Avoidance, evasion or plain old planning?

4 October 2016

Over the last two to three years, stories and articles about tax have been in the media fairly frequently including, more often than not, stories of wealthy individuals or companies paying a small amount of tax. People get very excited when their favourite comedian, reality TV star or ahem…coffee house, gets dragged through the media for not seemingly paying what they owe.  And, in this scenario, the same question always arises – ‘have they done anything illegal?’

Now this is where three terms come into play: was it tax avoidance, tax evasion or careful tax planning? From browsing through the comments section of a recent tax article it is easy to see how often these three terms are confused. Well, I hope to make you confused no more…

Tax evasion is the illegal non-payment or underpayment of tax. Examples range from being paid in cash and not declaring it to HMRC, to using complex structures of shell companies in overseas jurisdictions in order to hide income from HMRC. Put simply, it is using deceit or concealment to reduce your tax liability.

Tax planning and tax avoidance are far more subjective (and not illegal). Both involve using legal means to reduce your tax liability as far as possible to what the legislation states. They can, in some cases, be very hard to separate as one man’s tax planning is another man’s tax avoidance. To keep this simple, the best way to divide them is as follows:

Tax planning is the use of statutory reliefs and allowances as Parliament intended. An example being the use of ISA’s and pension contributions.

Tax avoidance is using the legislation to obtain a tax advantage of which Parliament did not intend. An example of which is creating a trade and manipulating loan transactions to create a  large loss which can be offset against other income. The key difference here is what Parliament intended. Ascertaining the intention of Parliament is very difficult, which further adds to the confusion between the two terms.

So, this leads us onto our ‘stars’ we like to moan about in the pub… HMRC will inevitably argue that they are extracting a tax saving that Parliament did not intend; thus leaping from the ‘avoidance bracket’ to ‘evasion’. Whilst the accused will say (or at least their lawyers will) that the ‘legislation is unclear – so we have no way of knowing what Parliament intended!’ I have personally been through parts of legislation which were exploited and you can see their point.

So there you have it – it all comes down to legality, and you think that would be easy to interpret, right? Well, unfortunately it isn’t, hence why we have an inundated number of ‘avoidance schemes’. HMRC are now taking steps to reclaim much of this before it goes to court and the accelerated payment rules.

Where would we be if the legislation wasn’t so subjective?

For further information on this blog post, or to discuss your specific circumstances, please contact Elliott Buss.