Tax Avoidance - One Rule for Everyone After All

Published byAnnie Pearson

14th April 2016

Following the release of the “Panama Papers” there has been an unprecedented amount of media interest in the arrangements made by some very high net worth individuals around the world to protect their wealth from the reach of the taxman. 

In the media storm, it’s important to remember that tax planning is still perfectly legal and that neither “offshore” nor “complex” is synonymous with “dodgy”.  With that in mind it’s worth looking at how the law handles tax saving arrangements. 

Not so long ago things were quite clearly divided – if arrangements fell outside the law they constituted tax evasion, a criminal offence.  Equally, if they were within the law, they were called tax avoidance and were legitimate, even if they appeared to produce tax liabilities far smaller than might have been expected. 

Gradually, as avoidance techniques and schemes have become ever more sophisticated and the world’s revenue authorities have struggled to keep pace, opinion has shifted to the point where it is no longer considered acceptable to merely stick to the letter of the law whilst driving coach and horses through its spirit. 

So where does that leave the question of avoidance vs evasion?  In the UK, the Taxes Acts are peppered with specific anti-avoidance provisions designed to close particular loopholes exploited by taxpayers and 2013 saw the introduction of the General Anti-Abuse Rule (GAAR), which aimed to stop the perpetual game of cat and mouse between HMRC and taxpayers.  Now, arrangements calculated to minimise a tax liability fall into three categories. 

Evasion:

As has always been the case, where arrangements fall outside of the law, a criminal offence is committed (although in all but the worst examples, the investigation and penalty are usually civil in nature).  Examples of evasion include deliberately under-reporting your income or overstating losses, perhaps producing false receipts or invoices to back up the fraudulent figures. 

Planning:

Tax planning is a legitimate way of reducing your liability to tax by making use of tax relief or benefits in the way in which the legislation intended.  Very straightforward examples of tax planning would be using a Deed of Variation to save Inheritance Tax on a relative’s estate; placing funds in ISAs; holding properties through a company rather than directly so as to change an Income Tax liability to a Corporation Tax liability; or passing assets to your spouse prior to sale to access their Capital Gains Tax Annual Exemption. 

Choosing to arrange your affairs in the most tax advantageous manner is generally acceptable but where that involves introducing complex transactions which serve no purpose other than to avoid tax, taxpayers run the risk of moving from legitimate planning into questionable avoidance. 

Avoidance: 

This is the slightly murky area between Evasion and Planning.  Activity which is within the letter of the law, but which is carried out with the intention of exploiting a gap in the legislation rather than taking advantage of a positive provision, is likely to fall foul of the GAAR. 

While this might not lead to criminal charges, the arrangements may be held to have been abusive and the taxpayer’s return will be adjusted to counteract any benefit gained from them.  Depending on the sums and timescales involved, the penalties and interest levied by HMRC can be substantial.

The message is therefore clear - responsible tax planning should be the norm, which means engaging with an experienced and reliable Independent Financial Adviser to make sure you stay on the right side of the line.