Tax evasion is illegal. It is deliberately not paying the tax that is due. Tax avoidance, however controversial, is not illegal. It is paying the least amount of tax possible, whilst staying within the law.
Average Joe, if offered a completely legal way of paying less tax, would likely jump at the chance. Many of us use ISAs to avoid paying tax on our savings. Moreover, ‘responsible tax planning’ is actively distinguished by the treasury and will not be affected by proposed new legislation. But where is the line to be drawn between this, and millionaires paying as little as 1% tax?
Few people would admit to finding the latter morally acceptable. Danny Alexander has likened tax avoiders to ‘the moral equivalent of benefits cheats’. David Cameron has described schemes such as K2 and the Icebreaker 2 as ‘morally wrong’.
It is the moral aspect of this topic that is the most emotive. Tax avoidance first hit the headlines in February 2012 when details emerged of companies such as Barclays avoiding hundreds of millions of pounds worth of tax through tax avoidance schemes. This week, individual celebrities have become the latest under fire; no criminal activity or wrongdoing has been alleged against any of those involved, yet there is a moral uneasiness about tax avoidance which has produced many a passionate debate. But should the blame be aimed at the companies and individuals in question, or should it in fact be aimed at a tax system which allows the abuse of such loopholes?
The government proposes bringing in a General Anti-Avoidance Rule (‘GAAR’) to act as blanket legislation which guards against abusive tax avoidance. Whether the avoidance is regarded as abusive will be decided according to factors such as whether the arrangement has been artificially generated, and whether the scheme is an ‘off the shelf’ package rather than a bespoke arrangement. There should be a valid, legitimate explanation for why the scheme was commercially appropriate.
The Treasury’s final report on GAAR concludes that a ‘broad spectrum general anti-avoidance rule would not be beneficial for the UK tax system. This would carry a real risk of undermining the ability of business and individuals to carry out sensible and responsible tax planning.’ A broad rule would also require a ‘comprehensive system for obtaining advance clearance for tax planning transactions’, providing HMRC with discretionary power as to the limits on ‘responsible tax planning’.
It therefore proposes bringing in a ‘moderate’ rule which leaves responsible tax planning unaffected but instead targets abusive arrangements. This, it is hoped, would deter contrived and artificial schemes, provide a more level playing field for businesses, reduce the risk of stretched interpretation by judges, and improve the certainty in the existing body of tax rules. It is proposed that VAT would remain outside the scope of the GAAR due to this tax having its own anti-abuse rules derived from EU law – applying a UK GAAR in parallel could raise issues of inconsistency with EU law. The GAAR consultation document has now been published with a view to legislation being introduced in Finance Bill 2013.
So we are faced with a spectrum. At one end is responsible tax planning, at the other is tax evasion and at the centre is the ‘grey area’ of tax avoidance, involving varying degrees of abuse and every so often engaging administrative sanctions. It is the centre which requires greater clarity.
Taxation relies heavily upon voluntary compliance and honesty and an individual suspected of acting dishonestly with regard to his tax affairs may find himself accused of potential criminal offences. Tax evasion is committed intentionally; it requires knowledge and fraudulent conduct – concealment or misrepresentation. It is when these factors come into play that we wander into the realm of the criminal law.
Both Barclays and Jimmy Carr have stated that they relied on the professional advice that they received prior to entering into avoidance schemes; they were assured that the schemes were both legal and compliant with the tax code. The step from legal tax avoidance into criminal tax evasion crosses a distinct legal barrier. What becomes ‘muddy’ is the moral debate which surrounds legal avoidance, and this evokes political views in us all. No doubt there will be many people waiting to see how effective the Government is in legislating around tax loopholes in future.
Corker Binning is a law firm specialising in general criminal work of all kinds. Visit our Tax investigation and litigation page for more information about how we can help you or call us on 0207 353 6000.