Tax planning is the organizing of financial matters with the ultimate goal of minimizing taxes. Tax planning is done through three processes: reducing income, utilizing tax credits and increasing deductions on finances. Moreover, tax planning involves aligning financial goals in an efficient manner through planning for taxes so as to result in reduction of tax liability. It comprises arranging of finances so as to avail from rebates, deductions and exemptions that are legally permitted by tax laws while reducing tax liability.
Tax avoidance involves entering into transactions with the aim of reducing tax levied to minimum amounts. Transactions, for instance, signing for saving schemes; retirement plans that are not taxable are used by individual and organizations in tax avoidance. Tax avoidance measures are within correct legal precincts and are permitted by laws. In tax avoidance, income expected can be postulated and received and is due for taxation. However, before taxation is applied, the person or organization avoids tax payment through devices that reveal the finance as diverted whereas making it to exist for use by the individual or company (Agrawal, 2006).
Benefits of tax planning and tax avoidance
According to Agrawal (2006), tax planning is advantageous in that it allows for the forecast of costs such as tax on income prior to its accrual. In addition, tax planning is done at the origin of the expected income. This is termed as long range planning in which finances that are taxable at the end of a year and are owed to HMRC can be revealed in advance. This allows an individual or organization to be able to forecast estimates of amounts that are to be paid as tax. Tax planning assists in this knowledge thus, ensuring taxes are not underpaid and penalties that are levied attributed to lateness are escaped.
Tax avoidance is used in tax planning to ensure minimum amounts of tax are paid during the process of taxation. For instance, a corporate may plan for a deferral in sales involving capital gains of property from one tax year to another, when the sale is undertaken at year end. This will have implications of tax levied on that sale being postponed to the next tax year (Spencer, 2013). Consequently, advantage on a full year’s cash gains is achieved through tax avoidance.
Tax planning facilitates anticipation on taxes that a business is to remit. This is through applying of suitable accounting methods whether accrual basis or cash basis to minimize tax liability that best suits type of business and will result in maximum reduction on tax liability.
Negative implications of tax planning and tax avoidance
Inaccurate interpretation of tax provisions results in organizations making losses in cases that they had anticipated tax relief. For instance, in a case in which shares of a company are given to a permanent residing establishment and it has a branch of the company that is located outside a country, group life benefits can be...