Tax Evasion or Tax Avoidance?

Ever since the last Budget there has been a lot of commentary on tax avoidance and following on from last night’s BBC Panorama show 'the truth about tax' I thought I would share my comments and understanding on the difference between Tax Evasion and Tax Avoidance.

Tax evasion is in quite simply unlawful and can expose the taxpayer to penalties. Examples include giving inaccurate information or describing a transaction as something different from what it really is. It is basically a form of deception.

Tax Avoidance however has developed over a number of years in to what we have today in artificial schemes by which a sequence of transactions is undertaken for the sole purpose of mitigating a tax burden much like what was shown in the panorama show.

I have taken a quote from the judge in the tax case Duke of Westminster 35 that perhaps sums it up the best "A taxpayer may have a choice between two or more alternative methods of achieving a desired result. He is entitled to select the method, if lawful which avoids altogether or reduces the tax he would pay on another alternative. He is not to be taxed on the basis that a more normal method would attract a heavier tax burden. The selection of a tax effective method is called tax avoidance"

The best analysis on tax avoidance does come from case law and taken from the 'Ramsay' case the courts came up with a strategy to look at tax avoidance.

1. There must be a per ordained series of transactions

2. Into which are inserted steps which have no commercial purpose except the avoidance of tax

3. In which case the court may disregard the inserted steps in deciding how the transaction should be taxed.

4. Look at the end result.

This is the basic form the courts have been using over the past 20 years to tackle these artifical tax avoidance schemes however many sophisticated schemes have been winning. I believe now along with the Chancellor's Budget we will see more anti avoidance measures put in place potentially starting with stamp duty mitigation and in a fairer society this can only be seen as a good thing. Although how strict these provisions are remains to be seen and I suspect the highly intelligent people operating these schemes will find a way around it.

It is very hard as a tax practitioner to tell a client who wants to minimise his tax liability and has taken part in these various schemes that it is unethical and to me goes against certain principles. I believe others have to suffer and pay more tax whilst people are working within the tax avoidance legislation to sometimes not paying tax at all. However whilst it is still 'law' and the legislation has not been amended then as a practitioner you have to accept the schemes. HMRC of course operate the general anti avoidance provision. Where the scheme must by notified to HMRC by its promoter to obtain a reference number to go on the tax return. There is a £5,000 penalty for failure to notify.

Tax Avoidance is a term that should not be used loosely and can’t be interrupted in a number of ways. Whilst I would not promote any artificial schemes I am all in favour of tax planning to minimise the client’s liability and here are some examples:

1. Income bearing assets should be held by the spouse with the lowest marginal rate to tax.

2. The use of pensions can reduce tax in the years of high income working whilst making provisions when the marginal rate is lower

3. On the sale of a business there is some scope for allocating the price between different assets to reduce the tax burden

I have many more what we call 'lawful' tax planning tips.

I hope you have found this useful and provide a clearer picture of tax evasion and tax avoidance and if you would like any help with your tax or have any questions please email me mitch@ljd.uk.com


Mitch the Tax Man