Planning to pay less tax doesn’t make you a tax cheat. This article explains the difference between tax evasion and tax avoidance. Case law is quotedMake Text Bigger
The government is diverting £900 million over the next three years to beef up HM Revenue and Customs in a bid to clamp down on tax avoidance to make sure everyone hands over every penny they should to swell the Treasury coffers.
Ministers demonise tax cheats in the media as immoral and illegal – and have increasingly included the term tax avoidance in the same context as tax evasion.
Calling someone a tax cheat because they are financially savvy is like calling someone an insurance cheat because they can arrange cheaper car cover.
The truth is tax avoidance is not wrong – those evading tax are the criminals who should be bought to book.
Despite how the government puts a spin on the facts to try to blur the boundaries, in tax law, the line between the two is quite apparent:
- Tax evasion is against the law and somewhere along the line involves fraud – generally by understating or failing to declare income. Everyone would agree this is illegal and immoral.
- Tax avoidance is perfectly OK and every taxpayer has the right to organise his or her tax affairs within the rules to pay the least amount of money possible over to the government. This right is enshrined in law by the courts.
The most widely stated case concerning the right to avoid tax is Ayrshire Pullman Motor Services and Ritchie v Inland Revenue Commissioners (1929 14 TC 754), from which this famous quote derives: “No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow — and quite rightly — to take every advantage that is open to it under the Taxing Statutes for depleting the taxpayer’s pocket.”
Later cases redefined some of the points, but still left the right to honestly organise tax affairs to a taxpayer’s financial benefit intact – specifically is the case of Inland Revenue Commissioners v The Duke of Westminster (1936 19 TC 490), which held: “Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.”
The last case to remember involves the Ramsay Principle – deriving from WT Ramsay v Inland Revenue Commissioners (1981 STC 194). The principle dictates that where a transaction or series of transactions was created just to avoid tax, the transaction(s) may be ignored by HMRC and the original tax still stands.
When a tax professional talks about planning or strategy, they mean legal tax avoidance that complies with the rules in line with Ayrshire Pullman and the Duke of Westminster rulings.
Next time a minister preaches about immoral and illegal avoidance costing the country lost taxes, remember tax avoidance is perfectly allowable providing you are open and honest about your financial affairs.
If you would like further advice on tax or accountancy please call The Money Centre’s Customer Care Team on 01603 894525 and we will be delighted to refer you to our Joint Venture Tax Partners who specialise in property taxation. The initial introduction is a no cost no obligation service.
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