Tax Avoidance and Tax Evasion

Tax Avoidance and Tax Evasion
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Tax avoidance, is the legal utilisation of the tax regime to ones own advantage, in order to reduce the amount of tax that is payable by means that are within the law. Examples of tax avoidance involve using tax deductions, changing one’s tax status through incorporation, or changing one’s tax residence (or domicile) and establishing a company, trust or foundation in an offshore tax haven.

In the UK, despite consultations going back many years, there is no general anti-avoidance rule. This in itself is unusual amongst developed countries, in that the UK has neither statute nor legal principle to counter tax avoidance in general. There are however, certain provisions within the tax legislation (known as anti-avoidance provisions) which apply to prevent tax avoidance in specific circumstances - where the main object or purpose (or one of the main objects or purposes) of a transaction is to enable tax advantages to be obtained. Tax avoidance essentially flouts the “spirit” of the law while actually following it to the letter and if therefore technically acceptable as no crime is committed unlike with tax evasion. The is certainly the view of the HMRC.

In comparison, tax evasion or tax fraud is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by illegal menas. Tax evasion, involves intentional behaviour or a degree of knowledge and normally includes taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities in order to reduce their tax liability. It includes the dishonest tax reporting such as understating income, profits or gains, or over-claiming expenses and deductions.

Tax avoidance may be considered to be the amoral flouting of one’s duties to society - or in the eyes of the tax adviser, the right of everyone (individuals and companies) to structure one’s affairs in a manner allowed by law, to pay no more tax than required. In the words of Lord Tomlin, in the House of Lords in IR v Duke of Westminster 1936 “every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less that it otherwise would. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.

Whilst this held good 60 years ago, the Ramsay case of 1981 was evidence that the courts would no longer see tax avoidance as acceptable where schemes were wholly artificial and preordained in their outcome. Tax evasion, however, is a specific application of the doctrine of evasion, and as such it is a crime in almost all countries and subjects the guilty party to not only fiscal penalties but potentially imprisonment.

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