22 Jun 2012

The line between legitimate tax planning and tax evasion

In the week Jimmy Carr was criticised as "morally wrong" for using a tax avoidance scheme, senior tax partner at Baker Tilly George Bull explores the difference between tax planning and tax evasion

Cowering in front of the spectre of past expenses “indiscretions”, and spooked by the prospect of having to publish their own tax return, MPs have sadly lost much of their moral authority. This week’s attempt to grab the moral compass by sniping at selected individuals from behind the shield of parliamentary privilege has therefore backfired.

So where are the lines to be drawn between acceptable tax mitigation, unacceptable tax avoidance and tax evasion?

The truth is, of course, that there is no precise dividing line between the two

George Bull

To start at the end, it has been famously observed that the distance between tax evasion and tax avoidance is the thickness of a prison wall.

We need not debate that further here.

However, the continuing uncertainty as to what is acceptable tax planning, and what is not, powerfully demonstrates the conundrum that lies at the heart of this debate.

Down the generations, Chancellors of the Exchequer have enthusiastically seized on the tax system to change people’s behaviours. Social goods may be achieved by encouraging charitable giving or giving tax breaks for pension contributions. Capital allowances for equipment purchases help boost the economy and generate jobs.

These tax reliefs were enacted specifically to encourage particular behaviours and the legislature is rightly self-congratulatory when reliefs achieve their intended effect.

The problem comes when specific reliefs or whole areas of the tax code are used in ways in which Parliament never even thought about when the relevant Finance Bill was – in time-honoured tradition – being rushed through the legislative process. I won’t attempt an exhaustive demarcation but it is clear that the use of specific tax reliefs for their intended purpose is no more than legitimate tax mitigation. By contrast, contriving situations in which complex structures or transactions are used to save taxes in ways that strain and tear at the original legislation may well be interpreted as abusive tax avoidance.

The truth is, of course, that there is no precise dividing line between the two.

Another important lesson emerges from recent events. Those who promote tax schemes based solely on tax savings, and those who buy them on that basis, are only looking at part of the picture. For buyers with a moral conscience, it is important that they are comfortable with all aspects of what is being proposed, before they sign up for the scheme.

For those with no such scruples, other factors still have to be weighed up: the risk that the scheme will not succeed; the potential for many years of uncertainty before the final outcome is known; the attendant professional costs and, of course, the bill for tax interest and penalties which will follow if the scheme fails. Experience demonstrates that, while some can live with all of those uncertainties, most cannot.


George Bull is senior tax partner at Baker Tilly