Avoidance and evasion are very different routes

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THERE is an old tax joke that asks: "What is the difference between tax avoidance and tax evasion?" Answer: "The thickness of a prison wall."

While this is not particularly funny, it did serve for a long time to underline the key difference between legitimate tax avoidance and illegal tax evasion.

I say "did" because anyone reading some of the more recent pronouncements from the two main taxing bodies, the Inland Revenue and Customs & Excise, would be forgiven for thinking there is a political agenda to blur this key ethical and legal distinction.

If this was the Government’s intention, it would do well to remember that the interpretation and implementation of tax legislation, like any other enacted by parliament, is subject to scrutiny in the courts.

The Inland Revenue or Customs’ view on what is the "right" amount of tax which should be paid on a particular transaction or income stream is no more or less valid than the taxpayer’s opinion .

Although it is a complex area, illegal tax evasion typically involves a failure to report income, or claims for deductions and benefits to which one is not entitled. This could include a businessman writing off personal spending as company expenses, then claiming the associated tax benefits. But there are many legitimate ways in which to save on tax spending.

Any blurring of the line between what is right and wrong is contrary to a well-established principle of the UK tax system - when organising their tax affairs, individuals inevitably have a number of equally valid routes open to them.

The courts have reiterated on a number of occasions, and at all levels, that it is perfectly acceptable to use the more tax-efficient path. This maxim is particularly true now that all taxpayers, and businesses in particular, are being used as unpaid administrators of the tax system.

The Government makes much of the fact that each taxpayer has to pay their "fair share" to meet the UK’s needs. While this is indeed true, those taxpayers who have other stakeholders in their results - the shareholders of publicly held companies, for example - also have a duty to those stakeholders.

In such circumstances, it is not unreasonable to view tax as simply another cost of doing business and it is, therefore, understandable that these taxpayers should seek to minimise that cost in all legal and proper ways. The concept of paying your "fair share" also assumes an element of simplicity which does not exist in the tax system. Some tax charges are illogical, often burdensome and, in the absence of tax planning, could block what would otherwise be commercially desirable transactions.

Far from the exploitation of loopholes, on which the Inland Revenue tends to focus its publicity, much tax planning merely seeks to avoid these arbitrary hurdles to healthy commerce. This is an important and real distinction that is often forgotten.

The developing attitude of the revenue authorities to tax avoidance is interesting. In a recent statement, the director of tax practice for Customs & Excise indicated that those who pay Customs’ interpretation of the amount of tax owed would be rewarded with an easier time, quicker rulings and less interference than those who seek to minimise their VAT liability.

While, from a distance, this does have a superficial logic, it again presupposes that Customs’ interpretation of the right tax liability is inherently correct.

While we should certainly applaud the revenue authorities when they identify fraudsters, those who steal from the public purse or otherwise evade tax, we must take a lucid view of the overall situation. It is not helpful for the Government to seek to blur the line between criminal activity and legitimate tax avoidance.

Richard Laverick is head of tax for Ernst & Young in Scotland and Northern Ireland