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Tax avoidance versus tax evasion: Whats the difference?

Tax avoidance versus tax evasion: What’s the difference?

Plus reaction to the Autumn Statement by David Thornhill, MD of Simplicity

Let’s face it no one really likes to pay tax from their hard-earned money.  It’s one of those things in life that we accept and pay – funding the country’s vital services, from the NHS to our children’s education – but wouldn’t it be great if the money came from somewhere else instead?  There is a fine line however between illegally not paying tax and deliberately choosing to not pay some of it a topic which has been heavily featured recently in the news with larger corporations (Starbucks for example with their supposed climb down on running the UK operation as a tax loss), regarding how much tax they pay. The Chancellor, George Osborne, also highlighted the issue during this week’s Autumn Statement, as an area that needs greater scrutiny to tackle this problem. So watch this space, it could get interesting especially if the Government sets its sights on SMEs in addition to the juggernauts of the business world.

But what is the difference and why do some businesses get it wrong and put themselves in trouble with the law? The difference, I was once told, between tax avoidance and tax evasion can be just the thickness of a prison wall.

In a nutshell, tax avoidance is essentially a legitimate way not to pay tax, or to pay a reduced amount of tax. A classic legitimate example of tax avoidance is investing in an ISA where no tax has to be paid on interest earned.  It’s in the more grey areas that tax avoidance schemes are high on the Government agenda, as they’d like to bring in a much tougher approach preventing large companies and extremely wealthy individuals using lawyers to exploit tax law loopholes to reduce their tax bills.  Tax evasion, however, (excluding errors) sees taxpayers, be they companies or individuals, deliberately hiding the true state of their finances from HMRC in order to reduce their tax bill they overstate deductions or fail to declare all or part of their income, profits or gains than were actually earned.

In the Autumn Statement, the Chancellor stated that the Government will take more action around tax avoidance than ever before. It was good to hear that prosecutions for tax evasion have increased by 80 per cent, with 2,500 more tax inspectors going after evaders and avoiders, in addition to the closure of hundreds of millions of pounds of tax loopholes this is a great start in tackling this problem, particularly in light of recent news stories, but more needs to be done to clamp down on the dodgy avoidance practices. It’ll be interesting to see how the Government plans to spend the allocated &pound77m to fight tax avoidance for corporate businesses and individuals, and how this will affect businesses who will legally find ways to pay less tax.

It’s also great to hear that more resources and partnerships will be set up to ensure companies are paying their proper share of taxes, but we’d like to see greater clarity in the media about the difference between tax evasion and tax avoidance – especially where offshore businesses are concerned (particularly the latter, which is often a legal practice outside of the mainland UK) – in addition to the difference between payroll funders and payroll/umbrella companies.

As a company which supports temp recruitment agencies with their back office support and financing, we aim to remove the pressures of worrying about tax from our customers by helping them to pay less – the legitimate way – and subsequently improve cash flow.

Systems like umbrella companies are available to help support SMEs in sectors such as recruitment to continue growing, tender for lower margin contracts and increase their own profit.  However, some companies have illegitimately exploited the umbrella travel and subsistence systems in order to pay less tax than they should be which has possibly left the country with billions of pounds in uncollected tax from thousands of companies.


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