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<\/figure>\n\n\n\nThe more accurate version? That’s hard – because there isn’t a single legal definition of “tax avoidance”. If there was, life would be easy: we’d pass a law saying that if you do tax avoidance, it doesn\u2019t work, you pay lots of extra tax, and maybe go to jail as well.<\/p>\n\n\n\n
Why isn’t there a definition? Because it’s too difficult.<\/p>\n\n\n\n
So why am I bothering to use the term at all? Because if you do something most people regard as tax avoidance then some or all of the following will happen:<\/p>\n\n\n\n
- \n
- People won\u2019t like you<\/a>. Newspapers will write bad things<\/a> about you. Perhaps even stop<\/a> buying your products.<\/li>\n\n\n\n
- You will probably be caught by one of the approximately 64,000<\/a> “anti-avoidance” rules enacted by Parliament over the years. So what you hoped would avoid tax in fact won’t avoid anything at all. The phrase used by most practitioners and HMRC is that your scheme “didn’t work”.<\/li>\n\n\n\n
- Even if you brilliantly escape the letter of the 64,000 anti-avoidance rules, you’ll run into the problem that judges really<\/a>, really, don’t like tax avoidance (and haven’t since the late 1990s<\/a>). So if you end up in court, the judge will probably magic some way for you to lose anyway (perhaps applying “common law anti-avoidance principles”). This annoys some legal purists, but doesn’t make me particularly unhappy.<\/li>\n\n\n\n
- For all these reasons, if HMRC finds out about your tax avoidance, they will challenge it, and \u2013 almost all of the time<\/a> \u2013 they will win. You will end up paying the tax you tried to avoid, very possibly other tax you picked up along the way, plus interest and (potentially) penalties of up to 100% of the tax due.<\/li>\n<\/ul>\n\n\n\n
So I would strongly advise individuals and businesses not to do tax avoidance1<\/a><\/sup>I’m probably supposed to say this is not legal advice, but I’m a lawyer, and this is my advice<\/span>.<\/p>\n\n\n
No really – what is “tax avoidance”?<\/h2>\n\n\n
The conventional view – shared by most advisers, academics and HMRC – is that tax avoidance is using “loopholes” or other features of the tax system to save tax (“obtain a tax advantage”) in a way that wasn’t intended by Parliament. This is not a legal definition, and probably can’t be – but it’s a workable rule of thumb.<\/p>\n\n\n\n
So here are some things that are not tax avoidance, even though (in the usual meaning of the term) you are “avoiding” tax:<\/p>\n\n\n\n
- \n
- Investing through a pension or ISA.<\/strong> Yes, it avoids tax, but that was absolutely intended by Parliament. Not tax avoidance. Anyone who says otherwise is very silly<\/a>. A small amount of cognitive dissonance<\/a> is required to say that an ISA avoids tax but isn’t tax avoidance, but it’s nothing I can’t handle.<\/li>\n\n\n\n
- Buying chocolate cake. <\/strong>Cake<\/a> has 0% VAT. A chocolate-covered biscuit has 20% VAT. If you are pondering whether to buy a cake or a biscuit, and buy a cake because it’s cheaper, you are (in the most literal sense) avoiding VAT. But this is a legitimate choice – Parliament has drawn a stupid<\/a> line in the sand, and you’re free to walk either side of it. The world is full of such choices, and none of them are tax avoidance.<\/li>\n\n\n\n
- Avoiding 39.35% income tax on dividends<\/strong> by investing in a “growth” company, so most of your return will be capital gain (taxed at only 20%). Another stupid line in the sand, but not tax avoidance.<\/li>\n\n\n\n
- Being genuinely self-employed<\/strong>2<\/a><\/sup>Where exactly you draw the boundary between employed and self-employed is a fascinating and difficult question which I am absolutely not going to get into here. Similarly, I’m not even touching IR35<\/span>. Self-employed people get to claim deductions for expenses. More importantly, there’s no 13.8% employer national insurance (because there isn’t an employer)<\/li>\n<\/ul>\n\n\n\n
And here are some things that are definitely tax avoidance:<\/p>\n\n\n\n
- \n
