Tax Avoidance and Tax Evasion

A Rahman Ravelli view of tax, the law and morality

Whether it be corporations or celebrities, the issue of tax is never far from the headlines. Is big business making cosy deals with the tax man? Are the rich and famous hoodwinking HM Revenue and Customs (HMRC) by using elaborate schemes to hide their wealth and, therefore, their tax liabilities?

In considering such issues, we need to make a distinction between tax avoidance and tax evasion. Tax avoidance involves exploiting the tax system to your advantage. You may disclose all relevant information to HMRC but you legitimately use aspects of the tax regime to ensure that you do not suffer the “full hit'' when it comes to paying tax. Tax deductions, creating offshore companies in tax havens or altering the structure of a business are all legal means of avoidance.

Tax evasion, however, involves illegal efforts to escape paying your full tax liability. Like tax avoidance, it can be practised by individuals, companies and organisations. Unlike tax avoidance, it is likely to involve disguising the true financial standing, most notably through dishonest reporting of income or profits.

Views on tax avoidance and the reasons why people do it vary. Some see it as every person's right to legally try and pay the minimum while others think it is the last resort of the social parasite. But, whatever the view, it is legal. Tax evasion, however, is criminal.

UK law is evolving to try and prevent people and companies carrying out transactions for the simple purpose of reducing their tax liability. The last decade has also seen the government order people and companies to disclose more details of their tax avoidance schemes to HMRC. The UK authorities, however, seem to accept the need for what they call tax mitigation, which means acceptable tax planning — reducing tax liabilities in ways that Parliament has not criminalised but has not expressly approved of. Such tax avoidance follows the letter of the law but most certainly not the spirit. And, as legal tax avoidance loopholes are closed by government, the expert tax advisors seek new ones to exploit. Many people will regard such activity as morally wrong including, no less, the then Prime Minister, David Cameron, when talking about comic Jimmy Carr's tax affairs. But it is not illegal.

For some businesses and individuals, the temptation is to not just avoid taxes but to evade them. Trying to show taxable profits were made in countries with lower tax jurisdictions is a routine tactic of big earners looking to pay small tax bills. And such moves can only be proved to be tax evasion if laws are broken and tax that is due is not paid.

The Powers of HM Revenue and Custom

But with HMRC looking ever keener to increase revenue for the government, it must be remembered that some of the tax avoidance practices that are often viewed as acceptable may not always turn out to be so. An example of an unsuccessful attempt to gain a tax advantage was seen in the case of Magnavox Electronics Company Limited v Hall. In this case, the taxpayer sought to ensure that a chargeable gain on a sale to a replacement purchaser arose in the same accounting period as a gain on the sale under the original contract. But this was not accepted and he fell foul of the HMRC.

Such tactics need to be thought through carefully otherwise the penalties can be fierce. Tax investigation penalties can range from 10% up to 200% of the tax that HMRC says is payable as a result of their tax investigation. One factor that can have a major bearing on the size of a penalty is the use of an experienced negotiator.

At Rahman Ravelli, we regularly represent individuals, companies and organisations that are being investigated over their tax affairs. Our staff have decades of experience of dealing with tax investigators. As soon as someone realises they are under investigation they have to accumulate all the relevant information, contact a legal tax expert and then let them negotiate on their behalf. With HMRC now out to use its powers under Code of Practice 9 (COP 9) to force companies to disclose any underpayment of tax, the right legal advice from day one has become even more important. In next month's newsletter we shall examine COP9 in detail.

Tax needn't be taxing, to quote the old advert. But without the right legal advice it can be costly.