Understanding Tax Evasion vs Tax Avoidance in the UK: The Art of Not Taking Things Too Far


Some sage advice for business owners

Key takeaways

The subtle legalities: tax avoidance & tax evasion in the UK

The consequence of crossing the line

Identifying red flags in tax schemes

The role of umbrella companies in tax affairs

How much tax should you really pay

Navigating offshore accounts and international tax laws


Frequently asked questions

Dealing with the UK tax system requires understanding the distinct lines between tax avoidance and tax evasion. Avoidance is about using legal means to lower your tax bill, whereas evasion involves illegal tactics that can land you in significant trouble.

Throughout this article on tax avoidance vs tax evasion, we explain these concepts by outlining what’s allowed and what is against the rules or outright illegal, so you’re informed enough to make the right tax decisions.

But before we really get into the definitions and examples I’ll start with…

..Some Sage Advice for Business Owners

Beware of Ethical Fading!

You might be surprised to hear that not every hardened criminal started out that way, quite often they made a mistake, didn’t fix it, and then realised that no one noticed. It can sometimes be very easy to get away with the little crimes and then progress to the bigger ones, business owners need to have strong ethical awareness.

Quite often you won’t realise how much trouble you’re in until it’s too late, but even then you always have the opportunity to come clean and make a deal with the authorities, an early voluntary disclosure gives you a lot of reputational credit in the UK.

Need Some More Advice?


Have some Credibility!

Aggressive tax avoidance is not going to serve you well in your business and the most successful business owners I know have come to terms with the fact they will need to pay some tax and have learned to celebrate the profits that led to the bill.

Tax loopholes take time to identify and understand, this is energy that can sometimes be better spent elsewhere. But with that in mind, many of them do exist to encourage certain business activities that are in the national interest, which is why the spirit in which you use them is important.

The challenge with tax loopholes is that they can be closed retrospectively, which means that what is legal today might be deemed an abuse of the system tomorrow with legislation allowing HMRC to recover taxes and penalties from when you started using it. There are very few areas in English law that operate like this, but tax is one of them.

Key Takeaways

  • Tax avoidance is the legal act of minimising tax liabilities through legitimate strategies, whereas tax evasion is the illegal act of deliberately misrepresenting or concealing information to reduce tax bills, potentially leading to severe penalties including fines and imprisonment.

  • Effective tax planning involves utilising legal tax reliefs and strategies such as taking the right dividends and salary, investments in ISAs or utilising pension schemes, while aggressive tax avoidance or evasion can lead to significant legal consequences and financial penalties.

  • HMRC takes a strong stance against tax evasion and aggressive tax avoidance schemes; individuals and businesses are encouraged to report suspected fraudulent activities and ensure tax advisors and umbrella companies are reputable and compliant with UK tax laws.

  • While tax evasion is outright illegal, aggressive tax avoidance is also a serious issue which is often caused when people use the letter of the law, but not the spirit in which it was intended to gain a financial advantage.

  • Typically aggressive avoidance would involve taking actions that serve little or no purpose from a commercial perspective, for example hiring a family member at a much higher than market value salary just to use up their personal allowance.

The Subtle Legalities: Tax Avoidance and Tax Evasion in the UK

Illustration of tax avoidance and tax evasion concepts

It’s crucial to understand the difference between tax avoidance and tax evasion. While both strategies aim to reduce tax liability, their legality differs significantly.

Tax avoidance involves using legal strategies to reduce the tax owed, such as exploiting legal loopholes or using deductions and credits. However, it’s worth noting that while it’s legal, it can still be penalised by HMRC.

On the other hand, tax evasion involves illegal activities like:

  • concealment of income or information from the HM Revenue and Customs (HMRC)

  • failure to declare income or assets

  • deliberate misrepresentation of financial information

  • forging invoices

Tax evasion is regarded as tax fraud. It’s a criminal offence, and those found guilty can face severe penalties, including hefty fines and imprisonment. Therefore, understanding these differences is crucial to ensuring compliance with UK tax laws.

The Thin Line Between Avoidance and Evasion

Now that we have a basic understanding of tax avoidance and evasion, let’s delve a bit deeper into avoidance vs tax evasion.

Is tax avoidance legal?