- Investing \u00a310,000 in a film and claiming \u00a350,000 film tax relief <\/strong>(i.e. so you had \u00a350,000 of taxable income; you now have zero taxable income). Where does the other \u00a340,000 come from? It’s borrowed from a bank, but actually goes round in a big complicated circle, so it’s as if it doesn’t exist. Absolutely tax avoidance. Didn’t work.<\/a><\/li>\n\n\n\n
- Paying \u00a395,000 to magically create \u00a31m of tax relief<\/strong> through a complex transaction<\/a> which threw large amounts of money round in a circle, supposedly linked to a second hand car business. Didn’t work<\/a>. <\/li>\n\n\n\n
- Avoiding \u00a32.6m stamp duty<\/strong> on the purchase of the Dickins & Jones building on Regent Street by taking advantage of a complex interaction between the partnership and subsale rules. The taxpayer thought it was a simple and elegant scheme. The Court of Appeal took about two pages<\/a> to kill it. <\/li>\n\n\n\n
- Having your wages paid to an offshore trust which<\/strong> then makes a “loan” to you (scare quotes because it never has to be repaid and there’s no interest on it, so it’s no more a loan that it is a banana). Instead of paying income tax on your wages, you pay either nothing or a very small amount. Tax avoidance. Doesn’t work<\/a>3<\/a><\/sup>This isn’t the article to get into why HMRC didn’t attack these schemes sooner and more aggressively, and the rights\/wrongs of the loan charge. I’m aware lots of people say they were hoodwinked into the schemes and didn’t realise what they were. But one thing is clear and inarguable: they were tax avoidance<\/span>. Amazingly, people still flog these schemes<\/a>.<\/li>\n<\/ul>\n\n\n\n
All these schemes had two things in common: they were trying to achieve a result that wasn’t intended by Parliament, and they were highly complex and roundabout ways of achieving something that should be simple (buying a house; receiving a wage; investing in a business).<\/p>\n\n\n
This seems easy enough – what’s so hard about defining tax avoidance?<\/h2>\n\n\n
How about these?<\/p>\n\n\n\n
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- Incorporation. <\/strong>A plumber makes \u00a350k\/year. He sets up a company and starts working through that, paying himself dividends from the company. Nothing much changes, but he now doesn’t pay Class 4 National Insurance contributions – saving him about \u00a33k\/year. This is incredibly common<\/a>.<\/li>\n\n\n\n
- Salary sacrifice<\/strong>. A [insert sympathetic employee of choice] earns \u00a350,000. She’s offered a \u00a35k pay rise – but that will be taxed at a 68% marginal rate<\/a>, as she loses child benefit. So she uses a “salary sacrifice” scheme to make larger pension contributions, and gets the benefit of the \u00a35k (eventually) without a high marginal tax rate. <\/li>\n\n\n\n
- Listing. <\/strong>A large plc is about to issue bonds to third party investors in the market. At the last moment, a tax lawyer spots that the bonds are unlisted, and so will be subject to 20% withholding tax – nobody will buy them. The obvious solution is to list the bonds, even though it serves no commercial purpose. A withholding tax exemption<\/a> will then apply. Was the decision to list tax avoidance? It certainly avoided tax.<\/li>\n\n\n\n
- Taxable presence. <\/strong>A French champagne company sends a Paris marketing team on a promotional tour of the UK. They worry they might accidentally create a taxable presence<\/a> in the UK, meaning that a chunk of their profits become subject to UK corporation tax. So they ask their accountants to draw up a list of dos and don’ts for the team to follow. Is that tax avoidance? Again, it could avoid a whole bunch of tax.<\/li>\n<\/ul>\n\n\n\n
Are these tax avoidance? I would say not, because each one is making a choice that is anticipated and permitted by tax legislation, and which has actual consequences.<\/p>\n\n\n\n
And then, the big problem:<\/p>\n\n\n\n
- \n
- Sometimes it’s obvious what was intended by Parliament – e.g. your earnings should be taxed. Sometimes it’s hard, even impossible, because the legislation is so arcane<\/a>, and the results completely unintuitive.<\/li>\n<\/ul>\n\n\n\n
