What is tax evasion, and how can I avoid it?

Make sure your business is tax compliant: learn about tax evasion and why you need to be mindful to avoid it while managing your business’ accounts in this article. 

We’ll cover the essential aspects of tax evasion, the risk it presents to your business, and how you can avoid it in the first place. Discover:

• What is tax evasion?
• What sort of taxes can be evaded?
• How HMRC can suspect tax evasion
• How to stay tax compliant using Countingup

Whether you’re a sole trader or limited company, don’t let mistakes in your tax returns appear as tax evasions. Learn how to stay within the law and how Countingup can make managing this easier below.

Tax evasion is defined as the deliberate attempt to not pay tax amounts that are legally owed and is a crime for tax due in the UK. People who commit tax evasion can face penalties or criminal convictions with imprisonment.

Tax evasion presents a serious and ongoing problem for HMRC and Treasury as it creates a shortfall in how much the UK government can use for investment. Currently, the tax ‘gap’ (the difference between what should be paid and what is) is calculated at a staggering £31 billion. 

While not all of this figure is from tax evasion (some comes from tax avoidance or simple mistakes in paperwork), there are still billions of pounds left unfairly uncollected.

Tax avoidance is a similar concept wherein tax obligations are minimised using legal measures, like certain accounting methods or loopholes in tax law. Generally speaking, tax avoidance is where the rules are bent, while tax evasion is where the rules are broken.

The tactics used to reduce tax payments are often superficial and only mask business activity that should have taxes applied. Therefore, just because avoidance methods are technically legal, HMRC still disapproves of them and will target individuals and businesses who practice them for payment.

In general, the terms tax avoidance and tax evasion are loosely defined. Although we’ve previously mentioned that one is illegal and the other isn’t, there is often a blurred line between the two. 

Therefore, as you are managing your business’ finances and tax liability, you should keep in mind where your efforts to claim expenses or list assets may stray into riskier legal territory. We discuss what to watch out for and how you can protect yourself in a further section.

Evasion tactics for tax payments can be applied to any number of UK taxes. These can include more well-known taxes like income tax and national insurance, VAT, corporation tax and capital gains tax. However, they can also include more niche tax examples like Air Passenger duty and Landfill tax.

Tax evasion doesn’t always have to involve complex accounting methods or innovative applications of tax law. While this can be the route that some choose to take when evading their taxes, instead, tax can simply be evaded by not declaring income or through careless paperwork mistakes. 

Therefore, tax evasion presents a complex problem: how can HMRC detect examples of evasion in tax return paperwork or in transitions it isn’t aware of?

HMRC uses a number of tools when seeking to measure examples of tax evasion. Some are fairly simple, while some have cost thousands of pounds to develop.

• Connect: HMRC has a powerful data analytics tool that cross-references transaction data and tax paperwork, finding examples of non-compliance like needles in haystacks. 
• International cooperation: HMRC has agreements and networks with countries and banks all over the world. Therefore, where individuals and businesses seek to hide money off UK shores, HMRC can still see it.
• Collaboration with other government departments: records of business activity can appear on other public registers even if HMRC don’t have income records associated with it. These can include landlord registers and taxi licences. HMRC uses these to make sure people are declaring business activity.
• Social media and lifestyle investigations: HMRC uses other publically available data, even if it isn’t run by the government, including social media. They seek to find examples of more lavish lifestyles than the tax paperwork should afford.

Recently, a new initiative to close the tax gap has been launched called Making Tax Digital (MTD). It aims at making accounting records for businesses more accurate and transparent: tackling everything from tax evasion to simple mistakes in one system.

MTD applies to a growing number of businesses as the initiative expands and the deadline for signing up approaches. To find out if your business is affected by MTD and the benefits that accounting software can bring to your business more generally, read our article What is Making Tax Digital?

Staying on the right side of tax law should be the least of your worries – setting up and growing a business is hard enough. However, simple mistakes in paperwork can cause problems with HMRC if left unchecked.

While we can’t replace a professionally accredited accountant, Countingup can help you take care of your business finances. Built for small business owners, the Countingup app is the two-in-one business current account and accounting software. It automates time-consuming bookkeeping admin, giving you more time to focus on growing your business.

Countingup provides key business features like tax estimates from your trading and handy tools like automated invoicing and real-time profit and loss data. Countingup also comes with a receipt capture feature so you can update your records on the go and can be sent to your accountant with the touch of a button.

Gain complete confidence in your new business’ financial records. Find out more about Countingup here and sign up for free today.