What is tax avoidance?
First of all, the wording of avoidance and evasion can vary in definition – for example, there are tax avoidance schemes out there (this will be discussed later on) which are completely illegal, however, on this page when talking about avoidance, what we mean is avoiding paying tax using legal methods.
The main way in which you can reduce your taxable income, legally, is by ensuring that you’re claiming back on all allowable expenses available to you.
Not all self-employed workers are able to claim back on the same expenses, as there are some that will only apply to certain contractors.
For example, a limited company contractor will have certain running costs that other contractors won’t have to consider, plus they will have additional expenses due to employing their own staff.
You can’t just claim back on anything and everything you fancy, you will need to ensure that each purchase you wish to claim for has been made ‘wholly and exclusively’ for business purposes.
Typical allowable expenses include:
- Travel costs – such as fuel, parking, hire charges, train/bus/taxi/air fares, accommodation while away for business reasons.
- Subsistence costs – this includes travel, as well as hotel rooms, meals, tax/bus/air/taxi fares and vehicle insurance.
- Office costs – such as stationary, printer ink/cartridges, postage, phone/mobile/internet bills.
- Clothing expenses – should you require specific protective wear, a uniform or costume.
- Financial costs – such as hiring an accountant.
- Training courses – they must be related to your current line of work to help improve your skills and knowledge.
- If you work from home, you may be able to claim a proportion of costs for your heating, electricity, Council tax, mortgage interest/rent and internet/telephone use.
All expenses will need to be added to your self-assessment tax return.
For further information, read our Sole Trader Expenses page.
What is tax evasion?
Tax evasion is very different compared to avoidance, as it involves deliberately hiding certain information from HMRC in order to evade paying tax on an individual’s income, which is very much illegal.
Tax avoidance schemes will try to lure people in by promising to reduce their tax bill by simply paying the promoter their fees and signing some papers.
Many people can even find themselves using one without realising that it is an illegal scheme, so it’s important to be aware that most often if something seems too good to be true, then unfortunately it probably is.
Recently, HMRC were given the power to name tax avoidance schemes for the first time as part of its ‘Tax Avoidance – Don’t Get Caught Out’ campaign, used to warn the public not to get involved with such organisations.
The list, which you can view here, will be regularly updated by HMRC and includes both the scheme and any promoters.
It’s not worth the risk using one of these companies – if you are caught using a tax avoidance scheme you’ll have to pay the tax that you owe, plus interest and even a penalty.
If you suspect that there may be non-compliance happening then you should contact HMRC as soon as possible by reporting it via an online form on the GOV.UK website.
We hope you found this page helpful. If you have any further questions, our team of experts are available to answer any queries, so give us a call on 01442 795 100 or email email@example.com.