Tax evasion versus tax avoidance

Taxpayers need to know when, in the eyes of HM Revenue & Customs, tax avoidance becomes tax evasion.

Tax evasion: Avoid evasion | 06 March 2015

The situation of tax evasion versus tax avoidance used to be clear-cut; tax evasion, as we all knew, was illegal, and was not the same as tax avoidance. Taxpayers had every right to minimise the tax they paid by whatever legal means at their disposal. Paying tax is a legal requirement, not a moral issue, and that’s why there are no queues to make voluntary payments to the taxman, although this is allowed by HM Revenue & Customs (HMRC).

Stack of receipts with calculator

Moral outrage

Tax avoidance used to be the acceptable face of tax planning, yet it is now being treated the same way as evasion. This is not as the result of new law or parliamentary debate, but from a sense of moral outrage. And HMRC has recently been lambasted in public by members of parliament for not recovering taxes from those that are benefiting from tax-avoidance schemes.

The Finance Act 2014 gave HMRC extensive new powers to target those who avoid payment by making use of tax law ‘in a way not envisaged by Parliament’, and ever since, it has been clamping down on providers of aggressive tax schemes, though it says it won’t attack arrangements that rely on statutory exemptions and reliefs.

Take care

Most people have little to worry about but, when it comes to tax matters, it is always best to err on the side of caution, and to get expert advice and to steer clear of sophisticated tax-planning ideas. The risks are made clear by Exchequer Secretary to the Treasury, David Gauke. He explained, “Dodging tax is immoral, illegal and unaffordable. The minority who cheat are increasingly finding that they have made a big mistake.”

Tony Müdd, divisional director of tax and technical services at St. James’s Place said, "Iindividuals remain entitled to plan their tax affairs in such a way as to ensure they do not pay more than they need to, so it is essential that taxpayers understand when, in the eyes of HMRC, tax avoidance becomes evasion."

UK Passport with sterling and euro currancies

Evergreen principles

There are signs to look for to help decide whether tax advice is good or should be avoided; the first relies on the evergreen principle that if a scheme promises something that sounds too good to be true, then it probably is. Rather than make a tax bill disappear, there is the risk of the launch of an in-depth enquiry by HMRC. This could go on for years and end up in the courts with considerable expense – for legal fees as well as payment of the disputed tax, interest and substantial penalties.

It’s worth noting that HMRC does not in fact approve schemes, even though some are presented as ‘approved’. The arrangements may have been given a scheme reference number (SRN) under the ‘disclosure of tax avoidance schemes’ (DOTAS) rules. But that only means that the provider has complied with the legal obligation to inform the authorities about the scheme, not that it has been approved.

Warning signs

There are other warning signs; one is that the tax benefits or returns are out of proportion to any real economic activity undertaken; another is that the arrangement involves money going round in a circle back to where it started; and a third is that the provider contributes or arranges funding to make the scheme work.

Müdd warned, “If nothing else, a taxpayer should be aware that using a tax-avoidance scheme will mark him or her out for special attention. While morality should be subjective – when it comes to tax, any taxpayer who is not aware of this new world order risks becoming HMRC’s ‘next man’.”

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

For more information, visit St. James's Place Wealth Management.