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Differences between Tax Avoidance and Tax Evasion

Tax evasion happens when people deliberately don’t pay the tax they should and individuals, firms, trusts and other entities evade the payment of taxes by illegal means.

Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities in order to reduce their tax liability, and includes, in particular, dishonest tax reporting, such as under-declaring income, profits or gains; or overstating deductions. HMRC states that tax evasion is a crime.

By contrast, tax avoidance is generally the legal exploitation of the tax regime to one’s own advantage, to attempt to reduce the amount of tax that is payable by means that are within the law, whilst making a full disclosure of the material information to the tax authorities. Examples of tax avoidance involve using tax deductions, changing one’s business structure through incorporation or establishing an offshore company in a tax haven.

Tax avoidance is often flagged up by the Government as an amoral way of dodging of one’s duties to society, a view seemingly supported publicly by many people. Others view tax avoidance as the right of every citizen to find legal ways to avoid paying too much tax. Tax evasion, on the other hand, is a crime in almost all countries and subjects the guilty party to fines or imprisonment. Switzerland is one notable exception: tax fraud, for example by forging documents is considered a crime, whereas tax evasion, for example by under-declaring assets, is not.

Some people feel they should seek to not pay tax, or part of their taxes, on principle. This has been called Tax Resistance – the refusal to pay the tax for conscientious reasons, because they as ‘tax protesters’ do not want to support the government or some of its activities. These actions sometimes break the law and fall into the category of tax evasion, even if the unpaid taxes are donated to charity. Here, whilst there may be no desire by tax resistors to keep more of their own money, actions like this will almost certainly be seen by HMRC as tax evasion.

The UK authorities use the term tax mitigation to refer to acceptable tax planning, minimising tax liabilities in ways expressly endorsed by Parliament. Such tax avoidance is thought by some to be unacceptable as flouting the spirit of the law while following the letter, albeit not criminal in the way that evasion is. Upholding a difference between mitigation and avoidance relies on a purposive reading of legislation and commentators disagree as to the extent to which this is permissible.

The Government, in the 2004 Budget, announced that ‘promoters’ and users of certain tax avoidance schemes would be required to disclose details of the schemes to the Inland Revenue. The strategy to close down avenues (loopholes) for tax evasion and avoidance, overtly remains a stated priority of the Government and a major reason for greater inter-agency co-operation around tax evasion and avoidance matters, between such bodies as HMRC, the police and the justice system. Are the boundaries between tax avoidance and tax evasion shifting?

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