“Tax avoidance is bending the rules of the tax system to gain a tax advantage, that parliament never intended.” (HMRC, 2015)
In principle, tax avoidance is a moral issue. We ought to pay all tax owed and not pursue strategies that provide any individual or company an advantage over other tax-payers. In 18th century context, property owners should have paid tax for their windows, and in the 21st century, people should avoid inventing fictitious overseas companies or use abusive tax avoidance schemes.
The recent disclosure of documents from the Panamanian law firm, Mossack Fonseca, has thrown the spotlight once again onto the morality of tax avoidance. Globally, tax avoidance costs $240bn (£169bn) each year – the majority coming from multi-national companies. Costa and Google, who avoided paying UK corporation tax, spurred chancellor George Osborne to introduce the diverted profits tax, known as the “Google tax”, to encourage global multi-nationals to pay their fair share.
So what is avoiding tax? The common explanation that avoidance is legal and evasion is illegal is somewhat erroneous and too simplistic. According to HMRC, using the tax relief available through Isas and pensions is purely saving tax and not considered avoidance. Tax avoidance is attempting to bend the rules to gain an unfair advantage, in a way they were not intended. HMRC takes avoidance seriously and tax inspectors, together with legal and accountancy specialists, seek to challenge individuals and companies who attempt to avoid paying taxes. The primary concern for those involved in tax avoidance (which they perceive to be legal) is it can quickly turn into evasion. Failing to divulge all facts or perjuring oneself can easily lead to a large fine or prison sentence.
Broadly those involved in tax avoidance will collude with advisers to minimise their tax burden. Typically, the individual will be informed the scheme is perfectly legal and proceed to file their tax-returns. If HMRC disagrees, it may result in a tax tribunal. HMRC wins eight out of 10 tax avoidance cases that are contested. The initial drawback is you have to pay all the contested tax to HMRC before commencing a dispute.
Tax avoidance costs around £5bn annually in the UK. Recently, the government has instigated aggressive tax investigations against avoidance schemes, in particular – film partnership funds – initially set up by the government to help the British film industry raise funds and provide the opportunity to save tax for the investors. HMRC has closed thousands of film partnerships, resulting in high-profile celebrities – including Wayne Rooney, Andrew Lloyd Webber, Bob Geldof and David Beckham – repaying millions in avoided tax.
To return to the HMRC definition of tax avoidance, parliament fully intended that the British public could utilise tax-free savings, make use of personal allowances and pay into pension schemes to reduce the tax burden. Arguably, parliament did not intend for UK domiciled individuals to establish bogus overseas companies that are controlled from the UK or to manipulate the tax system to gain an advantage. Making use of tax-allowances is good financial planning and by HMRC’s own definition, is merely saving tax as parliament intended – any alternative strategy is purely avoidance.
Richard Bishop is a lecturer in financial services at Coventry University College and a practising regulated financial adviser
