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Tax Tip

Tax avoidance or Tax Evasion?

The recent revelation about the group “Take That” and tax has raised a serious debate about when does tax avoidance become Tax Evasion?

Tax avoidance is not a criminal offence, but tax evasion certainly is.

So what is the difference between avoidance and evasion, and how can you still go wrong with avoidance? The judge in this case explained the difference, but it took 147 pages to do so. But, there are some simple rules to follow, we asked Stuart Coleman, Manager of the Tax Department of ABDS to explain.

“Of course everyone is allowed to avoid paying tax if they possibly can. It is perfectly legitimate - indeed the government encourages us - to save in a tax-free Individual Savings Account, an ISA, for example, which means you do not pay any income tax on the interest you receive, or capital gains tax when you come to sell. You can also save tax by putting money into a pension scheme, donating to charity via the gift aid scheme, or claiming capital allowances on things used for business purposes.

"Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended," according to a spokesman for Her Majesty's Revenue and Customs.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter - but not the spirit - of the law.

According to the latest figures from HMRC, tax avoidance currently costs the taxpayer £4bn a year, while illegal tax evasion costs about £5.1bn. Together, they account for about a quarter of the £35bn that is lost to the Treasury every year, otherwise known as the "tax gap".

If HMRC disagrees with your tax return, you can take them to a tax tribunal, as in the Gary Barlow situation, the court will be looking to decide whether there is any real business going on in such cases, or whether the business is just a means to make a loss, and so reduce a tax bill.

In the majority of cases, those involved in tax avoidance will pay others to help minimise their tax bills. But, if you do get involved in such "aggressive" tax avoidance schemes, you may end up in a protracted dispute with HMRC, and if you lose, you risk having to pay the tax, the interest and penalties as well. In fact, if you conceal facts, or lie about them, you can be judged to be breaking the law, which could result in a fine, or even a prison sentence.

HMRC issue guide lines, but, in essence, follow a couple of simple rules:
If it sounds too good to be true it cannot have been intended when Parliament made the relevant tax law. Or if the scheme involves artificial or contrived arrangements or the scheme involves money going around in a circle, back to where it started.

Avoid them.

If you need any help and advice with your Tax compliance and planning, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help in all your financial planning and business advice.

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

Brilliant with numbers   

Great with people  
Clear and precise with advice
Timely and cost effective 
In touch with issues that face our clients
Mindful of our client’s long term strategic goals

Helping Your Business is Our Business

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