Tax avoidance vs tax evasion: which one is legal and can help to reduce your corporation tax?

Ever wonder why Amazon has only paid £290m tax to the HMRC on the hefty £14 billion of revenues in 2019/2020 tax year? It’s only 2% of their sales. It can seem the answer is simple – the corporation tax is based on profits, not revenues. In addition, the Corporation Tax can be proactively reduced by companies, for example by investing in the infrastructure.

Similarly, it can work for the small businesses, like sole traders, contractors or limited companies. You always have some ways to use your revenue tax efficiently, and legally.

But there is a difference between tax avoidance and tax evasion. One is illegal, the other is legal, though arguably less acceptable by a wider society when done on a larger scale.

So what is the main difference between tax avoidance and tax evasion?

Let’s put it simple – Tax avoidance is legal and tax evasion is not.

A lot of people already do tax avoidance by having an Individual Savings Account (ISA), or paying some earnings into their Pension pots (like SIPP), which is a legal way to reduce you income tax. Businesses and sole traders can decrease their tax bill by claiming business related expenses, which is perfectly legal and the right way to do business.

Of course, some people might be pushing things too hard and engaging in the “aggressive tax avoidance” that can be challenged by HMRC via investigation. This could potentially lead to a hefty penalty on the top of the tax repayment.

Tax evasion on other hand is illegal. A typical example could include not reporting all of your income, or not filing a tax return at all; using fake offshore accounts or hiding taxable assets from HMRC. As you can guess, this is a criminal offence, so you could be “named and shamed“ by HMRC, if you have avoided more than £25,000 in tax, which will impact the reputation of you and your business and then affect sales, and can potentially lead to an actual prison term.

Determining which one applies

There is sometimes a fine line between tax avoidance and tax evasion, so it can sometimes be difficult to determine which one each case falls under. An accountant can give you more advice and make sure you’re doing everything legally. A good accountant should advise you how to utilise all legal routes to maximise your allowances and reduce your tax bill in the legal but most tax efficient way.

Most people think they are paying too much Corporation Tax. Ofter we are able to prove them right. You can rely on our team to advise on company tax, personal tax and R&D Tax credits whilst ensuring that you stay compliant with HMRC and tax deadlines. We can register your business for all the applicable taxes as part of our company formation service and take care of all tax filings.

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