story involving celebrities and big multinational companies. Though they sound similar, they’re actually very different things and it’s important to understand the differences if you’re to avoid ending up in serious hot water with HMRC.

What is tax evasion?

What is tax avoidance?

What are tax avoidance schemes?

What is tax planning?

What’s the difference between tax planning and tax avoidance?

What is tax evasion?

Tax evasion occurs when you deliberately and dishonestly avoid paying the tax you owe to HMRC. This could be income tax, excise duty, VAT, or any other form of tax.

The main point to know about tax evasion is that it’s against the law.

If you’re found guilty of tax evasion you may need to pay up to 200% of the tax due plus additional costs. You might even face time in jail.

What counts as tax evasion?

Tax evasion is deliberate and there are several ways it is committed, covering anything from failing to tell HMRC about cash-in-hand work, to aggressive tax avoidance schemes.

Not reporting your taxable income

This income could be from self-employment, pension income, or rental income to name just three. Essentially, if you have income that hasn’t been taxed at source, you’ll need to tell HMRC about it by submitting a tax return. If you don’t, you could be committing tax evasion.

But this is HMRC we’re talking about, so there’s always an exception. You might not need to report self-employed or property income to HMRC if the total amount you earn from it in a tax year is less than £1,000 – even if you also have other income (such as from employment). You can learn more about the Trading Allowance in our blog.

Cash-in-hand work

If you do work for a customer (or sell them a product) and they pay cash, it can be tempting to simply ‘pocket it’ without recording it for tax purposes. This is illegal, and a common type of tax evasion which is always best avoided. Make sure your income is accurately recorded!

Tax avoidance schemes

These are very specific financial schemes that are structured to deliberately avoid paying tax. Again, we can’t emphasise this enough: tax avoidance schemes can land you in serious hot water, including fines and prison time. Best avoided.

Claiming tax relief on non-allowable expenses

This is where you deliberately claim business expenses that aren’t actually eligible to claim against tax. Sadly, the fear of getting expenses wrong usually means that most people are missing out on claiming for those which are allowable.

It’s one of the many reasons why we’re so keen on meticulous bookkeeping – it makes it much easier to see what the allowable expenses are, and to claim for them accordingly.

Missing trader fraud/carousel fraud

This is where goods are imported, VAT-free, before being sold on to customers with VAT added on. Tax evasion occurs when the VAT is then not reported and paid to HMRC.

Not reporting imported goods properly

By undervaluing or not declaring imported goods on purpose, you’re committing tax evasion by not paying the right import duties.

Identity theft

This is where a person takes on someone else’s identity so they can carry out taxable transactions in their name.

Comprehensive tax return services

From only £24.50 per month

Learn more

What is tax avoidance?

Tax avoidance is a bit different from tax evasion in that it’s not technically against the law, although in some cases it does throw up some moral issues.

Tax avoidance is essentially using a legal tax avoidance scheme in order to reduce the amount of tax you have to pay. This could be by paying extra into a pension scheme for example, which would then work to save tax. This is a really common one and regarded as an acceptable practice.

That said, some tax avoidance schemes, although still legal, are rather more shady. The kinds of practices seen in the Panama Papers leaks showed that although using legal tax havens might not indicate illegal activity, many still consider them immoral, and out of sync with the government’s intentions.

Is tax avoidance legal?

Technically yes but it’s a big grey area, ranging from umbrella payroll schemes to disguised remuneration packages.

What are tax avoidance schemes?

Tax avoidance schemes are often set up as a way for participants to pay less tax than they otherwise would. If you’re found to be in a tax avoidance scheme then you’ll normally receive a penalty as well as paying what you owe.

HMRC are keen to make sure everyone pays the right amount of tax, so you can contact them if you think you might be a tax avoidance scheme and need help.

Umbrella Payroll Schemes (the potentially illegal kind)

Umbrella payroll schemes are pretty common in the UK, and are often used by contractors. Many of them are HMRC compliant and will process your payroll payments correctly, but others can be a bit more sinister so it’s useful to understand how to recognise the difference.

