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Everyone knows it’s legal to evade tax but completely illegal to avoid it, right? Wrong. What I meant to say is that it’s legal to avoid tax but illegal to evade it. Confused? You’re not the only one.
Putting aside the moral arguments and looking purely at what you can be jailed for doing, tax evasion is the naughty one. Tax avoidance is the practice of reducing your tax bill through legal, albeit often controversial, methods.
Let’s take a closer look at the difference.
First stop: the Oxford English Dictionary.
Avoid: 1. keep away or refrain from. 2. prevent from doing or happening.
Evade: 1. escape or avoid. 2. avoid giving a direct answer to (a question) 3. escape paying (tax duty).
So, there really isn’t a huge difference in definitions (apart from the very last point!), but it’s the idea of escape that’s crucial. Assuming you owe tax, you can’t legally escape paying it. But you can legally avoid certain tax liabilities through clever financial planning.
Recent governments have made a point of tackling tax avoidance and have been actively closing loopholes and schemes which take advantage of tax rules. This has included schemes used by famous footballers and musicians, as well as large umbrella operations targeting contractors by offering greater take-home pay through creative use of expense claims.
But is tax evasion illegal? Is tax avoidance illegal? Does anyone even know?
The media narrative often presents evasion and avoidance as one and the same, and equally wrong. Many commentators disagree with this notion, including Conservative MP John Redwood who defined tax avoidance as a legitimate and encouraged way of reducing your tax liability. He referred to it as “another name for tax incentives” which could include the following:
According to this perspective, tax avoidance isn’t just technically lawful but morally right. However, issues regarding offshore accounting processes (such as Employee Benefit Trusts) can also be legally acceptable – but are they within the spirit of the law? For this reason, former Permanent Secretary for Tax, Dave Hartnett, offers a more useful definition of what constitutes tax avoidance:
“Evasion is about dishonesty and concealment. Avoidance is about using the tax system in a way it was never intended. Lots of people see it as reprehensible, but it’s not dishonest activity. There’s a difference.”
So, the key difference between evasion and avoidance is the issue of honesty. If you’re avoiding tax, you can be clear on what you’re doing to lower your tax bill (i.e. “here’s what I’m doing to lower my tax bill, and this is why it’s legal”), but on issues of evasion, you depend on subterfuge to get away with decreasing your tax liability.
Evasion, then, is a matter of clear criminal wrongdoing such as non-declaration of earnings or claiming deductions for expenses that weren’t incurred or are not legally deductible. Tax avoidance is the exploitation of loopholes which, though legal, are morally questionable. All those tax saving methods described by John Redwood can be categorised as basic tax planning, but are essentially the same as many common tax avoidance techniques.
With all that said, the next time you hear the terms ‘avoidance’ and ‘evasion’ being casually mentioned, who knows what they might mean – it seems to depend on the individual’s interpretation.