Tax Evasion vs. Tax Avoidance
Hi, I'm Jonathan. Welcome to TransLegal's lesson of the week.
Today I'm going to be talking about the difference between the terms tax evasion and tax avoidance.
Now tax evasion is escaping payment by illegal means. This is obviously unlawful and is usually a criminal offence and is subject to a prison term or a fine if one is guilty of it. The person guilty of such offence is referred to as a tax evader.
An example sentence where you can use this is "It is likely that he will go to prison if convicted of tax evasion".
Now tax avoidance on the other hand is perfectly legal within the ambit of the law and is the legal use of the tax system to reduce taxes.
This can take many many different forms.
Typical examples are where an individual changes their tax residence to a country which has a lower income tax rate, for example the Cayman Islands and a country like that. These sort of countries are known as tax havens. An individual might also want to transfer assets to a company, which the individual indirectly owns or directly owns and this would also be a way of minimising the tax bill. A lot of business transactions are also set up in a way so as to avoid paying too much tax.
An example sentence of where the term tax avoidance is used is "The law firm set up a scheme that was aimed primarily at tax avoidance".
There is also another term which is used, tax mitigation.
Now this is avoiding tax legally, but it's more in the context of typical family tax planning where, for example, you move assets to your spouse in order to minimise your personal tax bill and make use of their tax allowances.
So bear in mind that there is often a fine line between avoiding tax which is legal and tax evasion, evading tax, which is illegal. As a tax lawyer you should be very careful to make sure that your clients do not cross that line.
Thank you for listening today.