Like you, everyone hates taxes. Though, you are obliged to pay them. Taxes are one of the substantial revenue sources of a state. Most people pay them, but some people try to avoid and evade taxes. As a result, the process of avoiding and evading taxes is known as “Tax Avoidance and Tax Evasion”.
As these terms are used together, people consider them the same. But they are quite different. On legal grounds, we can say that both are opposites. In most cases, tax avoidance is a natural process that is legal. On the contrary, tax evasion is an immoral and illegal practice.
You must have heard about the news of renowned personalities and organizations who do tax avoidance to decrease their tax liability. It is acceptable to some extent, but if practised on a larger scale it becomes a crime. But tax evasion is a great crime that can lead you to penalties and prison. HMRC is preventing tax evasion by implementing various strategies to save billions of pounds of the state.
In this blog post, we’re going to explore the difference between Tax avoidance and Tax Evasion.
Tax Avoidance- Definition:
Tax avoidance is the legal way to minimise the tax through applying various methods. Businesses can also reduce their tax liability through government-funded tax deductions and credits. They can also shelter their revenue from tax through retirement plans and others. This practice is encouraged by the government. But if it is done improperly, it can turn into tax evasion.
Typical examples of Tax Avoidance:
- Using tax allowances and deductions to reduce the tax rate or expenses
- Residing in a different country to pay a lower tax
- Transferring assets to the spouse for a reduced rate of income tax
- Providing property to the children before death to avoid inheritance tax
- Delaying tax payments using tax deferral plan
Tax Evasion- Definition:
Tax Evasion can be called tax fraud or tax offense. It is the process of using illegal tactics to avoid or reduce tax. Businesses and rich people do tax evasion by hiding their actual income or showing the wrong income to the tax authorities. It also includes the process of using fake offshore accounts. Moreover, hiding assets and property is also considered tax evasion. If someone has avoided £25,000 in tax, HMRC may shame the person along with penalties. It can also lead to prison. Hence, it can adversely affect the reputation of any individual and business.
Typical examples of Tax Evasion:
- Reporting income below the actual limit
- Hiding or not reporting any income source or asset
- Providing wrong information to HMRC about income and expense
- Making false transactions in the books and records
- Claiming false and extra expense
- Not paying the tax intentionally
Feeling worried about your business! Don’t know whether you fall under tax avoidance or tax evasion? Our tax consultants and accounting advisors are here to advice.
Tax Avoidance And Tax Evasion-Difference:
We have already discussed the definition and examples of the two. We’re going to differentiate between tax avoidance and tax evasion, dividing them into different sections. The following are the major differences between them:
Generally, tax avoidance is done to reduce or minimise tax. On the contrary, tax evasion is the practice of not paying taxes.
Tax avoidance is legally acceptable while tax avoidance is considered as a legal offence. And tax evasion is not legally authorized.
Tax avoidance is done through finding out the loopholes within the tax system as per the law. On the other side, tax evasion is the practice of breaking the law using illegal ways to eliminate taxes.
How it is Practiced:
Tax avoidance is aimed at availing short-term benefits by doing planning prior to the tax liability. But tax evasion is done after being charged with the tax.
If tax avoidance is done within the limitations of law, there are no legal charges or penalties. But tax evasion leads to penalties and even prison.
Quick Wrap Up:
Now that you know the difference between Tax avoidance and Tax Evasion. So, from now onward, you should do proper planning before paying your tax liability. You should be aware of the tax laws before opting for tax avoidance.
If you’re unaware of the tax regulations and law, be careful while doing tax avoidance. We don’t recommend any of the above-mentioned methods. As tax avoidance may cause tax evasions. Therefore, you need to be very careful before taking any step.
Still, if you’re searching for ways to reduce your tax liabilities, we can help you. Our professional tax expert will assist you to legally reduce your taxes at an affordable rate. Feel free to contact!