Everyone knows it’s okay to evade tax but completely wrong to avoid it, right? Wrong. What I meant to say is that it’s okay to avoid tax but illegal to evade it. Confused? You’re not the only one. On a recent BBC News item tax polemicist Richard Murphy had to repeatedly correct a muddled newsreader over definitions of avoidance and evasion.
Maybe it’s time we took a closer look at the difference…
First stop: the Oxford English Dictionary.
Avoid: 1. keep away or refrain from. 2. prevent from doing or happening.
Evade: 1. escape or avoid. 2. avoid giving a direct answer to (a question) 3. escape paying (tax duty).
So, there really isn’t a huge difference in definitions (apart from the very last point!), but it’s the idea of escape that’s crucial. You can’t legally escape from paying tax, but you can legally avoid certain tax liabilities by clever financial planning. However, the present government has made a point of tying avoidance and evasion together by referring to them both as morally wrong.
Many commentators disagree with this notion, including Conservative MP John Redwood who recently defined tax avoidance as a legitimate and encouraged way of reducing your tax liability. He referred to it as “another name for tax incentives” which could include the following:
1. Using a contractor to do work on your home who is below the VAT registration threshold to avoid VAT charges
2. Entering Central London by car outside the hours of the Congestion Charge
3. Buying a larger home than you need so more of your total investment is covered by the CGT relief on first homes
4. Investing as much through National Savings and ISAs as you can afford to avoid tax on investments
5. Going by subsidised bus rather than car to avoid fuel duty
6. Buying larger items that attract VAT just before a VAT rise
7. Home brewing to avoid various liquor duties
8. Playing the lottery instead of betting to avoid gambling taxes
According to this perspective tax avoidance is not just technically lawful but morally right. However, issues regarding offshore accounting processes (such as Employee Benefit Trusts) can also be legally acceptable, but are they within the spirit of the law? For this reason, I think the Permanent Secretary for Tax, Dave Hartnett, offers a more useful definition for what constitutes tax avoidance:
“Evasion is about dishonesty and concealment. Avoidance is about using the tax system in a way it was never intended. Lots of people see it as reprehensible but it’s not dishonest activity. There’s a difference.”
So, the key difference between evasion and avoidance is the issue of honesty. If you’re avoiding tax you can be clear on what you’re doing to lower your tax bill (i.e. here’s what I’m doing to lower my tax bill, and this is why it’s legal), but in issues of evasion, you depend on subterfuge to get away with decreasing your tax liability.
Evasion then is a matter of clear criminal wrongdoing such as non declaration of earnings or claiming deductions for expenses that were not incurred or are not legally deductible. Tax avoidance is the exploitation of loopholes which, though legal, are morally questionable. All those tax saving methods described by John Redwood can be categorised as basic tax planning.
With all that said, the next time you hear the terms ‘avoidance’ and ‘evasion’ being casually mentioned, who knows what they might mean – as it seems to depend on the individual’s interpretation. Perhaps it’s time these definitions were set in stone.
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