Sunday 9 October 2016

Tax Avoidance vs Tax Evasion

Tax Avoidance vs Tax Evasion

Tax Avoidance and Tax Evasion are two different terms that are related to paying taxes. It is totally your own responsibility to paying taxes and declare your taxes to the HMRC.

Tax Avoidance: Tax avoidance is the use of legal methods to modify an individual's financial situation to lower the amount of income tax owed. This is generally accomplished by claiming the permissible deductions and credits. This practice is different from tax evasion, which uses illegal methods, such as underreporting income to avoid paying taxes. Recent Panama Paper scandal is an example of tax avoidance methods.

Tax Evasion: Tax evasion is an illegal practice where a person, organization or corporation intentionally avoids paying their tax liability. Those caught evading taxes are considered to be criminal charges and substantial penalties.

Saving into an ISA or pension may be encouraged by HMRC, not all methods of tax avoidance are condoned. If HMRC disagrees with how you've reduced your tax bill it can demand you pay the extra tax back plus the interest and penalties.

This is what happened to pop star Gary Barlow. He and many other celebrities invested in Icebreaker, a scheme that was supposed to buy up intellectual property rights to generate income. In fact very few rights were bought and most of the money just circulated in a closed circle within the scheme, generating paper losses that investors could use to offset against their profits elsewhere for tax purposes. HMRC disapproved of Icebreaker and after a legal battle hefty tax bills landed on the doormats of all the celebrities involved – Gary Barlow alone is believed to have had to pay back millions.

Lord Fink has been accused of tax avoidance by moving shares into family trusts. In the past Ed Miliband successfully avoided tax by using a loophole known as a 'deed of variation' to change his father's will posthumously to minimise the inheritance tax bill.

There are many shades of tax avoidance, but it is not illegal as long as you are open about it. But, if HMRC thinks you've gone to far you'll have to pay the tax back. As mentioned earlier difference with tax evasion is that it is illegal. It is where you deliberately break the rules and deceive the taxman about what your tax bill should be.

HSBC embroiled in a tax evasion scandal as it has been revealed that back in 2007 it was helping clients hide money in offshore accounts in order to evade paying tax.

In 2014 an eBay trader was convicted of tax evasion and sent to prison for two years for failing to pay tax on income he made trading on the website.

Other examples of tax evasion are failing to file a tax return, not declaring your full income or hiding taxable assets. Get caught evading tax and you could be sent to prison for up to 10 years.



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