So you can’t realistically define tax avoidance in a legally robust way – and that’s why, as far as I’m aware, no country has managed to do so successfully.<\/p>\n\n\n
Doesn’t the GAAR define tax avoidance?<\/h2>\n\n\n
Since 2013, the UK has had a “general anti-abuse rule” – the GAAR<\/a>. Note the term is “anti-abuse” not “anti-avoidance”. This isn’t an accident – it reflects the impossibility of comprehensively defining avoidance. Instead the GAAR applies only where a scheme is so outrageous that it can’t reasonably be regarded as a reasonable course of action to take.<\/p>\n\n\n\n
The GAAR has in practice had very little effect, as the courts were happily striking down avoidance schemes for 57 different reasons well before the GAAR came in, and they’re equally happy to continue doing so. HMRC have in practice been using it as a shortcut, to save all the time\/cost of taking a case to trial.<\/p>\n\n\n\n
But we can be reasonably confident that, even if the four “definitely tax avoidance” examples above had somehow made it through every other anti-avoidance rule and principle, the GAAR would have kiboshed them. However, it wouldn’t have touched my four “maybe tax avoidance” examples – and that’s sensible (because otherwise no plumber would ever know if it’s safe to incorporate, and that would be unfair, and the resultant uncertainty would be bad for all of us).<\/p>\n\n\n
Doesn’t some tax avoidance work?<\/h2>\n\n\n
Perhaps. Here are some things many people would say are tax avoidance but which normally work4<\/a><\/sup>definitely not legal advice – if you do this without taking independent advice, you are crackers<\/a><\/span>:<\/p>\n\n\n\n
- \n
- A US digital company makes lots of money from customers in the UK,<\/strong> but as it has only a very limited presence in the UK, it pays only a very limited amount of corporation tax. Its huge profits should be taxed in the US, but because the US tax system is broken, they’re largely not (particularly prior to US tax reform in 2017<\/a>). <\/strong>Most laypeople people would say it’s tax avoidance; most advisers would say it isn’t. I’d say it’s a big problem either way: we’ll see in a year or so how effective the new OECD global minimum tax<\/a> has been at changing things.<\/li>\n\n\n\n
- A company reducing its profits by borrowing from its shareholders.<\/strong> Fair enough that interest paid to a bank reduces a company’s taxable profit, but we also permit this for interest paid to shareholders. There are now rules<\/a> that limit the tax benefit, but there’s definitely still a benefit.<\/li>\n\n\n\n
- Non-dom excluded property trusts. <\/strong>Being a non-dom is a perfectly legal way not to pay tax on foreign income for 15 years. After that, they’re<\/a> fully subject to UK tax. But if they’d prefer not to be then, just before the 15 years is up, they can put their foreign assets into an “excluded property trust”<\/a>, and keep them outside UK tax forever. Sure seems like tax avoidance, but it’s an inevitable consequence of the ways trusts are taxed, and so not something HMRC can usually challenge.<\/li>\n\n\n\n
- There’s 5% SDLT when you buy commercial real estate.<\/strong> So most commercial real estate is held in “special purpose vehicles” – offshore companies whose only activity is holding the real estate. Then instead of selling the real estate, you can sell the shares, with no SDLT. Seems fair to say it’s avoidance<\/a>, but it’s an inevitable consequence of the way SDLT works, and so there’s no chance of HMRC challenge. <\/li>\n<\/ul>\n\n\n\n
None of these would be stopped by the GAAR, which is reasonable given that each is a choice that Parliament has intentionally5<\/a><\/sup>Or at least some people intended it<\/span> made available to taxpayers.<\/p>\n\n\n
What is the difference between tax avoidance and tax evasion?<\/h2>\n\n\n
The classic tax lawyer answer is: “the thickness of a prison wall”6<\/a><\/sup>That quote originates with Denis Healey<\/a><\/span>. Like most classic lawyer answers<\/a>, it isn’t of any help at all.<\/p>\n\n\n\n
