Over the past few years, we’ve been inundated with stories about how large corporations like Amazon have been generating record profits whilst simultaneously paying less tax than ever before.
Naturally, with the effects of austerity still being felt throughout the United Kingdom, this leads to public uproar and the introduction of new measures designed to ensure the treasury gets its fair share of tax revenue. The terms ‘tax evasions’ and ‘tax avoidance have also become much more commonplace as a result. Whilst it’s often assumed that these two terms are interchangeable, however, they actually refer to two distinctly different practices.
Contrary to popular belief, tax avoidance is perfectly legal. In fact, many business and individuals engage in tax avoidance as a matter of course.
Rather than simply not paying the taxman his cut, any company or person that engages in tax avoidance is simply utilising existing rules in order to legally reduce their tax bill. If a person has a savings account, for example, their obliged to pay tax on any interest they earn. If they use an ISA for their savings, then they are not required to pay any tax on the interest they accrue. Similarly, companies can use various loopholes to reduce their tax bill.
Should a business claim back their expenses, for example, they are technically engaging in tax avoidance. Organisations can also take advantage of other government schemes that allow them to write off the cost of new equipment or even claim tax relief. Under no circumstances are such companies acting illegally. They are simply taking advantage of rules that have been designed in order to encourage businesses to grow, hire new staff etc. These methods are perfectly legal and are effective ways of making a company more profitable.
Unlike the perfectly legal and, many would say, sensible practice of tax avoidance, tax evasion is illegal. It involves dishonest and duplicitous techniques such as hiding income, using shell companies, filing ‘doctored’ tax returns and even simply not paying HMRC the tax they are owed at all. Put simply, tax evasion is the process of actively trying to deceive HMRC in order to reduce your tax bill and is a criminal act that can lead to a custodial sentence.
Tax avoidance is, to all extents and purposes, a loaded term. It is used to describe perfectly legal practices that exist in order to prevent tax from being overly punitive. At no point will an individual or business that engages in tax avoidance be deceiving anyone. No income is hidden, and everything is above board. More often than not, the money that businesses save from utilising these practices is re-invested into the company.
Tax evasion, on the other hand, is illegal. It involves dishonest practices such as not declaring or hiding income with the intention of paying less tax than is legally required.
Put simply, tax avoidance is a sensible business practice. Tax evasion is not.
If you’d like to find out more about how you can legally reduce your company’s tax bill, get in touch with Countable Accountancy today.