What is the difference between tax evasion and avoidance?
Tax evasion involves deliberately concealing your financial affairs so you pay less – or no – tax. It is against the law, and always has been. Those caught failing to pay their fair share of tax include jockey Lester Piggott and the gangster Al Capone, but you don’t have to be famous or notorious to attract HM Revenue & Customs’ (HMRCs') attention. Everyone who accepts cash in return for work or earns a profit without declaring it to HMRC is breaking the law. Even eBay traders have fallen foul: one was jailed for two years in September 2014 after failing to pay tax on profits made over a period of six years. About the expert
Nimesh Shah joined Blick Rothenberg’s private client team in 2012 and was made a partner in 2014. Nimesh was previously at a 'Big Four' firm where his primary focus was on entrepreneurial businesses, real estate taxation and shareholder tax matters relating to mergers and acquisitions.
He is a tax adviser with over ten years of experience in practice. He has a broad range of experience in UK taxation, acting for clients operating across varying industry sectors.
Nimesh regularly comments on tax matters on live radio and national television news. In November 2014, Nimesh was named as one of eprivateclients' 50 most influential private client professionals.
Tax avoidance is the use of legal methods to reduce your tax bill. The UK has a very long tax code, and there are many provisions within it to allow individuals and companies to legitimately claim statutory tax relief.
Why has sentiment towards tax avoidance changed?
That seems quite clear, so why is there confusion?Some 25 years ago, the difference between tax evasion and avoidance was stark. The legal treatment of tax avoidance schemes was based on the literal reading of the law. But in the last decade, HMRC and the UK Government has changed its attitude towards tax avoidance.
This change has been largely driven by the courts. There are many ways to interpret the law, and judges began looking at its intention, rather than its literal meaning. Courts consider whether or not a tax avoidance scheme interprets the law in the way Parliament intended.
Since the start of the recession and the period of austerity, the Government has sought to alleviate the UK’s financial problems by increasing tax revenue. The payment – and avoidance – of tax has become a major campaign topic for politicians, and those using perfectly legal tax mitigation schemes have been vilified for acting immorally, if not criminally.
When comedian Jimmy Carr was exposed as using a legal tax avoidance scheme in 2012, Prime Minister David Cameron said that “some of these schemes we have seen are quite frankly wrong”, while Danny Alexander, former Chief Secretary to the Treasury, described tax avoiders as “benefit cheats”
According to The Times
, even Carr believed he had done something questionable. At a gig he is reported to have said: “I’ve not broken the law. I’ve not done anything illegal. But morally, morally…”
This sentiment against tax planning is compounded by misrepresentation by both politicians and the media. The recent furore over non-domicile tax status is a good example of this, with several inaccurate descriptions being made of how non-dom status works, who benefits and how much it really costs the UK.
In the last few years, people have even come under fire for making use of tax legislation designed to encourage donations to charity. How does HMRC’s treatment of the two actions differ?
Former Labour Chancellor Denis Healey once said that the difference between tax avoidance and tax evasion was “the thickness of a prison wall”.
Tax evasion can result in hefty penalties, criminal conviction and imprisonment. Until now, these measures have been targeted at the end user – the person who is actually evading tax. But following recent revelations about the complicity of HSBC’s Swiss division in helping clients evade tax, the Government has announced measures to put some of the onus on financial intermediaries and professionals who facilitate tax evasion.
The Government is also introducing further measures to combat offshore tax evasion, including bringing forward the closure of formal offshore disclosure facilities in territories such as Liechtenstein and Jersey and replacing them with less attractive ones.
Tax avoidance is legal. However, since 2004, firms developing schemes that have no commercial use other than to artificially lower an individual’s tax liability have been obliged to disclose them to HMRC. Those who invest in them must include a specific code on their Self Assessment form. Both measures enable HMRC to assess whether the scheme pushes the boundaries of tax planning too far.
The move has had the desired effect for HMRC and the Government: the number of firms developing such schemes has dropped considerably. But I have known HMRC investigations to take up to eight years, leaving participants in these arrangements in limbo.
When tax avoidance schemes are closed down, the ruling is usually retrospective. This means that people who had invested in these schemes, believing them to be valid, have been forced to pay the full tax due plus interest and, in some cases, late-payment penalties, years after the event.
It is important to remember, in the midst of this vilification of tax avoidance measures, that these laws were introduced to benefit the UK economy. Some, such as the non-dom rules, are very old and have been updated and adapted, but may now be in need of further modification.
The law is there as a framework to help people arrange their tax affairs in a way that is suitable for their personal and business finances. If they cannot rely on that legislation, it creates uncertainty that is likely to be damaging for individuals, businesses and the UK economy.