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Published On: Fri, Jun 12th, 2020

The legality, extent of tax avoidance and evasion

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By Olanrewaju Saints

There is a specific offence relating to the ‘fraudulent evasion of income tax’ in the Taxes Acts, which was originally introduced in 2000. However, this legislation is not frequently used, as the Revenue often prefers to rely on the common law when they prosecute.
The most often quoted ruling on this subject confirming that tax avoidance is acceptable and legal comes from the court case of IRC v Duke of Westminster (1936). The Duke of Westminster paid his gardener a weekly wage and entered into an agreement by which he stopped paying the wage and instead drew up a covenant agreeing to pay an equivalent amount.
The gardener still received the same amount in wages but the Duke gained a tax benefit because under the law that applied at the time the covenant reduced the Duke’s liability to surtax.
When the case came before the House of Lords, the judge, Lord Tomlin, stated:
“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax” (IRC v Duke of Westminster [ 1936 ] AC1 (HL)).
There is a specific offence relating to the ‘fraudulent evasion of income tax’ in the Taxes Acts, which was originally introduced in 2000. However, this legislation is not frequently used, as the Revenue often prefers to rely on the common law when they prosecute.
Very occasionally, you might find that a taxpayer is prosecuted under the Theft Act for false accounting (or possibly the Fraud Act 2006) but the majority of tax evasion cases are brought under the common law criminal offence of ‘cheating the public revenue’ (remember Harry Rednapp and PJ Proby?).
Cases brought under this common law have established that for the offence to be committed there does not have to be a dishonest act – an omission such as the failing to account or register for VAT will suffice provided that the act or omission was intended to reduce the tax bill.Tough Penalties!
There is no maximum penalty for such an offence if found guilty so a defendant could be sentenced to life imprisonment as well as having to repay the Revenue. The previous Chancellor, Dennis Healey, famously described the difference between tax avoidance and tax evasion as being “the thickness of a prison wall”.
Unsurprisingly HMRC do not like the idea of tax avoidance and they appear to view all actions taken to reduce a tax bill as suspect unless the action can clearly been seen as taking advantage of a tax relief in the manner intended.
Tax Avoidance Disclosure
In March 2011, the Revenue issued a document entitled ‘Tackling Tax Avoidance’ which detailed how they would be approaching the problem of tax avoidance in the future.
The document states that they intend to develop the Tax Avoidance Disclosure rules, under which certain tax planning schemes have to be notified to the tax authorities shortly after they are marketed or implemented. The intention is supposedly to assist users so that they can work out the difference between what it terms ‘artificial avoidance schemes’ and ‘ordinary sensible tax planning’.
HMRC describes some specific Tax Avoidance Schemes they have encountered so far in the Spotlights section of its anti-avoidance pages from resourceful materials.
The text states that ‘the schemes featured are generally those which HMRC consider have the widest implications and about which there is the greatest need to warn potential users. They will often be schemes that have been disclosed to HMRC and have been given a Scheme Reference Number (SRN). Please note that the issue of a SRN does not mean either that HMRC ‘approves’ the scheme or that HMRC accept that the scheme achieves its intended tax advantage.’
TAX AVOIDANCE arises in a situation where the tax payer arranges his financial affairs in a form that would make him pay the least possible amount of tax. For examples; Federal Government unveils economic recovery plan and to raise VAT on luxury items, you can achieve Tax Avoidance by avoiding affected luxury goods and services on which VAT is levied. Far from boycotting the goods and services, tax avoidance schemes are carried out after a critical review of tax laws. The Tax payer then implement devices to exploit loopholes in the tax law that would enable him to avoid or minimize tax.
Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax bill and includes, in particular, dishonest tax reporting such as;
Understating the income
Overstating expenditure
Making false claims for allowance and reliefs
Omission from tax returns of chargeable income
Its pertinent to note that: Tax avoidance is legal act with diligent tax planning while Tax Evasion is an illegal act, meant to obtain unjust financial advantages at the expense of Revenue authority.
The Dictum established by the Lord President (Lord Clyde) in the case Ayrshire Pullman Motor Services & David M. Ritchie v. C.I.R (1936) on Tax Avoidance still hold, thus, stated that “No man in this country is under the smallest obligation, moral or otherwise, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow- and quiet rightly- to take every advantages which open to it under the taxing statutes for the purpose of depleting the tax payers’ pockets. And the tax payer is in like manner entitled to be astute to prevent so far as he honestly can, the depletion of his means by the revenue”
See also Belgore C.J. ‘In Federal Inland Revenue Services of Inland Revenue v. American International Insurance Company Nig. Plc… Stated “Tax is an Obligation, not a duty. One is not a bad citizen if one can organize his business or trade in a legal manner to minimize his tax liability. He could and he should resist within legal means and unduly wide interpretation or unconventional implication of legislatives intent of a tax law that might increase that burden. He can do without being ashamed of walking in the street as a patriotic citizen. A shrewd business acumen and a legitimate protection of sweat of Labour are not dishonest acts or an act having any moral turpitude. It is being pragmatic and practical. Being capitalistic might leave much to be desired but among what is left is not illegality”
The possible reaction of the revenue service to where loopholes in the tax legislation have been exploited is to take steps to block the loopholes. Thus specific legislation would be passed to block the particular loopholes or loopholes such is refer to as Specific Anti avoidance legislation. With the loopholes block, the tax payer would search out for another loopholes an exploit same. There are therefore bound to be several and unending specific anti-avoidance legislation to effectively stop the tax payer willing to carry out tax avoidance schemes. As legislature can’t accurately foresee all schemes which the determined tax payer could device, consideration would be given to the promulgation of General Anti Avoidance Legislation. General Anti-avoidance Legislation which vest the revenue with the power to disregard all transactions entered into that could be proved to have been entered into, solely for tax avoidance.
Olanrewaju Saints is a Public Affairs Analyst.

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