While tax avoidance is legal, people are often lulled into a false sense of security because they don’t understand the raft of measures HMRC have at their disposal to counteract compliant abuse of the tax laws. Common methods include exploiting financial arrangements and taking advantage of legal loopholes not anticipated by tax legislation.

The HMRC reserves criminal investigation and prosecution for severe cases of tax misconduct to emphasise the seriousness of tax evasion and serve as a deterrent for others. It’s a fine line between avoidance and evasion, but crossing it can have severe consequences.


There is legislation relating to the disclosure of tax avoidance schemes that deals with the abuse of certain government reliefs or an offshore company being used to bend the tax rules.

Quite often HMRC are aware of the schemes that are being sold to tax payers, but they don’t immediately have the time to investigate them, so they are issued with a DOTAS number.

The wrong type of endorsement

Often the providers who are selling these tax avoidance schemes advertise a DOTAS number as a benefit of the scheme in order to prove its legitimacy. Tax payers need to understand that this is a highly unregulated industry and having a DOTAS number guarantees an investigation and penalties, it is certainly not a good thing.

Scheme Providers

In the UK, there is no regulation of tax avoidance schemes and when you consider how much money HMRC make from taking legal action and imposing penalties on tax payers, it is clear why there is little appetite to do it.

Ultimately a scheme provider will get off Scott free or hide behind their terms and conditions while the tax payer is left to pick up the pieces, often for infractions they didn’t willfully commit.

Legality of Tax Avoidance Strategies

We’ve established that tax avoidance is legal, but what strategies are allowed? A few common tax avoidance strategies are using an Individual Savings Account (ISA), contributing to pension schemes, and claiming work-related expenses. These strategies are legally sanctioned and provide tax relief.

Some strategies for minimizing tax liabilities include:

  • Utilising the Annual Exempt Amount to avoid Capital Gains Tax (CGT)

  • Transferring assets between spouses or civil partners to reduce taxation

  • Incorporating as a limited company to take advantage of lower dividend tax rates compared to other personal tax rates

Effective tax planning allows for the legal minimisation of tax liabilities, ensuring adherence to tax laws while maximising personal or business earnings.

The Consequences of Crossing the Line

Illustration of consequences of tax evasion

If entities or individuals are found guilty of tax evasion, they can face unlimited fines, and imprisonment for up to seven years. If you provide false documentation to HMRC, you could face a six-month prison sentence or a maximum fine of £20,000.

It’s important to ensure all documentation provided is accurate and truthful as in the worst cases, certain tax evasion related crimes can result in a life sentence, especially in situations where HMRC have been cheated

Perhaps one of the most significant recent changes to UK tax law is the Criminal Finances Act 2017. Under this act, businesses in the UK can be criminally charged and face unlimited fines if they fail to prevent employees or associates from facilitating tax evasion or if they fail to detect tax evasion by their suppliers.

This significant shift in liability has placed a greater responsibility on businesses to ensure compliance with tax laws.

From Fines to Freedom Loss: Penalties for Evasion

It’s clear that the penalties for tax evasion are severe. Entities can face unlimited fines, their director’s can be imprisoned for up to seven years, and either can be required to pay up to 200% of the total tax due.

Summary convictions for tax evasion offences, such as income tax evasion or VAT evasion, can lead to a 6-month jail sentence or fines ranging from £5,000 to £20,000. When tried in a Crown court, these penalties can escalate to up to 7 years imprisonment or an unlimited fine.

Common forms of tax evasion include:

  • Not charging VAT when necessary

  • Failing to pay VAT or PAYE deductions to HMRC

  • Smuggling goods liable to excise duty

  • Operating a business off the books

  • Misreporting personal expenses as business expenses.

When Tax Planning Becomes Tax Fraud

Tax planning can sometimes blur the line with tax avoidance and even cross into tax fraud. High-profile cases, like those involving pop star Gary Barlow and comedian Jimmy Carr, have brought aggressive tax avoidance schemes like Icebreaker and K2 into the spotlight. These schemes, which were deemed tax fraud after being shut down by HMRC, reduced tax liability beyond what was intended by Parliament.

Common aggressive tax avoidance schemes involve misrepresenting payments as non-taxable loans, annuities, or bonuses, when in reality they attract Income Tax and NICs. Contractors and freelancers are at risk of being implicated in tax fraud if umbrella companies they engage with claim to legally increase take-home pay through complex tax avoidance schemes, causing potential liability for unpaid taxes and NICs. It’s crucial to differentiate between these schemes and legitimate tax deductible business expenses.

