I realised that the glossary was missing some key entries yesterday. As a result, I have added three new items:
Tax arbitrage refers to the process of selecting the regulation, law or legal system that will be applied to a transaction, or more likely a series of related transactions, with the usual intention of securing a profit, although this might be by way of reduced cost than by increased revenue.
Situations where such choices might be made relate, for example, to the use of differing accounting standards, or with regard to different regulatory environments e.g., by recording transactions in a tax haven or secrecy jurisdiction rather than the location where the transaction might be more obviously located.
A great deal of tax avoidance involves forms of arbitrage. The identification of opportunities for regulatory arbitrage is at the heart of tax spillover assessments.
Tax evasion is the illegal non-payment or under-payment of taxes, usually resulting from the making of a false declaration or no declaration to tax authorities; it entails criminal or civil legal penalties.
Tax avoidance is the term given to the practice of seeking to minimise a tax bill without deliberate deception (which would be tax evasion or fraud). The practice may be summarised as ‘seeking to get around the law'.
Tax avoidance usually entails setting up artificial transactions or entities to re-characterise the nature, recipient or timing of payments with the intention that a resulting saving in tax should arise. Motive is generally considered important in the identification of tax avoidance activity.
Where the entity is located or the transaction is routed through another country, it is international avoidance. Special, complex schemes are often created purely for this purpose.
Since avoidance often entails concealment of information and it is hard to prove intention or deliberate deception, the dividing line between avoidance and evasion is often unclear, and depends on the standards of responsibility of the professionals and specialist tax advisers.
An avoidance scheme which is found to be invalid entails repayment of the taxes due plus penalties for lateness.
Some claim that this term refers to any activity that reduces the amount of a person's income subject to tax, for example, claiming of allowances and reliefs clearly provided for in national tax law. This is not the case. If the law provides that no tax is due on a transaction then no tax can have been avoided by undertaking it. This practice is now generally described as tax compliant. Tax avoidance instead refers to the practice of seeking to not pay tax contrary to the spirit of the law. Some also call this aggressive tax avoidance.
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Welcome additions to the glossary – many thanks.
Is buying an ISA or contributing to your pension tax avoidance? If so is this included in your calculation of the tax gap?
Have you read what I have written?
Come back suggesting where you think it might be in a proper tax gap analysis and then we might have a discussion.
It happens that today I received a circular from the (very expensive) firm of “wealth advisors” St James Place offering me access to a seminar on minimising inheritance tax. (The missive is now in the recycling bin).
But the above raises the question, does establishing trusts which are outside inheritance tax (which I think is the sort of thing they are promoting) count as tax avoidance, or would you count it as tax compliant since I understand it follows the taxation rules for trusts? My instinct it is outside the spirit of fair taxation of inheritances.
You will note that I extend the definition of the tax gap in other wok I have done to cover five areas, not the three HMRC use. Tht lets me consider the abuse of available exaemptions as a party of the tax gap. That is what I think is going on here.
I thought Clair Quentin’s paper, “Risk-Mining the Public Exchequer”, had an interesting way of trying to draw a clear line between tax avoidance and tax compliance, in terms of whether whether the taxpayer is taking a course of action which deliberately increases tax risk, meaning the risk that the taxpayer’s filing position could be challenged by the tax authority, increasing the amount of tax due.
Compliant tax advice is often about reducing tax risk. If advice increases tax risk, then the advisor should be warning about this in advance.
I expect these schemes for getting out of inheritance tax come with lots of warnings in the small print!
I agree with their approach
Is ‘tax minimisation’ often ‘encouraged’ by our ‘well meaning’ politicans? e.g. For instance, the many exemptions from or reduction in CGT and inheritance tax for investing in high risk startup companies – or companies that pretend to be high risk startup companies.
The resulting complexity has the added ‘benefit’ of reducing transparency / perceptions of fairness in the system. When for years the simple decision of whether to operate a business as a sole trader or a company carried significant tax consequences – e.g. whether income is labelled earned (higher tax) or investment (lower tax) income – you really must wonder at the intention of those who designed the system.
It is encouraged, as you suggest