Tuesday, July 14, 2009

Tax avoidance - what are you allowed to do? A simple guide.

This is a follow up to yesterday's posting about tax avoidance and tax evasion. In this connection I have long believed that most people want to find ways to pay less tax.

How much less is rarely clear. In practice there seem to be two targets:
  1. Any feasible and legal reduction in taxes as compared with current expectations; and
  2. As much of a 'wipe-out' of the tax otherwise due as can feasibly be achieved legally.
In this context it is worth clarifying what is and what is NOT legal:

Simply stated it is legal to legitimately minimise your tax liabilities through:

  • Claiming all available allowances and reliefs;
  • Claiming tax relief for expenditure incurred “wholly and exclusively” for business purposes; and
  • Planning your affairs to keep your tax liabilities as low as possible within the law.

On the other hand it is ILLEGAL to deliberately/dishonestly evade tax. This includes:

  • Claiming tax relief for non-business expenses;
  • Telling untruths on your tax return or in the way you describe transactions;
  • Failing to include all of your taxable income in your accounts;
  • Withdrawing money for personal use from an incorporated business (company) and not making any attempt to make sure it is treated correctly for tax purposes;
  • Failing to declare all of your taxable income and gains on your tax returns;
  • Failing to ask for or to complete tax returns to report your taxable income and gains.

The consequences of illegal activity typically include: Revenue investigations, back taxes, interest on late paid tax and penalties (up to 100% of tax), time, hassle, professional fees, and if you’re very unlucky, ill-advised or stupid – prosecution and prison.

It is also worth stressing that the level of penalties charged these days depends very much on whether or not you were deliberately avoiding your tax obligations.

Any questions?

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