Identifying Red Flags in Tax Schemes

While the lure of lower tax bills can be enticing, it’s crucial to be able to identify red flags in most tax avoidance schemes. Some warning signs of tax avoidance schemes include:

  • Deceptively low tax bills, which may tempt individuals to avoid paying tax

  • Minimal taxpayer effort

  • Involvement of complex transactions

  • High promoter fees

Specific red flags can be spotted in employment contracts lacking details on income payment and deduction, offering cash for referrals, or requiring signatures on multiple contracts. Tax avoidance schemes can manifest in payslips that do not match actual bank deposits and may include unexplained extra payments.

Upon suspecting a tax avoidance scheme, it is urgent to contact HMRC immediately, seek guidance, and be ready to settle any underpaid taxes.

Distinguishing Genuine Advice from Schemes

Genuine tax advice should be based on transparent transactions with a clear commercial intent and should not consist of contrived schemes created solely for tax benefits. Qualified, independent tax advisers who are members of regulated professional bodies provide reliable and genuine tax planning services. Be cautious of misleading claims, such as tax schemes being endorsed by HMRC or guarantees of increasing take-home pay, as they can be indicative of non-compliant advice.

Aggressive tax avoidance techniques like using fake offshore accounts or hiding assets should raise alarms for individuals evaluating tax advice. Individuals should thoroughly research tax advisers and schemes, and should seek independent advice before entering into tax avoidance schemes simply to minimize their tax liability.

Reporting Suspicious Activity

If you suspect you’ve come across a fraudulent tax scheme, it’s crucial to report it. Tax evasion and avoidance issues can be reported through the government website by completing an online form or by forwarding suspicious emails to phishing@hmrc.gov.uk. There is also a dedicated HMRC fraud hotline for those who cannot use the online reporting service.

When making a report, your personal information is kept private and confidential. It’s important not to probe further into the fraud or alert anyone, including the suspected party, that a report is being made. To prevent involvement with non-compliant entities, HMRC publishes lists of named tax avoidance schemes and their promoters, enablers, and suppliers.

Contractors should check if an umbrella company has a government-assigned scheme reference number (SRN) identifying it as under investigation for tax avoidance.

The Role of Umbrella Companies in Tax Affairs

Umbrella companies play a significant role in the UK. They are typically used by recruitment agencies to:

  • Manage payroll for temporary workers

  • Handle PAYE taxes

  • Ensure that contractors pay the correct, legal amount of tax and National Insurance contributions (NICs).

Contractors can verify the compliance of umbrella companies with HMRC by selecting companies accredited by professional bodies like the Freelancer & Contractor Services Association (FCSA). This ensures adherence to regulations and the protection of workers’ employment rights.

Umbrella Companies

There are a few red flags to watch out for. The presence of an ‘enhanced’ pay scheme option from an umbrella company is likely a form of tax avoidance and should be recognised as a red flag. Non-compliant umbrella companies might promote tax avoidance by claiming to offer a ‘legitimate’ or ‘tax efficient’ way to keep more of your income by reducing your tax bill.

It’s crucial to check that the umbrella company is making correct payments for your Income Tax and National Insurance contributions, pension, and any student loan repayments. You should also compare your payslip amounts with your corresponding personal tax account, student loan repayment account, and pension accounts.

Ensuring Compliance with National Insurance Contributions

A legitimate umbrella company processes pay with deductions for PAYE, National Insurance Contributions, and possibly other contributions, to comply with UK tax laws.

There are many tax calculators online where you can enter your pay and it will give you your take home amounts and tax amounts, these can be a useful tool when it comes to sense checking if you’ve had the correct tax deducted.

How Much Tax Should You Really Pay?

You might be wondering, “How much tax should I really pay?” To answer this question, we need to consider various components of income, apply reliefs and allowances, compute the tax on each income component, and adjust for any applicable tax reducers or additional taxes. This process will help you determine the correct amount to pay income tax.

Key deductions from income components include the personal allowance and the blind person’s allowance. Income considered for tax includes employment, pensions, social security benefits, trading or business income, property income, savings, dividends, and other miscellaneous sources.