In theory, the difference is simple. Tax evasion is dishonestly failing to pay tax7<\/a><\/sup>Actually there isn’t a single criminal offence of “tax evasion” in the UK. There is a common law criminal offence of “cheating the Revenue” and numerous statutory offences covering different taxes; but all share the key feature I mention here.<\/span>. It is illegal – i.e a criminal offence, punishable with jail time and an unlimited fine.<\/p>\n\n\n\n
So, for example:<\/p>\n\n\n\n
- \n
- Having “cash in hand” income<\/strong> you don’t declare to HMRC. Easily the most common<\/a> form of tax evasion. <\/li>\n\n\n\n
- Opening a Monaco bank account in the name of your dog<\/strong>, using it to receive “bungs”, and deliberately not declaring the bung or the bank account to HMRC. This is a hypothetical<\/a> example. <\/li>\n\n\n\n
- Claiming film tax credits <\/strong>on expenses that never existed<\/a>.<\/li>\n\n\n\n
- Doing an elaborate tax avoidance scheme<\/strong>, but where the key element is deceiving HMRC<\/a> about the value of some shares. <\/li>\n\n\n\n
- Doing an elaborate tax avoidance scheme<\/strong>, where a key element is lying about the residence <\/a>of a company.<\/li>\n<\/ul>\n\n\n\n
These are all clearly tax evasion, and people can and do go to jail for them.<\/p>\n\n\n
What’s the difference between tax avoidance, tax mitigation, tax shelters and tax planning?<\/h2>\n\n\n
All are undefined vague terms that can mean what we want them to mean.<\/p>\n\n\n\n
But I would say:<\/p>\n\n\n\n
- \n
- Tax mitigation = a polite term for tax avoidance<\/li>\n\n\n\n
- Tax shelters = a term that the US tax avoidance industry has successfully used for years, so that US media often refers to “tax shelters” (which sound nice!) rather than “tax avoidance schemes” (which don’t).<\/li>\n\n\n\n
- Tax planning = chosing to walk on on one side of a line that has been drawn by Parliament, and being careful not to step over the line.<\/li>\n<\/ul>\n\n\n
So is tax avoidance legal or illegal?<\/h2>\n\n\n
It depends:<\/p>\n\n\n\n
- \n
- John and Jane both enter into the same tax avoidance scheme. John believes it works. Jane knows it doesn’t, but thinks HMRC won’t spot it. HMRC do spot it, challenge the scheme, and win.<\/li>\n<\/ul>\n\n\n\n
The result, in theory, is that John and Jane both filed an incorrect tax return, and so owe the tax, interest and (if they were careless) penalties. They got their tax wrong, and that’s not illegal.<\/p>\n\n\n\n
But Jane was dishonest. She committed tax evasion and so did act illegally. The question is: can HMRC prove it?<\/p>\n\n\n\n
Here’s another, and more realistic, example:<\/p>\n\n\n\n
- \n
- Catherine devises an elaborate “tax avoidance scheme” which she knows in her heart-of-hearts has no chance of working, but by the time HMRC come round to challenging it, Catherine (and her fees) will be long gone.<\/li>\n\n\n\n
- Catherine flogs the scheme to hundreds of taxpayers, assisted by an opinion she somehow<\/a> obtained from Bob, a tax QC. <\/li>\n<\/ul>\n\n\n\n
This is definitely tax evasion – Catherine and Bob were dishonest. Other tax advisers may say the scheme had no reasonable prospect of success, and we can suspect (but perhaps not prove) that Catherine and Bob knew this. Catherine will say she had an opinion from Bob. Bob will say he was advising on the basis of his instructions (and they’re probably legally privileged anyway). So it’s hard to prosecute and, as far as I’m aware, HMRC don’t try. I believe they should.<\/p>\n\n\n\n
But the key point: it’s incorrect to say that tax avoidance is per se “legal” or “illegal”. Much of the tax avoidance I’ve seen in the last year falls into the Catherine\/Bob category.<\/p>\n\n\n
So why do almost all articles about tax avoidance say “there’s no suggestion this was illegal”?<\/h2>\n\n\n
I’ve no idea<\/a>.<\/p>\n\n\n
Do companies have a legal duty to minimise their tax?<\/h2>\n\n\n
Directors have a broad duty to promote the success of their company, and tax is just one of the many factors directors should consider in making a decision. A director may well be failing in their duties if they blunder<\/a> into a large unnecessary tax charge. But in no sense does this create a duty to minimise tax, anymore than it creates a duty to minimise employees\u2019 pay or maximise consumer prices. This is very clear<\/a> under the Companies Act 2006, and was clear enough under the old common law rules. <\/p>\n\n\n\n
