I have published a new Tax Briefing that offers definitions of each of the above terms, which are frequently abused. The briefing says
the following:
Introduction
The language of the tax gap and all issues relating to it is confusing for many lay observers of the tax world. This briefing seeks to tackle one major cause of confusion, which is the difference between tax evasion, tax avoidance, tax compliance and tax planning.
Tax evasion is the illegal non payment or under-payment of taxes, usually resulting from the making of a false declaration or no declaration at all of taxes due to the relevant tax authorities, resulting in legal penalties (which may be civil or criminal) if the perpetrator of tax evasion is caught.
Tax avoidance is seeking to minimise a tax bill without deliberate deception (which would be tax evasion) but contrary to the spirit of the law. It therefore involves the exploitation of loopholes and gaps in tax and other legislation in ways not anticipated by the law. Those loopholes may be in domestic tax law alone, but they may also be between domestic tax law and company law or between domestic tax law and accounting regulations, for example. The process can also seek to exploit gaps that exist between domestic tax law and the law of other countries when undertaking international transactions.
The tax avoider faces uncertainty when pursuing their activities. That uncertainty focuses mainly on their not really knowing the true meaning of the laws they seek to exploit and taking the chance that either a) they may not be discovered to be tax avoiding or b) that if they are the interpretation placed on the law that they seek to exploit is favourable to them. Their risk of penalties arising as a result of their actions depends upon what the outcome of these risky situations might be.
Tax compliance
Tax compliance is different from tax avoidance and tax evasion because it is defined as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. The significant difference between tax avoidance and tax compliance is the intent of the taxpayer. A tax avoider seeks to pay less than the tax due as required by the spirit of the law. A tax compliant tax payer seeks to pay the tax due (but no more).
Tax planning
Tax planning is a part of tax compliant behaviour. It is not a part of tax avoidance. Tax law reflects the complexity of modern life and the multitude of choices and options available to all taxpayers when legitimately seeking to structure their affairs. This necessary offer of options within tax legislation creates the opportunity for choice on the part of the tax payer and means that determining the right amount of tax (but no more) that they seek to pay does necessarily requires the exercise of judgement on occasion.
So long as the exercise of that judgement seeks to ensure that the taxpayer makes choices that exercise options clearly allowed by law and that they do not exploit unintended loopholes created between laws then that process of a taxpayer choosing how to structure their affairs is the process of tax planning, which is a legitimate, proper and socially acceptable act.
As example, a taxpayer choosing to save in an ISA (Individual Savings Account) is exercising an option made available to them in law that is entirely tax compliant so long as all the published conditions for saving in that way are met. As a consequence no one can accuse a person using an ISA of tax avoidance. Those who say they are tax avoiding can safely be said to be wrong.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
If there is a disconnect between the letter and the spirit of the law, who should be charged with interpreting what the spirit of the law is?
It’s a shame you couldn’t make the distinction when you wrote the Tax Gap report.
@Peter
I did
If you are unable to notice or persistently lie about it that is your issue
But the definitions have not changed
The conclusions have not changed
The only issue is your continued misinterpretation – which is no doubt absolutely deliberate
Seeing as you didn’t answer my question I can only assume that you too do not know how the spirit of the law is to be ascertained.
It is clearly not for HMRC to determine what the spirit of a law is, neither is it the role of the tax adviser to determine what the spirit of the law is.
It is for the legislature to transfer this so called spirit of the law into legislation. If he does not, and the law is open to different interpretations then frankly it is tough luck if the taxpayer succeeds in tax avoidance.
Therefore, your beef is not with the taxpayer and their advisors, it lies with the legislature.
Frankly, the whole concept of spirit of the law in fiscal measures is just nonsense. I think the spirit should go with the taxpayer and you believe it should always be applied against the taxpayer. Confusion still reigns.
@Hugh
I do not run this blog for your convenience, you may be surprised to hear
Other readers will no doubt not be surprised to note that like others of your persuasion you do however think the world revolves around you
It doesn’t
And I do know who my beef is with
I am also entirely happy that the spirit of the law can be discerned – after all from 1980 to 2004 the law was effectively based on the idea that it could be discerned
So you are entirely wrong
Richard, what changed in 2004?
@Greg
House of Lords decisions that took us back to pre 1980
You present an interesting opinion, but these definitions do not align with interpretations applied by the courts, as I am sure you are aware. And I think also do not match the way HMRC, and Parliament work in managing the grey area between avoidance and evasion.
Your problem is in your artificial construct of tax compliance, or more specifically your reliance on the idea of the spirit of the tax laws. Under English law the idea is that you comply with the letter of the law, and any coflicts are resolved in a Court of law. the Courts are the arbiter, and Parliament is the law maker.
