Freelancer’s Guide to Tax Avoidance

Knowledge base from Boox

By Jonathan London on 18th July 2014

Freelancer’s Guide to Tax Avoidance

Recently, a number of celebrities and highly paid professionals have been caught up in controversy due to their use of a tax avoidance scheme.

The now infamous Liberty programme was used by stars Gary Barlow, Katie Melua and Sir Michael Caine as a way to invest their money in an efficient manner. As a result, they could now be left footing a significant bill up front.

Guide to Tax Avoidance

But as BBC personal finance reporter Brian Milligan pointed out in his May column, these people haven’t technically broken the law in any legal sense.

Milligan goes onto say that tax avoidance is usually legal, which is why Liberty has been able to operate for so many years. However, there’s a fine line between avoidance and tax evasion. And when this threshold is crossed the law is definitely being broken.

But what is the difference between the two, other than a word that many could be forgiven for believing mean the same thing?

Tax avoidance versus evasion

First of all, tax evasion is a crime, plain and simple. In its broadest terms it means using illegal means to evade paying the amount of tax due.

However, tax avoidance is technically legal, as long as it is done within the rules of the tax system.

HMRC is still keen to reduce the amount of tax avoidance that occurs in the UK, as it claims such systems contribute to the ‘tax gap’.

There are shades of grey here too, as tax avoidance generally occurs when an individual or organisation exploits the tax system in a way that was not intended by the government.

Many tax avoidance schemes claim to be operating within the scope of the law and therefore in a legal capacity. However, HMRC can still investigate a plan that it believes that it is taking advantage of the system, as it has done with Liberty recently.

The best way for a freelancer or contractor to stay out of this debate it to avoid using a tax avoidance scheme at all.

Tax planning

This is again different to both tax evasion and tax avoidance, but it’s still easily confused with the latter.

Using an ISA (Individual Savings Account) is an example of tax planning as the individual is using such an account for its intended purpose.

Many freelancers use ISAs to save sums of money as they can do so without paying tax on interest, this is perfectly legal and part of the reason such accounts exist.

According to HMRC, other examples of tax planning include claiming capital allowances on assets used in your business or paying into a pension scheme….

Generally, HMRC sticks to the mantra ‘if something’s too good to be true, it probably is’ and freelancers should take this advice into account.

Although it is technically legal to use a tax avoidance scheme, HMRC can and does frequently investigate such organisations in order to collect any debts owed.

At Boox our dedicated team of accountants are here to help you understand you taxes and finances properly, for more information about our service, get in touch today.

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