Tax avoidance versus tax evasion: What’s the difference? by David Thornhill, MD of Simplicity

Tax avoidance versus tax evasion: What’s the difference?

by David Thornhill, MD of Simplicity

Let’s face it; no one really likes to pay tax from their hard-earned money.  It’s one of those things in life that we accept and pay – funding the country’s vital services, from the NHS to our children’s education – but wouldn’t it be great if the money came from somewhere else instead?  There is a fine line however between illegally not paying tax and deliberately choosing to not pay some of it; Harry Redknapp is particularly familiar with the difference, with a court case for alleged tax evasion currently underway where his financial activities are being heavily scrutinised by the British legal system.

But what is the difference and why do some businesses get it wrong and put themselves in trouble with the law? The difference, I was once told, between tax avoidance and tax evasion can be just the thickness of a prison wall.

In a nutshell, tax avoidance is essentially a legitimate way not to pay tax, or to pay a reduced amount of tax. A classic legitimate example of tax avoidance is investing in an ISA where no tax has to be paid on interest earned.  It’s in the more grey areas that tax avoidance schemes are high on the Government agenda, as they’d like to bring in a much tougher approach preventing large companies and extremely wealthy individuals using lawyers to exploit tax law loopholes to reduce their tax bills.  Tax evasion, however, (excluding errors) sees taxpayers, be they companies or individuals, deliberately hiding the true state of their finances from HMRC in order to reduce their tax bill; they overstate deductions or fail to declare all or part of their income, profits or gains than were actually earned.

As a company which supports temp recruitment agencies with their back office support and financing, we aim to remove the pressures of worrying about tax from our customers by helping them to pay less – the legitimate way – and subsequently improve cash flow.

One method of doing so is by using an umbrella offering, such as ‘gainsimply’, whereby the temporary worker’s payments are treated as though they were an employee of the umbrella, submitting their completed timesheets at the end of each week via an online system, in addition to informing us about any HMRC allowable expenses they wish to set off against income via our SMS TEXT service; we arrange for the issue and invoice the recruitment agency client for payment. A lower sum (income less legitimate allowable expenses) is then paid through PAYE, with the added benefit of payment for such legitimate expenses increasing their ‘take home pay’.  This system is widely being used within the recruitment industry at the moment, as expenses attract tax relief, which enables temporary workers to reduce the amount they pay in income tax and National Insurance in a legitimate tax avoidance way.  It means workers can take home more pay each week, get paid on time (when they work with Gainsimply) and recruitment agencies can enjoy increased margins and better cash flow. Gainsimply makes this legitimate umbrella tax saving solution much easier for agencies and workers than others by the use of text and web based submissions and text payment alerts for mobile workers, as well as the very important funding of the company invoices which ensures that workers get paid on time even when agencies fail to pay on time.

Systems like this are available to help support SMEs in sectors such as recruitment to continue growing, tender for lower margin contracts and increase their own profit.  However, some companies have illegitimately exploited the umbrella travel and subsistence systems in order to pay less tax than they should be which has possibly left the country with billions of pounds in uncollected tax from thousands of companies. Such a case is in the recruitment press as I write, concerning Reed; although it has to be said that Reed intends to appeal the tax tribunal decision.

If you’re unsure about how much tax your temporary workers could be paying, then our experts would love to hear from you and discuss the right finance methods for your business.  For more information visit our website www.simplicityinbusiness.com and please feel free to contact us for a no obligation consultation on 01594546585 or sales@simplicityinbusiness.com.

Otherwise, you can find out more about tax at www.hmrc.org.uk.