Avoidance Evasion Planning

The differences between tax evasion, tax avoidance and tax planning explained
Most people know that tax evasion is wrong. Not so long ago, tax avoidance used to be thought of as “acceptable” and so we could be forgiven for being at least a little uncertain, these days, as to whether “avoidance” can ever represent the “acceptable face” of tax reduction.

Uncertainty (confusion even) will certainly have been influenced by the fact that over the past few years “avoidance” has arguably had more (negative) publicity than evasion. So much so that for some, even many, “tax avoidance” is synonymous with tax evasion.  In the light of all of this, our impression is that there is still confusion over what is and isn’t “acceptable” and some may shun even the most permissible planning through fear of HMRC challenge. If you take action (with or without advice) and as a result you end up paying less tax, have you not “avoided” tax – regardless of how you avoided it? Well, at a simplistic level, yes you have. But the determination of whether what you have done is likely to be challenged by HMRC is dependent on whether the means of avoidance was contemplated by Parliament. Did the planning that you carried out (even if it was within the “letter of the law”) defeat the established intention of Parliament? If so, it will be (probably successfully) challenged. In extreme cases, the assistance of the General Anti Abuse Rule (GAAR) may be enlisted in support of HMRC. If not, then you are likely to be ok, regardless of the tax you have saved (avoided).

Given the importance of clarity over what is and isn’t permissible when it comes to actions taken to reduce taxation any official guidance that can be relied on must be seen as helpful. Such help is at hand in the shape of an important part of the HMRC / Treasury report entitled “Tackling tax avoidance, evasion, and other forms of non-compliance” published in March this year.

On pages 6 and 7 of that document, tax evasion, tax avoidance, tax non-compliance and tax planning are all clearly defined along with a clear statement of the consequences of each.
Here are some definitions and consequences.

Tax evasion is always illegal. It is when people or businesses deliberately do not declare or account for what they owe. It includes the hidden economy, which is when someone hides taxable activity from HMRC completely.

Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law. Most tax avoidance schemes simply do not work, and those who use them may end up having to pay much more than the tax they tried to avoid, including penalties.

Tax non-compliance is not getting your tax right the first time, for any reason. It includes evasion, avoidance and other behaviours, such as making careless errors or mistakes on your tax return. Tax planning involves using tax reliefs for the purpose for which they were intended – it is not tax avoidance. For example, claiming relief on capital investment, saving in a tax-exempt ISA or saving for retirement by contributing to a pension scheme are all legitimate forms of tax planning.
So that’s all clear then.

Tax plan all you want but don’t defeat the intent of Parliament. Basically, use tried and tested strategies that are effectively contemplated by the legislation or otherwise have been clearly and reliably “accepted” as “non-confrontational” by HMRC. So, does all of this clarify and to some extent limit or diminish the importance of the financial adviser in relation to that taxation part of the financial planning process? Absolutely not.

The value of advice
To conclude that if you rule out aggressive or “edgy” tax avoidance arrangements planning is then reduced to the “easy stuff” would be a grave misjudgement. There are so many hard choices to make in all aspects of the financial planning process. And the consequences of making the wrong choices can be serious and financially detrimental – and therein is the value of expert advice. Knowing that choices exist, knowing the consequences of those choices and then making the choices that will have the most positive impact on the achievement of the client’s objectives.

For example, which tax wrapper (after the tax “no brainers” of pension + ISA) will deliver the optimum after tax outcome – UK or offshore collective and if offshore, reporting fund or non reporting fund? And then would a UK investment bond deliver a better outcome? Even more important to know the nuances given that the same underlying investment portfolio could, broadly speaking, underpin all of them.

EIS or VCT? Which trust to use for estate planning? Corporate investment – what are all of the tax implications? More than you might think at first glance.  The list (of choices – with consequences) goes on. clients aware of those choices and telling compelling stories that illustrate the (financial) difference between taking the wrong or right choices for people like their clients is a key part of the process that leads to engagement and better outcomes. In the current era of disclosure of “costs and charges” this level of clarity will also be a strong contributor to proving the value of advice.