Tax avoidance is legal, tax evasion is illegal.
Over the years the difference between the two has been blurred. Sometimes tax avoidance can result in tax evasion when the scheme “does not work” for technical reasons or it has been incorrectly implemented.
Taxpayers may have previously subscribed to a tax avoidance scheme and now wish to extract themselves from it in order to give some certainty in their tax affairs.
Why do people commit tax avoidance?
The amount of tax we all pay depends upon the type of income received in each year. Deferring the income being received into a different year where the tax rate is lower can save the amount of tax to be paid to HM Revenue & Customs (HMRC). A number of tax avoidance schemes have been developed that seek to achieve this position.
Some schemes have been accepted by HMRC, some have not. Those that have not are being challenged by HMRC under their Litigation and Settlement Strategy.
Why do people commit tax evasion?
Some taxpayers refuse to pay the amount of tax that they owe and embark on ways of deliberately concealing their income from the tax authorities.
A taxpayer may not set out to commit tax evasion but simply makes a mistake. If the mistake goes undetected, matters can then be compounded by deliberately repeating the action in the belief that they will not be discovered.
Why is HMRC targeting tax avoidance?
Some tax avoidance is seen to be “aggressive” by HMRC. HMRC will sometimes consider there to be a fine line between tax avoidance and tax evasion. All the relevant facts need to be established before any considered view can be made.
If a scheme is “contrived” or “artificial”, HMRC will make a challenge. There are many tax avoidance schemes being challenged by HMRC including Employee Benefit Trusts and Film Partnerships.