With global corporations being exposed left, right and centre for paying hardly any corporation tax, and celebrities coming under increased scrutiny for their tax arrangements, the public’s perception on tax avoidance remains at an all-time low. For the good of the society, paying tax is absolutely necessary, and while we wish taxes were a little lower (or a lot lower), the general consensus is that everybody pays their fair share. So what is fair?
In essence, fair offers two options. Option one, where we all hire accounting professionals to ensure that we maximise our tax liability, paying the right amount of tax each year, whether you’re self-employed or employed. Or there is option two, where we all make full use of the legislation loopholes, available allowances and tax reliefs. If fair is fair, then we should all agree that legitimate tax planning is acceptable, but at what point does it become tax avoidance or evasion?
Tax avoidance is not illegal, and it’s where a person takes advantage of inadequacies or gaps in legislation to benefit their tax liability. Sentiment about morality does not always align with legality however, and although tax avoidance is not considered illegal, the extent of the public outcry about people who manage to bend the rules remains strong.
The Middle Ground
Many people believe that a line is crossed when an individual hides their financial circumstances to benefit their tax liability, especially when that individual has the funds to pay the correct amount of tax in the first place. Just after ‘acceptable planning’ and just before ‘tax abuse’, there is a middle ground called ‘tax avoidance’. This category is within the law and completely legal, however those who decide to make use of the loopholes in legislation are considered crooks and tax dodgers.
So how do legislators tackle such legal tax arrangements? Should the government take a closer look into the finances of the people that make use of loopholes, and enforce ‘fair play’ tax legislation? It may sound like a good idea, but then again it could cause confusion among responsible taxpayers, making them second guess planning their tax affairs with certainty.
In 2010, a study group was commissioned by the government to investigate the benefits of general tax avoidance. Publishing its report in 2011, the group summarised that in order to counteract the tax advantages of such legal avoidance arrangements, the HMRC could also introduce adjustments that are just as reasonable as the legal avoidance itself, or a general anti-abuse rule (GAAR).
After accepting many of GAAR’s recommendations, a consultation paper was published in 2011 accepting the proposals, and in 2012, more revised draft legislation as published, with the rules taking effect in April 2013. The new legislation adopts a number of tests to define the term ‘abusive’, considering many elements including reviewing all the circumstances that would cause an individual to take the route of tax avoidance. The government has also promised a further £77m worth of investment in the scheme to expand anti-evasion and avoidance facilities.