Tax evasion, tax avoidance, tax breaks – can we get definitions right please?


Trying to find clarity in the tax debate – and a way forward

These terms are bandied about by all sides and unfortunately only succeed in blurring what for me at least are very serious issues. Tax evasion, tax avoidance, tax breaks and tax havens have all been featured in recent news reports – whether on the Olympics or whether on the report in the Observer.

Tax evasion: Criminal offence. Get caught doing it and you could get prosecuted.

Tax avoidance: Not criminal offence – but something Parliament, The Treasury and various campaigners don’t like, but some business people do like. The definition of tax avoidance that I go with is the one from The Treasury – from the executive summary (p5) of Tackling Tax Avoidance:

“[Tax avoidance] involves using the tax law to get a tax advantage that Parliament never intended. It frequently involves contrived, artificial transactions that serve little or no purpose other than to reduce tax liability. And it enables some taxpayers to gain an unfair advantage, undermining confidence in the tax system”

Tax breaks are not the same as tax avoidance. Tax breaks can be misused to avoid tax, but the breaks themselves have been approved by Parliament for a specific purpose. ISAs being one. So if anyone says you shouldn’t save in an ISA account because you’re against tax avoidance, they are talking nonsense. Parliament brought in tax exemptions for the Olympics – most probably because the IOC and LOCOG had their arms twisted by their sponsors. i.e. Give us these breaks or we’ll take the Games away from you. Hence why 38degrees and friends (using unfortunate language) have gone after the big sponsors getting them to commit publicly that they won’t take advantage of any tax breaks they might be eligible for.

Tax havens vs low tax jurisdictions.

When is a tax haven not a tax haven? I agree with the CBI here – a distinction needs to be made between transparent low tax jurisdictions versus those that hide behind secrecy. The Republic of Ireland for example over the past decade tried to run its economy as a low tax jurisdiction – i.e. with low rates of corporation tax (despite understandable pressure following the banking crisis to raise them). The advantage for the Republic was that you got the benefits of being almost integrated with the UK and EU markets without the huge corporation tax burdens that go with them. The Republic, being part of the EU has to comply with EU regulations. Somewhere like Liechtenstein which is not, does not. But being where it is, and following a tax scandal in 2008, several EU states including the UK negotiated treaties to find out more about wealth held there.

You then have the well-known ‘offshore’ ones such as the Cayman Islands – which has more registered companies than it has people. Up to 80% of its income is from financial services (40%) and tourism (up to 40%). In the 2008 US election campaign, Obama put the spotlight on one building supposedly housing over 12,000 corporations – one which was tracked down by the BBC as being a law firm hosting over 19,000.

Tax havens belonging to The Crown.

This is one of the big unanswered questions: Who should do what about them? The Channel Islands, the Isle of Man, the Cayman Islands…all have some sort of Crown oversight – but not a Parliamentary one. The Foreign Office is responsible for advising The Crown on overseas territories. The Ministry of Justice has oversight of Crown Dependencies. My take is that any debate around tackling tax avoidance from a UK perspective needs to have reform of the UK’s relationship with such territories at its heart.

Co-ordination with international counterparts

If it hasn’t hit politicians already, I don’t know where they have been. I’m still in favour of the principle that if your firms are multinational, your regulator needs to be. As far as Europe is concerned, at the moment it feels like the best of a very imperfect bunch. Given its inability to sort out the Eurozone crisis, I don’t hold particularly high hopes for it sorting out tax avoidance and tax evasion given the scale that its at. Not least because it turned a blind eye to such activities within existing Eurozone states.

The problem the UK faces is a political establishment with a disposition against any co-ordination or harmonisation in the area of tax – lest it be seen as the next step towards an EU superstate. The Coalition has already made clear its opposition to steps such as a financial transaction tax. Given where much Conservative Party funding has come from in recent years, that should not be a surprise. The challenge for Labour in the coming few years is whether it will commit to doing the opposite – and (should it get elected in the next election) holding firm under a deluge of lobbying form The City.

One area where I agree with those on the centre-right of the political spectrum is simplifying the tax system. I don’t agree with all of their steps – for example I don’t agree with flat taxes or poll taxes to replace income tax. But the number of tax breaks and concessions that litter the current tax code make things much easier for those that want to partake in tax avoidance activities to do so.

More tax inspectors?

Imagine if the levels of reported tax avoidance and tax evasion were attached to levels of benefit fraud. What would the response be then? Again, going by the figures reported from Treasury, the Exchequer Secretary to the Treasury David Gauke MP (C) said the ‘tax gap’ was estimated at around £40billion. I like quoting from this document because most of the people who seem to defend tax avoidance to me tend to be Conservatives – and this document was signed off by a Conservative Minister.

What we have at the moment is a massive imbalance of people doing the regulating (as opposed to regulations) versus the firms being regulated. You can have all the traffic laws in the world but if you only have one police office responsible for traffic…it’s a similar thing here. Simple question to all political parties:

What plans do you have to rebalance the number of skilled regulators with the number and size of firms that should be regulated in the financial sector of the economy?

Part of the answer in tackling these tax issues is international co-operation, part is in changing the laws and regulations, and part is in ensuring there are enough skilled regulators to ensure the law is being abided by. Because if the banking scandals have taught us anything, banks cannot at present be trusted to regulate themselves.


7 thoughts on “Tax evasion, tax avoidance, tax breaks – can we get definitions right please?

  1. Oh, it’s far more simple than that. Legitimate tax break is what politicians do to avoid paying their tax (think tax exempt status for MPs’ expenses, or George Osborne’s trust fund). Evil tax avoidance is what people that politicians don’t like do (think Jimmy Carr).

  2. I partially disagree with the definition of tax avoidance used. The problem with it, is the fact that the law is not meant to be purposive. Either something is or isn’t legal and to try to ascertain what “Parliament intended” is not something that is expected of the taxpayer.

    A taxpayer is free to arrange his affairs as he wishes and is not required to maximise that amount of tax payable. As long as the arrangements are legal (both individual steps and the whole chain of transactions) there shouldn’t be a problem. That’s what tax avoidance is normally defined as.

    The debate got muddied when we started referring to “aggressive tax avoidance”. Really either HMRC should have won cases such that this became tax evasion or changed the law. Because moving to a situation where we have to examine what seems fair dramatically undermines certainty and the rule of law.

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