Tony Wickenden: The fine line between tax avoidance and evasion
Government action against tax avoidance has made the headlines on numerous occasions over the past few years, with significant developments in litigation, legislation and early tax collection, via a combination of follower notices and accelerated payment notices.
Add to this the expansion of the disclosure of tax avoidance schemes, hallmarks to improve HM Revenue & Customs’ awareness of what is in the market as well as its ability to issue APNs, and you have a pretty joined-up strategy.
The so-called tax gap – effectively the difference between what HMRC should collect if the tax legislation were perfectly applied, as intended, and what is actually collected – is officially estimated to be in excess of £30bn, or almost 7 per cent of theoretical tax liabilities. While the UK tax gap apparently compares well to that found in other countries, the Government is, understandably, determined to reduce it further.
The Government (and the previous coalition) has cracked down on those determined to break or bend the rules with radical initiatives. As a result, it has changed the economics of tax avoidance by reducing the incentives for entering into avoidance schemes. It has also worked to ensure HMRC has the tools and powers it needs to address evasion and avoidance.
Many avoiders have been found by HMRC or have come forward to put their tax affairs in order. The key means to achieving this end has been the various disclosure schemes promoted – for example, Liechtenstein, Isle of Man, Channel Islands and Switzerland. Through these, many using offshore deposits and other strategies have sought to pay up or decided not to engage in further schemes.
They have offered immunity from criminal prosecution and reduced penalties. However, they are coming to an end shortly, with a less attractive “last chance saloon” option in the upcoming tax year.
All the action against aggressive avoidance has caused some confusion over what is acceptable and what is not. Tax evasion is and always has been illegal. This is when people or businesses deliberately do not declare and account for the taxes that they owe. It includes the hidden economy, where people conceal their presence or taxable sources of income.
On the other hand, tax avoidance, according to the Government, involves bending the rules to gain a tax advantage Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.
Tax planning, meanwhile, involves using tax reliefs for the purpose for which they were intended – for example, saving via an Isa or a pension scheme. However, tax reliefs can be used excessively or aggressively by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament. Where this is the case, HMRC believes it is right to take action, as it is important the tax system is fair and perceived to be so.
Understanding clearly the difference between evasion, unacceptable avoidance and tax planning is incredibly important for financial planners, as is being able to clearly and simply articulate these differences. Of course, perhaps most important is being able to apply these definitions to any tax-reducing strategy, so as to be able to correctly categorise it and advise the client appropriately.
This kind of practical tax know-how will also be hugely useful in proving competence and trustworthiness to professional