Non-compliant umbrella schemes

Non-compliant schemes can occur when your pay from the umbrella company is divided into smaller payments which go through payroll before being subject to PAYE deductions.

Processing your pay like this means you’re only paying income tax and National Insurance on a much smaller part of your income, leaving a large chunk of the remaining income untaxed. To give you a few examples, you might spot a non-compliant scheme if:

  • You receive larger payments from a different account to the smaller ones
  • Payments come from overseas
  • Your payslip shows the larger payments separately
  • The payments are referred to as a credit, investment, or loan – which is a problem, because it’s not true!
  • The scheme promoter makes claims which sound too good to be true, such as promising you can keep as much as 95% of your pay without needing to pay income tax or National Insurance

Some will even try to convince you that HMRC endorse the scheme, when in fact they don’t. Payments may even be sent through a number of companies before they get to you.

Disguised Remuneration Schemes

Disguised remuneration schemes work to avoid income tax and NI by paying people their income as a series of loans. These loans are then intentionally not paid back, but because they were never meant to be, they should attract tax. Often they are known as disguised remuneration loans.

The loan charge is an anti-tax avoidance measure forming part of the government’s Finance Act 2016, designed to recoup HMRC’s losses that are brought about by disguised remuneration schemes.

On average that year, the amount of tax each person involved in these schemes was avoiding was around £20,000 per year. The loan charge has since meant many people have faced a significant tax bill, forcing many into bankruptcy.

Aggressive tax avoidance

‘Aggressive tax avoidance’ is again something of a grey area. Though frowned on by the government, the case must be heard in court. This is to decide whether the avoidance is manipulating the law in a way that doesn’t represent the government’s intentions towards tax.

Due to the uncertainty surrounding tax avoidance, you should get a legal opinion before you go ahead. If HMRC finds an individual to be aggressively tax avoiding, they may have to pay back all the tax they owe, plus interest.

What is tax planning?

Tax planning is the term used to describe the practice of (legally) minimising how much tax you have to pay. There are plenty of opportunities to save money on your tax bill without breaking the law, such as being tax-efficient in the way that you pay yourself from your own limited company, and claiming tax relief.

Paying into your pension or an ISA are also examples of effective tax planning. The money you then save on your tax can be either spent or invested as you wish.

What’s the difference between tax planning and tax avoidance?

Well, tax avoidance – although not illegal as such – is riskier. With tax planning, there’s no element of deceit, you’re simply using legal tax policies to save money. Think of it like shopping at a discounter rather than a high-end supermarket; a perfectly legal way to try and save money.

What is personal tax planning specifically?

Undertaking personal tax planning can have several elements. For instance, making sure your tax return is completed accurately so there are no errors, and so that you benefit from any tax reliefs, allowances or expenses claims that can reduce the amount of tax you need to pay.

What is corporate tax planning?

Making more money for your business isn’t just about increasing sales. Careful corporate tax planning is just as important.

Corporate tax planning has the simple goal of reducing your liability for Corporation Tax so that your business is more profitable. It can help you get a better grasp of your company’s finances, allowing you to make more informed decisions, for example how to maximise reliefs and tax credits.

After all, if you don’t have accurate records around how much Corporation Tax you’re paying, it’s going to be really hard to know where you can cut your tax and increase your profit.

Why is it important to get professional tax planning advice?

At some point in life many of us will need professional tax planning advice in some way or another. Anyone starting a new job, moving to the UK from abroad, starting or growing a new business, making investments, or planning their estate will want to arm themselves with the facts. Because quite frankly, nobody wants to pay more tax than they have to.

The fact is that tax planning, evasion, and avoidance are all areas of accountancy that can be incredibly complex. It’s extremely easy to fall foul of the law, which is why professional advice is always the best way to avoid sleepless nights at best, and hefty penalties at worst.

Learn more about our great value accountancy services or talk to one of the team on 020 3355 4047. Don’t forget you can also get an instant online quote.

Want to learn more?

