Tax Avoidance vs Tax Evasion

Even after doing my job for nearly 20 years, I still have to stop and think when I talk about tax avoidance, to make sure I don't inadvertently say tax evasion. One is legal, the other is illegal and deplorable.

Tax Avoidance vs Tax Evasion

The difference is simple enough. Tax avoidance is about taking advantage of government-sanctioned allowances and reliefs to minimise your tax bill legitimately. Tax evasion is cheating on your tax bill, that's all. It's about hiding money and routing it through shady offshore schemes. And often it has been about coming up  with ever-more elaborate mechanisms to take advantage of  loop-holes in tax law. In other words, gaming the system.

February is Tax month here on MeaningfulMoney, so over the next few weeks there will be podcasts and videos on legitimate tax planning (in my view, a better term than tax avoidance) to help you take advantage of the various schemes on offer.

But right at the top of the month, I wanted to get a little something off my chest, which I imagine will resonate with most law-abiding citizens and readers.

Our moral duty to pay tax

Civilised society should be built on a premise of those who have, helping those who have not. In a developed economy such as our own, the government is the primary mechanism for achieving that, however imperfectly.

Those of us with jobs and businesses pay tax on our income and profits which the government use to provide welfare, hospitals, roads and security. Setting aside the often-inefficient bureaucracy which has been built to administer all this, we all benefit to a greater or lesser extent from our own tax money.

And because we benefit, we should gladly pay our share of tax to enable this to happen.

But I'm self-sufficient

Sometimes I get the objection from someone that they have private medical insurance and so do not use the hospitals, and that they are law-abiding so they do not need the police (seriously, someone said this to me once) – and so their contribution should be minimal. But unless they flew, Harry Potter-style, into my office on broomsticks, they presumably used the road to get to me, which they conveniently forgot about.

I declined to work with this particular person, for whom avoiding as much tax as possible was his primary motivation. He wasn't a nice person, and life is too short to spend time with that sort. None of us is totally self-sufficient and we should therefore pay our share of tax to ensure the mechanisms we need for civilised society remain intact.

Use all legitimate means

But that is not to say that we should blithely pay more tax than we need to. There are many reliefs and allowances for saving tax, many of which go unclaimed. Often, these tax-saving incentives are designed to help the government achieve its aims of encouraging smaller businesses, or reducing the burden of welfare.

So we should definitely use all the legitimate means at our disposal to feather our own nests, and in doing so we can rest in the knowledge that we are staying on the right side of both the spirit and the letter of the law.

Tax avoidance vs tax evasion? It's about intent.

Lots more practical stuff to come over the next few weeks, so stay tuned!