UK income tax rates for the tax year 2023 to 2024 include a basic rate of 20%, a higher rate of 40%, and an additional rate of 45% with respective income bands.

Understanding Your Tax Bill

Understanding your tax bill is not as daunting as it may seem. It includes identifying all components of your income, such as wages, bonuses, and other forms of compensation. After identifying income components, it’s important to apply relevant reliefs and allowances, which can legally reduce your taxable income.

Calculating the tax involves:

  • Applying the correct tax rates to the remaining income after reliefs and allowances have been taken into account

  • Considering any tax reducers, which could lower the tax bill

  • Understanding additional amounts of tax due, potentially arising from other taxable sources or circumstances.

Tax Efficient Planning vs. Avoidance

Tax planning involves reducing tax liability through legal means, such as investing in Individual Savings Accounts (ISAs) or utilising other tax breaks. Good tax governance in businesses involves minimising tax liability by leveraging government resources and frameworks, including allowances, deductions, rebates, and exemptions, all while responsibly paying tax.

Tax efficient planning involves utilising tax reliefs, allowances, and reducers within the legal framework to minimise the tax liability, while tax avoidance involves bending or stretching the rules to reduce tax.

Tax planning focuses on the future and serves long-term or short-term gains, whereas tax avoidance, though similar in nature, typically yields short-term benefits and should be distinguished based on legality and features to avoid complications and penalties.

Navigating Offshore Accounts and International Tax Laws

Photo of offshore accounts and international tax laws

Offshore accounts, often associated with tax avoidance schemes and tax evasion, actually serve many legal purposes. They not only allow saving money and conducting transactions in different currencies but also promote global business expansion, investments, and growth.

However, the use of offshore tax havens can deprive governments of tax revenue and harm the economy of the account holder’s home country, thereby affecting public services and creating unfair competition among businesses.

UK residents often hold offshore accounts in the Crown Dependencies of Guernsey, Jersey, and the Isle of Man, as well as in Monaco, Switzerland, and Liechtenstein.

The Legality of Offshore Banking

While offshore banking can be entirely legal, the establishment of an offshore company in a tax haven to exploit tax system loopholes is considered tax avoidance. However, investing in offshore pensions such as QNUPs (Qualifying Non-UK Pension Schemes) can provide tax advantages like exemption from Capital Gains Tax and Inheritance Tax.

Exempt Property Unit Trusts (EPUTS) offer a way to invest in property with unique tax advantages, exempting them from all UK taxes.

Risks Associated with Offshore Tax Havens

While offshore tax havens may offer certain benefits, they also come with considerable risks, including:

  • Significant loss of tax revenue for governments

  • Perpetuating income inequality

  • Financial instability

  • Limited protection

  • Legal and reputational hazards

  • Diminishing effectiveness due to international crackdowns and treaties.


Remember, tax planning should be based on transparent transactions with a clear commercial intent, and it’s crucial to identify red flags in tax schemes.

While offshore accounts can serve many legal purposes, they also come with considerable risks. It’s always recommended to seek professional advice when navigating these complex issues.

Frequently Asked Questions

What is the difference between tax avoidance and tax evasion?

Tax evasion involves hiding income or falsifying records and is illegal, while tax avoidance involves using the system to decrease tax liabilities by exploiting the rules and legislation.

What is worse tax evasion or tax avoidance?

Tax evasion is worse than tax avoidance because tax evasion is illegal, while tax avoidance is legal to a certain extent. So, while both involve minimising the amount of tax paid, tax evasion involves breaking the law, whereas tax avoidance does not.

What is the penalty for tax avoidance in the UK?

In the UK, the penalty for aggressive tax avoidance is usually a proportion of the tax lost to HMRC, plus interest charges. It is worth noting however, that if HMRC take you to a tax tribunal then there are also many other costs involved that you probably can’t recover.

What is a real life example of tax avoidance?

A real-life example of tax avoidance is when individuals or businesses use legal strategies such as exploiting loopholes in the tax system to reduce their tax liability, as stated by the UK government website.

What are some red flags in tax schemes?

Be wary of tax schemes that involve unusually low tax bills, require minimal effort from the taxpayer, use complex transactions, and charge high promoter fees as they could indicate tax avoidance.

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