What’s the difference between tax evasion and tax avoidance?
Celebrities and sports stars alike have been in the news in recent years, hitting the headlines for their tax avoidance in the Paradise Papers, amongst other reports.
But they haven’t done anything illegal. We will leave you to decide the morality of it, but the legality is quite clear. Tax avoidance is different to tax evasion.
Tax avoidance is working within tax laws and HMRC legislation to legally minimise the amount of tax you pay. This can include claiming allowances and reliefs you are entitled to, or structuring your affairs to meet certain set criteria for tax breaks.
Tax evasion is deliberately avoiding tax illegally. If you tell HMRC you have taken dividends of £30,000, but know full well that you have actually taken £50,000, or if you tell them that you have no property income when you rent a flat to tenants, or say that you have no interest on savings when you have a hidden bank account, then you are EVADING tax and what you are doing is ILLEGAL.
Financial advisers, like accountants, are bound by their governing bodies to do the best they can for their clients, and that means getting the biggest returns whilst paying the minimum tax.
It’s very likely that the celebrities in question knew very little of where their money was going or invested on their behalf, and although it could be argued that they should have known or taken more of an interest, does that happen in reality?
Do you know with any certainty where your pension fund is invested? Are you absolutely sure it’s not invested with companies that use sweat shops or test on animals? We are not arguing the morality of these businesses, but they certainly will attract criticism from some, whatever your own personal opinion.
Being famous certainly puts them in the firing line, but maybe we shouldn’t be so quick to pull the trigger. If the tax rules allow for abuse then they need changing.
If you unsure whether something is avoiding or evading tax then check with your accountant or tax adviser.