Subscribe to our newsletter to get accounting tips like this right to your inbox

What’s the Difference Between Tax Evasion, Tax Avoidance, and Tax Planning? | The Accountancy Partnership (1)

What’s the Difference Between Tax Evasion, Tax Avoidance, and Tax Planning? | The Accountancy Partnership (2)

About The Author

Beth-Anne Bruce

I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.

More posts by this author

As an expert in tax matters, I have a deep understanding of the intricacies involved in tax evasion, tax avoidance, and tax planning. I have hands-on experience navigating the complexities of the tax landscape, and my knowledge extends to the legal frameworks and practical applications of these concepts.

Let's break down the key concepts discussed in the article:

Tax Evasion:

Tax evasion involves deliberately and dishonestly avoiding the payment of taxes owed to HMRC (Her Majesty's Revenue and Customs). It is against the law and can result in severe consequences, including fines, imprisonment, and having to pay up to 200% of the tax due plus additional costs. Examples of tax evasion include not reporting taxable income, engaging in cash-in-hand work without reporting it, and identity theft for taxable transactions.

Tax Avoidance:

Tax avoidance, unlike tax evasion, is not technically illegal, but it raises moral issues. It entails using legal methods, often through specific financial schemes, to reduce the amount of tax an individual or entity has to pay. Examples of tax avoidance include contributing to a pension scheme to save on taxes. While some tax avoidance practices are widely accepted, others, such as those revealed in the Panama Papers leaks, may be considered immoral.

Tax Avoidance Schemes:

Tax avoidance schemes are structured financial arrangements designed to intentionally reduce tax liabilities. Engaging in such schemes may lead to penalties and the obligation to pay the owed taxes. Examples of tax avoidance schemes mentioned in the article include umbrella payroll schemes (both compliant and non-compliant), disguised remuneration schemes involving loans, and aggressive tax avoidance, which may involve manipulating the law in ways not aligned with the government's tax intentions.

Tax Planning:

Tax planning is the legal practice of minimizing the amount of tax an individual or business has to pay. It involves strategic financial decisions, such as being tax-efficient in how income is received, contributing to a pension, or investing in an ISA. Unlike tax avoidance, tax planning does not involve deceit or manipulation; it focuses on leveraging legal tax policies to save money within the bounds of the law.

Personal Tax Planning:

Personal tax planning includes accurately completing tax returns to benefit from reliefs, allowances, and expense claims that reduce the overall tax liability. It is essential for individuals to ensure compliance and maximize tax efficiency.

Corporate Tax Planning:

Corporate tax planning aims to reduce the liability for Corporation Tax, making a business more profitable. It involves maintaining accurate records, maximizing reliefs, and making informed financial decisions to optimize the company's tax position.

Importance of Professional Tax Planning Advice:

Given the complexity of tax matters, seeking professional tax planning advice is crucial. Individuals and businesses may require such advice when starting a new job, moving internationally, establishing or growing a business, making investments, or planning their estate. Professional guidance helps navigate the complexities, ensuring compliance and minimizing the risk of legal issues and penalties.

In conclusion, understanding the distinctions between tax evasion, tax avoidance, and tax planning is essential for individuals and businesses to navigate the tax landscape responsibly and legally.

What’s the Difference Between Tax Evasion, Tax Avoidance, and Tax Planning? | The Accountancy Partnership (2024)
Top Articles
Latest Posts
Article information

Author: Terence Hammes MD

Last Updated:

Views: 6280

Rating: 4.9 / 5 (69 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Terence Hammes MD

Birthday: 1992-04-11

Address: Suite 408 9446 Mercy Mews, West Roxie, CT 04904

Phone: +50312511349175

Job: Product Consulting Liaison

Hobby: Jogging, Motor sports, Nordic skating, Jigsaw puzzles, Bird watching, Nordic skating, Sculpting

Introduction: My name is Terence Hammes MD, I am a inexpensive, energetic, jolly, faithful, cheerful, proud, rich person who loves writing and wants to share my knowledge and understanding with you.