Paying our taxes is not something we look forward to. It is not simple to work hard and then pay a portion of your earnings to the government. But it is the law, and you must pay as citizens. There are numerous advantages to paying taxes, but people continue to try to defraud the government by failing to do so. Tax evasion and tax avoidance are two comparable concepts that are frequently used interchangeably.

Tax evasion is a crime in many modern countries, punishable by financial fines and even prison time, demonstrating how seriously it is considered. Failure to comply with the law can result in severe consequences for both persons and businesses in the United Kingdom. To stay on the right side of the law, it is critical to understand what tax evasion includes.

When a person or company avoids paying taxes by concealing the true state of their affairs from tax authorities, this is referred to as tax evasion. It includes income tax or VAT evasion, excise duty, and customs duty fraud. Tax avoidance, on the other side, is when a person or firm lawfully exploits the tax system to decrease tax payments, for as by establishing an offshore corporation.

Claiming tax deductions or credits you are not entitled to, willfully underreporting or failing to disclose income, and concealing taxable assets are all examples of tax evasion. Fines, penalties, and/or prison terms may be imposed for tax evasion.

Tax avoidance, on the other hand, is the use of lawful means to lower taxable income or the amount of tax owed. Claiming allowable tax deductions and credits, as well as investing in tax-advantaged accounts such as IRAs and 401(k)s, are frequent strategies.

Under the Criminal Finances Act 2017, which came into force on 30 September 2017, businesses are criminally liable if an employee or an associated person (an agent or another third party) facilitates tax evasion whilst providing services on their behalf.

The Act, built on the existing Bribery Act 2010, already deems it a criminal offense for individuals or businesses to evade tax. Yet, the Act made it hard for the authorities to prove a business had been complicit in tax evasion, and the new legislation got over this problem. Failure to comply with this new law can result in significant financial penalties and even prison time, not to mention serious reputational damage.

This means businesses need to take responsibility and have procedures to protect themselves. If one of your employees or a third party individual (e.g. a consultant) evades tax, you need to be able to prove that you had reasonable prevention procedures in place.

The Difference Between Tax Evasion And Tax Avoidance

The difference between tax evasion and tax avoidance largely boils down to two elements: lying and hiding.

“Tax avoidance is structuring your affairs so that you pay the least amount of tax due. Tax evasion is lying on your income tax form or any other form,” says Beverly Hills, California-based tax attorney Mitch Miller.

For example:

• Putting money in a 401(k) or taking advantage of a tax-deductible donation are perfectly legal methods of lowering a tax bill (tax avoidance), as long as you follow the rules.
• Concealing assets, income or information to dodge liability typically constitutes tax evasion.

Examples of tax evasion

Tax evasion doesn’t require elaborate schemes or dark-alley meetings. Here are a few examples of how it can happen more easily than you’d think.

• 1. Paying for childcare under the table

Paying someone who works for you in cash doesn’t constitute tax evasion, Freyman says. What does, however, is a lack of communication with the IRS and payroll tax payments. You should report the wages you pay on Schedule H and give the worker a W-2 each year, he says. Not sure if that household helper counts as an employee? IRS Publication 926 will help you decide.

• 2. Ignoring overseas income

This often affects people who work or own rental properties outside of the country, Freyman says.

“We’ve heard a lot of times: ‘But my property is not in the U.S. Why in the world should I report any income on it if it’s a rental?’” he says. “That’s one that always gets people. They think just because it’s out of the country, they don’t have to report it.”

• 3. Banking on cryptocurrency

Using virtual currencies won’t get you through any secret loopholes. Cryptocurrencies may be relatively novel, but the IRS already has rules about them: Their transactions are taxable. And sometimes taxpayers overlook cryptocurrency holdings that have increased in value.

“They might get rid of it and not realize that that’s still income,” Freyman warns.

• 4. Not reporting income from an all-cash business or illegal activities

Some of the most common tax evasion cases involve people running cash businesses who pocket money from the cash register without reporting the income, Miller says. “That’s tax evasion,” he says. “That is very, very common — and the IRS knows that’s very common.”

Read Also: In What Ways do Taxes Reinforce The Developing Economies?

Tax evasion also happens when people don’t report income from illegal activities, such as drug dealing or prostitution. (Yes, you have to report that on your tax return.)

Examples of tax avoidance

When it comes to tax avoidance, there are plenty of ways to reduce your tax bill legally.

• Capitalizing on tax-advantaged retirement accounts such as 401(k)s and individual retirement accounts are popular methods of tax avoidance.
• Learn more about the world of tax deductions and credits. You might qualify if you paid for tuition, daycare, medical expenses or even sales taxes. Charitable donations may also help you.
• Your tax prep software or tax advisor can help you find legal options for tax avoidance.

Notable UK Tax Evasion Cases

HMRC’s fraud investigations led to over 600 individuals being convicted for their part in tax crimes in a single year. Their Fraud Investigation Service brings in £5 billion a year through civil and criminal investigations.

Clearly, some individuals will go to great lengths to abuse the system and not pay their taxes. But the convictions show just how seriously the HMRC is taking tax evasion. Prison sentences are getting longer too, and this is likely to continue.

The examples below have a notable trend: tax evasion often occurs with other crimes such as smuggling and money laundering.

1. Fraudulent investment claims

Antony Blakey and John Banyard, directors at Ethical Trading and Marketing, who attempted to steal more than £60m through a fraudulent tax avoidance scheme claiming to invest in HIV research and conservation, were jailed for 14 and a half years.