Why do so many people appear to think this is a live issue? I\u2019ve no idea. In 25 years of practice, I didn\u2019t once come across a client or lawyer who thought directors had a duty to minimise tax. So this appears to be a political\/ideological point rather than a legal one. <\/p>\n\n\n\n
<\/p>\n\n\n\n
\n\n\n\n- 1<\/span>I’m probably supposed to say this is not legal advice, but I’m a lawyer, and this is my advice<\/div><\/li>
- 2<\/span>
Where exactly you draw the boundary between employed and self-employed is a fascinating and difficult question which I am absolutely not going to get into here. Similarly, I’m not even touching IR35<\/div><\/li>- 3<\/span>
This isn’t the article to get into why HMRC didn’t attack these schemes sooner and more aggressively, and the rights\/wrongs of the loan charge. I’m aware lots of people say they were hoodwinked into the schemes and didn’t realise what they were. But one thing is clear and inarguable: they were tax avoidance<\/div><\/li>- 4<\/span>
definitely not legal advice – if you do this without taking independent advice, you are crackers<\/a><\/div><\/li>- 5<\/span>
- 2<\/span>
- 1<\/span>
- John and Jane both enter into the same tax avoidance scheme. John believes it works. Jane knows it doesn’t, but thinks HMRC won’t spot it. HMRC do spot it, challenge the scheme, and win.<\/li>\n<\/ul>\n\n\n\n
- Opening a Monaco bank account in the name of your dog<\/strong>, using it to receive “bungs”, and deliberately not declaring the bung or the bank account to HMRC. This is a hypothetical<\/a> example. <\/li>\n\n\n\n
- A company reducing its profits by borrowing from its shareholders.<\/strong> Fair enough that interest paid to a bank reduces a company’s taxable profit, but we also permit this for interest paid to shareholders. There are now rules<\/a> that limit the tax benefit, but there’s definitely still a benefit.<\/li>\n\n\n\n
- A US digital company makes lots of money from customers in the UK,<\/strong> but as it has only a very limited presence in the UK, it pays only a very limited amount of corporation tax. Its huge profits should be taxed in the US, but because the US tax system is broken, they’re largely not (particularly prior to US tax reform in 2017<\/a>). <\/strong>Most laypeople people would say it’s tax avoidance; most advisers would say it isn’t. I’d say it’s a big problem either way: we’ll see in a year or so how effective the new OECD global minimum tax<\/a> has been at changing things.<\/li>\n\n\n\n
- Salary sacrifice<\/strong>. A [insert sympathetic employee of choice] earns \u00a350,000. She’s offered a \u00a35k pay rise – but that will be taxed at a 68% marginal rate<\/a>, as she loses child benefit. So she uses a “salary sacrifice” scheme to make larger pension contributions, and gets the benefit of the \u00a35k (eventually) without a high marginal tax rate. <\/li>\n\n\n\n
- Paying \u00a395,000 to magically create \u00a31m of tax relief<\/strong> through a complex transaction<\/a> which threw large amounts of money round in a circle, supposedly linked to a second hand car business. Didn’t work<\/a>. <\/li>\n\n\n\n
- Buying chocolate cake. <\/strong>Cake<\/a> has 0% VAT. A chocolate-covered biscuit has 20% VAT. If you are pondering whether to buy a cake or a biscuit, and buy a cake because it’s cheaper, you are (in the most literal sense) avoiding VAT. But this is a legitimate choice – Parliament has drawn a stupid<\/a> line in the sand, and you’re free to walk either side of it. The world is full of such choices, and none of them are tax avoidance.<\/li>\n\n\n\n
- You will probably be caught by one of the approximately 64,000<\/a> “anti-avoidance” rules enacted by Parliament over the years. So what you hoped would avoid tax in fact won’t avoid anything at all. The phrase used by most practitioners and HMRC is that your scheme “didn’t work”.<\/li>\n\n\n\n