Tax avoidance vs tax evasion: what's the difference?

The short answer

Tax avoidance bends the rules to gain an advantage Parliament never intended, while tax evasion means deliberately not paying tax that is due and is illegal. When comparing tax avoidance vs tax evasion, remember that an avoidance scheme that fails can still leave you owing tax, penalties and interest.

Tax planning, tax avoidance and tax evasion

Tax planning uses reliefs and allowances as Parliament intended, for example claiming allowable expenses or paying into a pension.

Tax avoidance bends the rules to produce a tax advantage they were not meant to give, often through artificial transactions with little or no other purpose.

Tax evasion is deliberately not paying the tax you owe. Looking at tax evasion versus tax avoidance, the deliberate failure to pay tax due is what makes evasion illegal.

"Tax dodger" is an everyday phrase; HMRC's terms are avoidance and evasion.

See GOV.UK's definitions of avoidance and evasion.

What counts as tax evasion

HMRC's examples of tax fraud include:

• Deliberately submitting false tax returns.
• Falsely claiming tax repayments or reliefs.
• Hiding income, gains or wealth offshore.
• Smuggling taxable goods.

These examples come from HMRC's approach to tax fraud.

Warning signs of an avoidance scheme

Pause if an arrangement has any of these features:

• It sounds too good to be true.
• You are paid through loans or other untaxed payments.
• The promised tax benefit is out of proportion to the cost or risk.
• Money goes round in circles, or the arrangements seem artificial.
• The promoter makes claims such as "HMRC approved".

HMRC does not approve tax avoidance schemes. A scheme reference number (SRN) does not mean approval, and having no SRN does not mean an arrangement is not avoidance. GOV.UK says most tax avoidance schemes simply do not work.

Read GOV.UK's tax avoidance introduction and seek independent advice from a qualified accountant or tax adviser who belongs to a professional body that regulates its members.

What happens if an avoidance scheme fails

You can be asked to pay the tax you tried to avoid, plus penalties and interest. GOV.UK explains that HMRC will fully investigate the tax affairs of people who enter a scheme and may:

• Issue an accelerated payment notice requiring the full amount HMRC calculates as due upfront, within 90 days.
• Take legal action. GOV.UK says HMRC wins around 9 out of 10 avoidance cases heard in court.
• Treat you as a high-risk taxpayer.

Failing to tell HMRC about a scheme covered by the disclosure rules can bring a penalty of up to £5,000.

Where avoidance arrangements are defeated, HMRC presumes you did not take reasonable care over related inaccuracies for returns covering periods starting on or after 6 April 2017 and ending after 15 November 2017, sent on or after 16 November 2017. Advice from someone with appropriate expertise is normally treated as reasonable care unless it is disqualified advice, and you must still give your adviser accurate and complete information. See HMRC's reasonable care guidance.

The General Anti-Abuse Rule (GAAR) was introduced to deter and prevent artificial and abusive tax avoidance schemes.

Penalties and consequences for evasion

For an inaccurate return, HMRC's standard maximum penalties are 30% for a careless error, 70% for a deliberate error that was not concealed, and 100% for a deliberate and concealed error. These percentages apply to the tax at stake, HMRC's Potential Lost Revenue: the tax lost because of the inaccuracy. A careless error is not the same as deliberate evasion.

These are the onshore standard maximums before any reduction for disclosure. Higher maximums can apply to some offshore Income Tax and Capital Gains Tax matters. See HMRC's penalty maximums.

Illustration: £10,000 of tax left off a return

This illustrates the maximums, not a prediction of a particular outcome. All figures are before any reduction for disclosure.

Evasion can also lead to criminal conviction and imprisonment, as set out in HMRC's evasion briefing. HMRC can publish details of deliberate tax defaulters where penalties for deliberate defaults involve more than £50,000 of tax, but does not publish if the person earns the maximum reduction by fully disclosing. See the publication rules for deliberate defaulters.

For the wider picture, read our HMRC penalties overview. If you need to challenge a penalty, see how to appeal a penalty.

If you think you have got something wrong

Tell HMRC rather than wait to be found out. GOV.UK says the earlier you contact HMRC, the less interest you will pay. HMRC can reduce a penalty for the quality of your disclosure, including how early you come forward and how much help you give. The timing, nature and extent of your disclosure matter; see HMRC's disclosure guidance.

If HMRC suspects fraud, it may offer a Contractual Disclosure Facility (CDF), with 60 days from the letter to decide. Accepting and fully disclosing is the only way to guarantee HMRC will not criminally investigate with a view to prosecute for the behaviour disclosed. Rejecting it means HMRC may begin a criminal investigation at any time. The CDF is for fraud, not errors or avoidance schemes unrelated to fraud. Take professional advice before replying to a letter that mentions fraud.

An authorised accountant can deal with HMRC for you.

Our guides to the HMRC enquiry process and HMRC letters explain what to expect. If you owe tax you cannot pay, read about Time to Pay.

Reporting suspected tax fraud

You can report suspected tax fraud or avoidance by a person or business to HMRC using the online form. You do not have to give your details.