As you rightly point out, the UK tax code is complex, and there are many instances where individual provisions are contradictary. It is reasonable to draw a distinction between artifical schemes which are in the loophole area, and which more closely fit your definition of avoidance, and conflicts where reasonably made choices can impact the total tax bill arising, which don’t.
@alastair
Look at the HMRC definition of the tax gap
They are exactly in accord with me
Let me start by saying categorically that I am totally with the spirit of what you are saying Richard. I believe that it’s fundamentally ridiculous that employees, the self-employed, owners of smallish limited companies, private equity traders etc pay different rates of tax (and NI) but…..
As I see this problem, you are asking taxpayers not to exercise choices that are open to them as the law is written, if not what Parliament intended when writing that law. The most specific instance of this is the legal, if not intended, right to choose between self-employed or limited company status. I would respectfully suggest that the “loophole” that exists has been known for many years and Parliament has done nothing to close it. In those circumstances, I further suggest that it is more or less inevitable that the vast majority of ordinary, self-employed taxpayers, ie those most likely to use this “loophole”, are going to take advantage of the choice and have no moral qualms about what they’re doing.
Compare this with the deal private equity firms did with the Treasury to pay 10% CGT on their income (and so pay a lower effective tax rate than their cleaners). This was not only outside the spirit of the law but, being based on a negotiated concession, also outside the letter.
Compare it also with more or less unlimited tax relief on pension contributions that benefits only the wealthiest and is, in my opinion, a wholly immoral tax relief enshrined in law.
These three examples of “loopholes” arise for different reasons. In the first, Parliament has failed to act on a known problem, in the second a deal has been done behind closed doors and in the third Parliament has failed, for reasons of politics or cowardice, to grasp the nettle. I suggest that all three, regardless of their root cause, lead to similar undesirable, if not entirely unintended, consequences.
I firmly belief that clear legislation is not only the only workable but also the fairest basis of eliminating loopholes – appeals to morality don’t stop major companies and wealthy individuals taking advantage whenever and wherever they can and they won’t stop anyone else either. And I agree with the suggestion that you’ve made elsewhere, that purposive rather than prescriptive legislation would improve the situation, because the explosion of prescriptive tax legislation over the last 10-15 years has, it seems to me, led us ever deeper into this morass.
Lest you view these comments in a similar vein to those from the far right, I’m open to persuasion that my conclusions are incorrect!
Comment deleted because the poster persistently uses a false email address
Could you please show me where you have distinguished between tax planning and tax avoidance in your work.
In the Missing Billions for example you calculate the difference between corporation tax paid and headline rates at £11.9 billion. You state: (p.34)
“Much may be due to legitimate tax planning, but by no means all is. Some, undoubtedly, is due to tax avoidance.”
However you include the entire £11.9billion in your headline £25billion loss due to tax avoidance which you then quote in your other reports.
HMRC estimate that avoidance by large companies costs £3.1billion (quoted in your blog of 9 December 2009). What is your estimate of avoidance and where have you revised your £25billion number downwards?
@nick james
I won’t be arguing with you – as you’re right
We’ve got some lousy laws
And governments have been too timid to change them
I’m entirely happy to see them kicked up the back side too
And HMRC – who should never have taken Arctic Systems without changing the law first
A GAntiP would have revealed that flaw
A GAntiP is not enough – purposive legislation and an equitable basis for legal interpretation is also needed
I think we’re on common ground
@Brian Law
I have commented here http://www.taxresearch.org.uk/Blog/2010/06/29/tax-avoidance-is-part-of-the-tax-gap-so-lets-move-on/
I have said I am working on this issue again at present and will re-publish it later this year
I confirm now I am happy with the estimate for the present – because amply evidence suggests any estimation difference one way is more than compensated the other way
I am also happy that the personal tax estimate remains low
And as a part of the total tax gap I estimate any difference arising is utterly immaterial
So, of course I do expect to reise the data
Of course I do expect to update the methodology
Of course I do expect a new result
Of course I accept an estimate is just that
And of course I’m willing to engage in constructive debate
But you haven’t done that – not least by failing to note that tax avoidance is legitimate
I accept I could have written the sentence in question better with the power of retrospect
But it does not change the conclusions
I trust you are not suggesting that tax laws should apply retrospectively.
@JayPee
I would have thought it glaringly obvious I was doing the exact opposite
@Richard Murphy
I am afraid that your view is anything but obvious. if it was, why then does it matter whether HMRC changed the law before or after the Arctic Systems case? Clearly the Revenue thought that the law was on their side and persisted with the case up to the House of Lords.