Evasion, avoidance or planning?

What are the differences between tax evasion, tax avoidance and tax planning. Opinions among politicians, tax officials and even among accountants, will vary about where the line between legitimate planning and morally dubious avoidance should be drawn, but here, with some examples is my take.

But first a few quotes.

The first is from Lord Clyde giving the court’s decision in Ayrshire Pullman Motor Services v Inland Revenue [1929].

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 which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.

And the second is from Nick Clegg complaining on the Andrew Marr show about the last Labour government’s failure to clamp down on tax loopholes, which are …

… perfectly legal but morally questionable.

And finally a thought from the tax guru Robert Maas who has pointed out that tax planning is something all of us do, probably without realising, every day.

… am I avoiding VAT when I buy my zero-rated lamb chop my zero-rated cauliflower and my zero-rated carrots and cook them at home paying only 5% VAT on my gas usage, whereas if I had chosen to eat out I would have had to pay 20% VAT on the entire cost of my meal? If so, I am one of those hated tax avoiders, because I eat in a lot more than I eat out.

So with those wise words in mind:

 Tax PlanningTax AvoidanceTax Evasion
CharacterUsing available reliefs entirely honestly and in the way there were intended.Perfectly legal but morally questionable.Illegal - typically involves dishonesty and concealment.
ConsequencesYou get tax reliefIt might work - it might notInterest, penalties & possible criminal record
Tax enquiry unlikelyInevitable tax enquiryTax enquiry when caught
Tax affairs settled quicklyYears to find out if it has workedSeveral years to settle
ExamplesUsing your annual ISA allowanceDiverting income through an offshore trust.Failing to register
Incurring business expenses before the year end rather than afterUsing investment vehicles to create artificial lossesUnder-reporting income
Taking 2 weeks off to avoid going over the VAT thresholdArtificially transferring income to tax havensFraudulent VAT claims