Tax has been in the news a lot lately, and as it used to be my living for 10 years (but I am now no longer qualified, so don’t take anything I say as tax advice), I thought I would weigh in with the difference between tax avoidance and tax evasion.
Tax avoidance is the reduction of a tax bill through legal means, whilst tax evasion is the non-payment of tax that is legally due.
I have a somewhat biased view of tax avoidance given that it was my job for 10 years, first (and last) by reducing the amount businesses had to pay over to the tax authorities in relation to employees they sent overseas on assignment, then working on behalf of high net worth non-doms to lower their worldwide tax liabilities. All tax planning was done within the laws of all countries involved.
I have also experienced (and participate in) first-hand tax avoidance. I paid money into my employer’s pension scheme (thereby legally reducing my taxable income and reducing my tax liability). I have used an ISA and Premium Bonds for savings (whose earnings are tax free). I used to (when I still paid tax) tick the gift aid box on charitable contributions (thereby extending my basic rate band and reducing my tax liability). My parents gave me cash gifts in line with the annual allowances while they were still alive in order to reduce their inheritance tax liabilities. I claim my personal allowance when I file my tax return, as well as allowable expenses against income. All of these are legal ways to reduce your tax liability – or to put it more sensationally ‘tax avoidance’.
What I find more interesting is some of the details of the tax returns that have recently been published.
For 2014/15 George Osborne reported £3 gross bank interest. The current rate of interest is 0.5%, which means that he only had £600 gaining interest over the year. His taxable income was £198,738. Where was that money being squirreled away to? It certainly wasn’t sitting in a current or savings account earning 0.5%.
Jeremy Corbyn (who handwrote his tax return and didn’t answer all of the questions or file on time), didn’t earn any bank interest at all, even though he earned £70,795 in the year.
In contrast, my income is beneath the personal allowance most years these days, and yet I managed to earn £1.46 on my measly savings account in 2014/15.
If you are looking for tax evasion, then by definition you are not going to find it directly by looking at someone’s tax return (unless it’s a case of purely not paying the tax listed as being due there). Tax evasion will involve hiding income away and not reporting it on the tax return. All a tax return will tell you is what source of income or capital gains someone has reported to HMRC for the year, and what legal deductions they applied in calculating the amount of tax due. It might tell you about what sorts of investments someone holds, but only in terms of how much and what type of income has been paid out in that year (or losses taken/carried forwards).
If you want to use the ‘receiving a benefit from an offshore company’ rule, then anybody who has ever bought anything from Starbucks, or Amazon, or Asda, or Dell, etc. has received a benefit from an offshore company in the lower price they paid as a customer.
Governments run a fine line, they want to encourage certain types of investments and so offer things such as lower capital gains tax rates if you hold shares for a longer period, or lower rates of tax on income from dividends to encourage (potentially risky) investments in companies. They want to encourage people to pay into pensions and to give to charities, so they offer tax breaks around that. Internationally they want companies to come to their country and so compete over corporation tax and business rates. The problems (as I see it) are when they don’t apply the rules that already exist. I just can’t cry ‘tax avoidance’ over a parent giving a child a gift and then trying to live 7 years to reduce the inheritance tax due when they die, when transfer pricing agreements still (even after the law re-write) allow large corporations to move profits around to lower tax regimes. This is hardly surprising given the large job losses in HMRC. There just aren’t enough people who understand the law in order to assess it all.
What I used to do (certainly the high net worth non-dom stuff) was highly specialised and there were probably 1 or maybe 2 HMRC inspectors to every 30 people who worked on the ‘other side’, and there weren’t very many of us. Instead of using resources to catch benefit ‘cheats’, why not instead train those people in the tax laws so that they can spot where the big money is being lost, in corporate tax returns.