Theres been a lot of media interest, excitement even, in issues around tax avoidance and evasion recently. Where is the line drawn?
Many people know the basic principle that tax avoidance is legal and tax evasion is illegal, but what are the definitions, and how do you know?
The cynics answer to “Whats the difference between tax avoidance and tax evasion?” was always “the thickness of a prison wall” (attributed in fact to Denis Healey) – in fact that’s not far wrong!
Tax avoidance is arranging your affairs, within the law, so that you pay as little tax as possible. The courts have consistently recognised this under the so called Duke of Westminster principle , “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. 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.” – Lord Tomlin – IRC v. Duke of Westminster (1936)
Tax evasion is working outside of the law to minimise your taxes, quite simply disregarding law and cheating.
In practice its sometimes hard to distinguish the two: blurring in the media doesn’t help, nor does moralising from politicians and philosophers about “unacceptable tax avoidance” (sic). Often the courts get asked to rule, however sometimes the question is solved more pragmatically and less publicly through HMRC civil action.
In all, the boundaries are not always clear, but a good test is “sunlight” – if the scheme involves excessive secrecy, artificial processes and steps or use of overseas jurisdictions in contrived ways, then the finger points to evasion.
Another factor to bear in mind is that some types of tax avoidance are unofficially sanctioned by HMRC, simply by being accepted by custom and tradition, whereas other avoidance routes are recognised as legal but “unacceptable” and hence moves tend to be made to restrict or close them. Sometimes the acceptability of a particular aspect of tax avoidance can change due to social or political imperatives; what was “acceptable” last year is “unacceptable” this year – although often still legal! Not a ideal business environment; politics has a huge influence.
Happily theres a lot, with good advice, a UK taxypayer can to do legitimately and legally to minimise – avoid – tax. Probably the first starting point is to use a good accountant or lawyer, someone who is familiar with the area of your concern – UK tax rules are complex, and unless you work with them daily its difficult to not only understand them, but also to understand how different taxes interact with each other and with general law. Like so many things in modern life, specialist advice can save a lot of difficulty.
So, what about the exotic schemes that the press were talking about, using offshore arrangements and so on, as favoured by some celebrities? Well, the devil is in the detail, some of these schemes possibly fall into the avoidance side of things, others evasion – quite often the difference is never established as the schemes are closed down by HMRC using their anti avoidance powers – note a anti avoidance scheme gets shut down, a blatant evasion scheme probably prosecuted. A lot of the schemes that have attracted press interest recently have involved secrecy, non disclosure and a (un)healthy dose of contriving. Often its said a good test is are you able to explain the scheme, and are you comfortable doing so? Clearly the answer is probably no, if your tax scheme involves secret loans via offshore companies!
That’s the exotic end of things: what about the more mundane? The advice that a firm like Whitefield provides tends to be less cutting edge – that’s not to say its not up to date and current – but our clients don’t have the motivation nor, generally the need, to enter into novel and risky tax schemes that attract HMRCs eye or carry abnormal risk. However that still leaves us a awful lot of opportunities for the benefit of our clients – in particular getting business structures right – company or not; planning asset holdings within a marriage or civil partnership; planning for asset purchases and disposals; company extraction planning – dividend v salary; succession planning; inheritance planning – and that’s just for starters.
We are convinced that the complexity of the tax code gives plenty of opportunity for legitimate planning for individuals and businesses.
A final note on paying people cash – no matter what Government ministers would like you to think, theres nothing wrong with it! Paying tradesman and suppliers in cash is fine, unless its been made clear to you that the recipient prefers cash so they can avoid declaring it. Paying employees cash is perfectly acceptable as well, so long as you operate PAYE and meet employers obligations – paying “casual wages” without operating payroll is where the difficulties start – in fact, at law, there are no such thing as “casual wages”.