What is the difference between tax evasion and tax avoidance?

Tax evasion and tax avoidance can be easily be confused. looks at the difference between the two

Essentially, the difference between avoidance and evasion is legality. Tax avoidance is legally exploiting the tax system to reduce current or future tax liabilities by means not intended by parliament. It often involves artificial transactions that are contrived to produce a tax advantage.

Examples of tax avoidance are: tax deductions, changing one’s business structure through incorporation, or establishing an offshore company in a tax haven. In a recent report, HMRC denounced tax avoiders saying that “a small minority bend or break the rules by deliberately avoiding or evading their taxes – and we are resolute in tackling these people”.

Celebrities such as Jimmy Carr have come under criticism from the media in the past for participating in tax avoidance schemes.

The scheme used by Carr, known as the K2 scheme, meant that wealthy Britons paid less than 1 per cent tax, costing the taxman £168m.

The organisation ‘UK Uncut’ challenges large corporations and businessmen who attempt to avoid tax. Sir Philip Green, who runs the Arcadia group, is among UK Uncut’s targets.

Green does not actually own the Arcadia group, it is instead in the name of his wife, who lives in Monaco and doesn’t pay income tax. In 2005, the business tycoon paid himself a dividend payout of £1.2 billion which was channelled through offshore accounts in the tax haven of Jersey before ending up in his wife’s tax-free bank account in Monaco.

Tax avoidance is not the same as tax planning or mitigation. Tax planning is conduct which reduces tax liabilities without going against Parliament, for instance, through gifts to charity or investments in certain assets which qualify for tax relief. Other examples of mitigation include saving in a tax-free ISA or paying into a pension scheme.

Tax evasion is to escape paying taxes illegally. This is usually when a person misrepresents or conceals the true state of their affairs to tax authorities, for example dishonest tax reporting. In November 2012, HMRC announced that they “will relentlessly pursue those who engage in evasion, with serious consequences for those who don’t pay all the tax they owe, from financial penalties to criminal conviction.” An exception here is Switzerland, where many acts that would amount to criminal tax evasion in other countries are treated as civil cases.

Harry Redknapp, former Portsmouth fooball manager, was tried for tax evasion after it was revealed that he accepted an untaxed bonus from the football club which was paid into an account named after his pet dog, Rosie.

8 comments

  1. My daughter is a student, and what the fashion industry terms ‘petite’, she can therefore sometimes buy ‘children’s sizes’ In doing so she avoids VAT, this is not what parliament intended. If you bought DVDs or games from online retailers such as Game or HMV before April 2012, you got them cheaper because you too were avoiding VAT. By your definition this is avoidance? Or just common sense?

    If Goldman Sachs were to delay paying bonuses until after 6th April, their employees would save 5% on their income tax. Parliament knew this could happen, it always happens when tax rates are reduced. Therefore this is just planning not avoidance?

    The difference between tax planning and avoidance is that “I” do tax planning “other people” are involved in tax avoidance. There is no morality in the tax system, just the law. Tax receipts are low because the economy is stagnating. If the government wants to collect more money it needs to draft legislation properly, and manage the economy. ‘Tax avoiders’ and ‘dole scroungers’ are moral panics designed to deflect attention from the government’s shortcomings.

  2. The recent discussion about tax and our obligation to pay it has often thrown terms like ‘fraud’ around, so I’m very pleased to see an article trying to distinguish tax evasion (fraudulent, unquestionably illegal) and tax avoidance (legal). However, I’m not sure that there is such a clear distinction between tax ‘planning’ and ‘avoidance’, and to that extent I agree with the previous poster. How do we categorise ISAs or VCT/EIS investments? Pension contributions? Salary exchange schemes? . All of these are means of ‘avoiding’ tax. And I don’t see why Amy should think that ‘tax deductions’ are (by implication) always dodgy – though admittedly I’m also unsure what she means; if she means say, claiming work expenses against tax, surely this is OK?

    I’m not convinced that we can easily make a distinction based on ‘what Parliament intended'; at least, I’m not sure that my powers of mind-reading extend that far. If Parliament doesn’t like certain avoidance/planning schemes, it has the power to legislate against them (so perhaps the recent outrage against Starbucks, Amazon et al was directed against the wrong targets?). But until it does, we are thrown back on our individual sense of what is legitimate avoidance, and what is a step too far, and it’s unlikely that we will all agree about this. Of course the demands of morality go beyond the demands of law, but in cases as complex as this we often rely on the law to inform our sense of what is right and wrong.

  3. Taxation is legalised theft backed up with state violence, therefore tax avoidance is a moral duty.

  4. “Tax avoidance is not the same as tax planning or mitigation.”

    Oh, come off it. They’re exactly the same thing in principle: you act so as to minimize your tax bill within existing legal structures. The only difference (or purported difference here) is to do with the amount of money involved. Frankly, this is a tedious semantic exercise (avoidance vs mitigation), the only purpose of which seems to be to allow certain folk to still use the term “tax avoidance” like it’s a dirty word.

    You should at least acknowledge that tax avoidance is the same in principle, whether it’s practiced by multi-national businesses, households, wealthy individuals and poor individuals, and ask the question which underlies all this: when is avoidance acceptable and when is not, i.e. how much money will escape the clutches of HMRC?

  5. 4 Oct ’13 at 8:58 pm

    munoda chimhamhiwa

    tax evasion is a way of tax planning which is legal whereas tax avoidance comes from underground activities which are illegal and constitutes penalties

  6. 7 Oct ’13 at 1:58 pm

    hang_them_all

    fuck the taxman

  7. “Tax evasion is to escape paying taxes illegally.”

    No; it isn’t. That sentence does not say what you think it says. Tax evasion is to illegally escape paying taxes. The difference is subtle but critically important, especially as far as the courts are concerned.

  8. This should be in the business section!

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