Avoid it or evade it What’s the difference?

We really need to make sure that we use the correct terminology when discussing tax, particularly in relation to tax avoidance and tax evasion. It’s really quite simple. Tax avoidance is legal and tax evasion is not. Tax avoidance is about arranging your affairs in such a way that you pay as little tax as possible. Tax evasion is about hiding your income and your assets from HMRC so that you don’t pay any tax on it them possible, or as little as you can.

An ISA is a tax avoidance scheme. You can take money out of your bank account, where you pay tax on the interest, put it in an ISA, within limits, and not pay tax on the interest. That’s tax avoidance.

A pension is a tax avoidance scheme. You can take some, or all, or your earnings and pay them into a pension. You will get tax back on the money you pay in, the fund can grow pretty much tax-free, and you can get some of it back as a tax-free lump sum. That’s tax avoidance.

No-one, or very few of us, would suggest that the government does away with pensions or ISAs.

But at the deep end tax avoidance and tax evasion are very similar beasts, practiced by wealthy individuals and corporations with a view to paying as little tax as possible.

The Government muddies the water because it criticises some of those who arrange their affairs in such a way as to minimise their tax bills. But these people are not breaking the law. Their accountants and advisers might be working at the margins but, by and large, they are working within the law.

We’re told that HMRC need to crack down on tax avoidance when in fact it doesn’t. How can you ‘crack down’ on something that is legal? What needs to happen is that the Government needs to stop people not paying tax. They need to change the law so that what is currently tax avoidance becomes tax evasion, and they need to prosecute those that are guilty of it.

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