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.