2. VAT avoidance

A Berkshire-based gang selling illicit alcohol was jailed for more than 46 years. Evidence showed that they stole £34m in VAT and laundered £87m through more than 50 bank accounts in Britain, Cyprus, Hong Kong, Dubai, and other foreign countries.

3. Avoid tobacco taxes

Robert Zduniak was part of an organized gang that processed smuggled raw tobacco in illegal factories. He was tracked down to a Prague hideaway and brought back to the UK to serve an 8-year sentence for his part in a £17m tax fraud.

4. Avoiding fuel taxes

Five people were jailed for 16 years after distributing and selling an estimated 4.8 m liters of illegally mixed kerosene and diesel to unsuspecting motorists, including haulage companies across the South East.

5. Fraudulently reclaimed VAT

A father and son pair were convicted for claiming £1m in VAT repayments after they lied about spending £14 million on building new properties. Stephen Howard, a former Top Gear mechanic, was jailed for helping them flee the UK to Spain.

6. Fake investments

Five tax fraudsters who devised a fake eco-investment scheme as a tax break for wealthy investors were jailed for 43 years. They were also ordered to repay £20m or face another 39 years behind bars and still owe the money.

7. Avoiding tobacco taxes

Dhanji Varsani claimed to be unemployed while driving high-powered vehicles, playing at top golf courses, and enjoying holidays in places like Dubai. He was jailed for nearly 4 years for smuggling almost 7 tonnes of hand-rolling tobacco and failing to pay the £1.2m owed in excise duty.

8. VAT fraud

Fictitious transport firm boss Lee Hickinbottom conspired with his former partner to submit fraudulent VAT repayment claims to HM Revenue and Customs (HMRC) between 2014 and 2017. Hickinbottom was convicted of stealing £1.3m in tax-payers money. Spending included buying property in cash, home improvements, and more than £1 500 in Lego. 

9. Gift aid tax fraud

Dale Hicks, the voluntary treasurer of a charity for an ex-offenders charity (yes, you did read that correctly!), was jailed for 3 years. He had tried to steal more than £330 000 in a Gift Aid repayment fraud to fund a lavish holiday, including a £25 000 cruise.

Famous US tax evasion cases

1. Walter Anderson

Walter Anderson’s case is the biggest tax evasion case in U.S history. The telecommunications entrepreneur was convicted for hiding his earnings through aliases, offshore bank accounts, and shell companies. While on trial in 2006, Anderson admitted to hiding approximately $365 million worth of income. He was sentenced to nine years in prison and issued a fine of almost $400 million in back taxes, fees and penalties.

2. Al Capone

Prosecutors worked for years to build a case against notorious crime boss Alfonse “Scarface” Capone. Eventually, the only thing they could get him on was tax evasion, and in 1931 Capone was sentenced to eleven years in prison and fined $80,000. Capone only served seven years in prison, but it worked to scare other people off not paying their taxes. More than $1 million in unpaid taxes were submitted the year after his conviction.

3. Leona Helmsley

Hotel operator Leona Helmsley and her husband were accused of billing millions of dollars in personal expenses to their business to escape taxes.

Helmsley dubbed the ‘Queen of Mean’, was famously quoted as saying, “We don’t pay taxes. Only the little people pay taxes.” She was convicted on three counts of tax evasion and served 18 months in prison.

What Are The Consequences of Tax Avoidance in The UK?

If you are being investigated for tax evasion, it is quite likely that HMRC has uncovered suspicious abnormalities or contradictions in your tax return or company finances. HMRC receives leads by using a database called ‘Connect,’ which examines enormous volumes of data and generates patterns and reports. HMRC may initiate an investigation based on this information and other sources of information.

The penalties for tax evasion can be financial, criminal, and in some instances both. The majority of cases of tax fraud and evasion are usually dealt with via HMRC’s civil procedures.

HMRC will only prosecute you for tax evasion if the evidence shows that there has been a criminal offense committed and it is in the public interest.   This is called the 2-stage test for prosecutors.  The evidential test and the public interest test. One of HMRC’s objectives, when proceeding with prosecutions, is to act as a deterrent that sends a clear message of their zero tolerance of tax evasion, either individual or corporate.

If you’re found guilty of tax evasion, there is a risk of a prison sentence, dependent on the severity of the tax evasion.

How penalties are determined

HMRC will investigate the reasoning for the underpayment of tax and the amount due. This will result in your tax underpayment case being placed in one of four categories.

These are:

Mistake or misinterpretation

1. If you have made a genuine mistake that has resulted in an underpayment of tax, HMRC will treat it as an honest mistake.  
2. There is unlikely to be any penalty imposed as long as the underpaid tax is paid.

Failure to take reasonable care

1. If a taxpayer fails to take due care when filing a tax return, such as failure to fill in a supplementary form, the HMRC regards it as a failure to take reasonable care.
2. The HMRC regards this as a moderate offense and could result in a penalty of 30 percent of the tax owed.

Deliberate understatement

1. If HMRC concludes tax liability was deliberately understated, it is regarded as serious tax fraud.
2. This could apply if the taxpayer deliberately overstated the level of their expenses or allowances.  
3. Because this is treated as tax fraud, it could result in a tax evasion penalty of up to 70 percent of the tax owed.

Punishment for not declaring income

1. The most severe tax evasion UK penalties that can be charged are for deliberately misleading HMRC when completing a tax return and then taking steps to hide, or attempt to hide the fraud.
2. It might apply if relevant documents have been destroyed or money has been moved to offshore bank accounts.  This type of fraud can result in penalties up to 200 percent of the tax due.