It’s important to know the difference between tax avoidance and tax evasion. Despite the similarity of the terms, they fall on very different sides of the legality spectrum – tax avoidance, whilst heavily criticised, is considered to be bending the rules but still legal, but tax evasion is a criminal offence.
Tax evasion is also referred to as tax fraud, which should give some indication as to how seriously it is taken by HMRC – ignorance is no excuse. Should an individual be suspected of partaking in tax evasion they will be investigated, with prosecution the aim in some cases, regardless of whether this was their intent. This is why it is hugely important to retain a tax specialist to assist with your business dealings and ensure that you do not fall foul of any legal misunderstandings or errors.
If an individual or business is placed under tax investigation from HMRC, it will be due to suspicion that something is awry with the tax returns in question. This could be related to the tax return that you have filed as an individual or business, any expenses that have been claimed as tax deductible, payments made to employees that fall below the government-mandated minimum living wage, or any VAT that has been involved in your business transactions.
The process will usually begin with a formal legal letter from HMRC, announcing that your accounts have been selected for a compliance check and asking for further information – potentially also inviting you to a meeting. If inconsistencies are found, these will be discussed with the individual in question and draw a conclusion as to any penalties that may be required, which is often a fine. In the case of major businesses suspected of tax malpractice, however, HMRC may make an unannounced visit to the company premises and review financial records on-site.