23rd October 2012 at 9:05am
What is the difference between tax evasion, tax avoidance and tax planning? About 5 years! It’s an old gag – but it is no laughing matter for those facing an HMRC tax investigation.
Nobody wants to pay more tax than is necessary. But where is the line between what is acceptable, frowned upon or will leave you bang to rights?
It can seem complicated, because tax rules change and depend on your circumstances, so what’s acceptable today could land you in hot water tomorrow.
Tax evasion – a criminal act
Deliberately not paying tax which is due is tax evasion. It is illegal and could land you in jail. It is typically as a result of not declaring or under-declaring of income, capital gains or profits.
Tax avoidance – exploiting loopholes
Tax avoidance on the other hand involves exploiting tax loopholes. Although not illegal or deliberate deception, it is outside what was intended by law. The Government have described it as “morally wrong”. It generally involves aggressive schemes with little purpose other than to achieve a tax advantage. With them comes an element of uncertainty of the tax outcome.
It is not just through the courts that HMRC are tackling avoidance. The Disclosure of Tax Avoidance Schemes (DOTAS) rules act as an early warning system. And a new General Anti-Abuse Rule (GAAR) will be introduced to catch abusive arrangements which slip through the net.
Tax planning – the sensible approach
Everyone is allowed to arrange their affairs to take advantage of their exemptions and allowances. Tax planning is exercising options clearly anticipated by law. There is no avoidance or reliance on loopholes in tax planning.
Spreading gains across tax years or passing assets between spouses could double the tax savings. But this not contentious, it’s just sensible planning.
ISA’s and pension contribution are given tax privileged status. Investment bonds benefit from tax deferral on withdrawals of up to 5 per cent each year. By giving incentives to encourage saving it means there maybe less reliance on the state in future years.
The Government are stepping up their efforts to plug the tax gap. That’s the estimated £35 billion gap between what is owed and the amount actually paid each year.
Responsible middle-of-the-road tax planning is clearly the way forward unless you are prepared to wait for HMRC to deliver the punch-line.
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Read more about increasing your tax efficiency on our website.