Whether you’re rich or poor, an individual or a business, nobody enjoys paying tax. Of course the taxation system serves a purpose that many of us don’t fully appreciate but seeing part of your hard earned money disappear from sight isn’t something that sits well with most people and businesses. As a result some people will go to great lengths to reduce their tax bills and in some cases try to avoid paying tax altogether. In this article we will be looking at the often confusing subject or tax evasion vs tax avoidance. Including how to spot the difference between tax evasion vs tax avoidance.
What Is Tax Avoidance?
- Holding assets such as shares in your spouses name to make use of their capital gains allowance
- Selling off assets before the end of the tax year to make use of unused allowances when those allowances cannot be carried forward
- Holding cash savings in an ISA so that any interest generated in free from taxation
What Is Tax Evasion
Tax Evasion Vs Tax Avoidance – How To Spot The Difference
- Light Tax Avoidance/Planning – Activities in this category would include holding assets in an ISA to legally avoid tax. Transferring assets to a spouse or civil partner to utilise their allowances. Selling shares at the end of a tax year to realise a gain with the intent to repurchase the asset at a later date.
- Heavy Tax Avoidance – Offshore corporations and specifically designed tax avoidance schemes would usually fall into this category.
- Tax Evasion – Understating/concealing income or overstating/fabricating expenses would be classed as tax evasion.
Tax Avoidance Schemes
- Avoiding Income Tax on Pay (Spotlight 11) – “HMRC are aware that people who have used employee benefit trusts (or similar) to avoid paying tax on employment income. These people are being targeted with products designed to shelter funds in current schemes from the effect of tax legislation”
- Gift Aid With No Real Gift (Spotlight 9) – “An avoidance scheme exploiting the gift aid provisions has recently been disclosed to HMRC. The scheme seeks to exploit the rules, which enables a charity to claim a repayment of tax at the basic rate on a qualifying donation by an individual. In the correct circumstances, the individual may claim relief for the donation on the difference between the higher and basic rates of tax”
Spotting A Tax Avoidance Scheme
- It sounds too good to be true – where the reward far outweighs the cost this is often an indicator of a tax avoidance scheme
- Pay in the form of loans – If you are encouraged to take payment in the form of a loan that doesn’t need repaying this is also an indicator of a tax avoidance scheme
- Huge Benefits – Scheme providers often promote huge benefits with little or no risk to your money. This is another indicator
- Round in circles – Where the aim is to move your money round in a circle with it ending up back where it started this can also be an indicator of a tax avoidance scheme
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