Toy story: The difference between tax avoidance and evasion

Posted: November 10, 2017 in News

There has been plenty of coverage of revelations this week that millions of pounds from the Queen’s estate has been invested in offshore tax havens.

The Paradise Papers highlighted hundreds of millionaires using offshore schemes to hide their cash.

This has rightly shone the spotlight on the issue of tax evasion and avoidance, but it is important to get the terminology right.

Tax evasion is illegal. This is where an individual or saver deliberately omits, conceals or misrepresents information in order to reduce their tax liabilities.

Tax avoidance, technically is legal, as long as it is in the spirit of the law. The trouble is HMRC and lawyers and financial advisers may differ on how far the spirit stretches.

HMRC defines avoidance as bending the rules of the tax system to gain a tax advantage that Parliament never intended. This often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage.

This could for example mean understating the value of transactions to reduce stamp duty or misrepresenting profits to reduce corporation tax.

Clamping down on those avoiding and evading tax for illicit gain is important, but at the same time, we must give people confidence to use legal methods of tax relief.

Anyone with a pension or an Isa is technically a tax avoider. Both let you save money and earn interest tax-free. But they are perfectly legal, as long as you keep to your allowances.

You can currently put up to £40,000 per year in a pension and £20,000 into an Isa.

There are other perfectly kosher savings vehicles such as Enterprise Investment Schemes or Venture Capital Trusts that give tax relief for those backing smaller companies.

Additionally, everyone has a personal savings alliance where basic rate taxpayers can earn up to £1,000 in savings income tax-free, while higher-rate taxpayers get a £500 allowance.

Amid all the focus on overseas tax avoidance schemes, it is worth noting that there are offshore investment funds, authorised under the Alternative Investment Fund Managers Directive, that are also perfectly legal.

It is important in all the hysteria over getting the wealthy to pay their fair share to remember the legal ways you can avoid tax so that people can still feel confident about saving without fear of the taxman.

Hopefully the Lego men and women below can help when it comes to tax planning.

tax avoidance

taxevasion

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