Tax evasion vs tax avoidance – what’s the difference?

Never before in the history of taxkind has so much been written about tax avoidance and it seems that there is still a way to go before the gap between public perception and reality is closed.

Put simply, tax avoidance is legal. There are a multitude of legitimate tax reliefs and ‘schemes’ which allow individuals and companies to pay less tax than if they were to ignore these reliefs altogether. For many, morals don’t come into it; they are simply abiding by the law and are therefore doing nothing wrong, legally speaking.

Indeed it is in the remit of most companies that they maximise shareholder returns and many do this by using legitimate tax avoidance to enhance profits and thus potential dividends.

Many tax avoidance schemes have been around for years and for individuals these can be as basic as gifting money to charity, owner managers taking more out of the company in ‘tax friendly’ dividends or topping up a pension fund.

The controversy has been focused more around higher earners and large corporates; those who have large chunks of disposable income not needed to feed the family or divert a cash flow crisis. This is the money which has been caught up in the tax avoidance scandals. It has been used in legitimate avoidance arrangements which have been approved and often championed by the various governments. The Enterprise Investment Scheme is one such example, encouraging wealthy individuals to invest in risky businesses. In return for helping with potential economic growth, the individual receives tax allowance on their chunk of invested income plus they pay relatively little tax on any returns they receive. It could be argued that without tax avoidance incentives such as this, many businesses would not get the financial backing they need in order to get off the ground.

It is understandable that some do not agree with the tax arrangements of Google, Starbucks and Amazon who have participated in avoidance methods which have resulted in lower tax bills. This may be seen as morally wrong but let it not be forgotten, this is still legal. It is also interesting to note that the UK government is producing legislation in an attempt to attract corporates to these shores to avoid paying higher taxes abroad! This is the sort of behaviour Margaret Hodge, bete noire of the Big 4 accountancy practices is saying is immoral.

Tax rules are made by government and so it could be argued that anger and frustrations be directed at Chancellor Osborne and the policy makers, rather than the companies and wealthy individuals who are carrying out their business perfectly legally.

And of course, not forgetting the definition of tax evasion – put simply this form of tax arrangement is illegal. And that means prison time and/or hefty financial penalties.

Very difficult balancing act and it’s unlikely that the perfect solution will be found in the UK any time soon.

Suzanne Blundell, Curo Chartered Accountants

June 2013