Avoidance or evasion?

Blurring the fine line between legitimate tax planning and illegal tax evasion neither helps the industry, nor does it inform the public debate, says James Hender

Tax avoidance and tax evasion show no signs of leaving the political and media agenda. Misinformation and misunderstanding about them is rife. We need reasoned distinctions between tax planning that is legal and based upon common sense (which the government encourages through tax incentives on investments and savings) and practices that fall foul
of the law.

At the heart of the confusion is the term 'tax avoidance'. It now has such a broad spectrum of meanings, that ordinary financial prudence is often lumped in with sophisticated tax evasion and even fraud. A recent YouGov poll shows this clearly, suggesting that 59
per cent of the British population believe
that it is 'unacceptable' to avoid paying tax legally.

Avoidance is everywhere

Professional advisers know well that there are often two or more ways of arranging a client's affairs to reach the same financial goal. When saving for retirement, you could do it in a tax efficient way (for example through a pension) or via ordinary savings, which would suffer income tax or capital gains tax. Taken to extremes, and not too dissimilarly to some prominent views currently circulating, paying into a pension could therefore be considered tax avoidance.

The new rules on pensions furnish new ways of avoiding tax. Among other things, they explicitly allow undrawn pension assets to pass on to beneficiaries on death, free of inheritance tax.
The government has made the changes to encourage savings through pensions and to appeal to voters. It will be no wonder if people structure their affairs
to take advantage of this.

People who ensure that their spouses or civil partners have an equal spread of investment income are avoiding tax. Likewise, investing in ISAs or EIS companies reduces your overall tax bill. The government uses tax reliefs to encourage behaviours that benefit the economy. If the sands around these continually shift, it will deter people from investing, and the government will blunt its own power to encourage preferred economic activities.

Above all, there is no obligation under the tax rules to structure your affairs in order to pay more tax, nor should there be. For most people, tax is a cost in their lives that must be managed much like every other cost. To do this, they are entitled to apply good thinking and foresight.

From time to time, the line between 'abusive' and acceptable avoidance may need to be decided in court. However in the vast majority of cases, it should be quite clear. Ideally if legal means of avoiding tax are anticipated in the tax legislation, you should be confident that HMRC will not take issue with them at a later date.

Yet the danger of the current climate is that if taken too far, it could lead to retroactive changes to the law. This creates a sense of uncertainty for professional advisers who are tasked with advising clients on long-term strategies. Arguably we have already seen this with certain tax avoidance schemes which were deemed acceptable (albeit aggressive) when they were established in the middle of the last decade, but have now fallen foul of a changing political and legal environment.

There is a lot of political capital in doing nothing to dispel the unclear thinking about tax avoidance among members of the public. Certain politicians are not helping by bracketing legitimate tax planning with abusive and illegal behaviours. Ultimately we will see more red tape, investment will be deterred,
and no one stands to gain.

So what is to be done? It is far from clear that we need more tax legislation; often the complexity of the system is what creates problems and uncertainties. I would suggest that the government and HMRC would do very well to provide clearer guidelines on the application of current laws. Political parties should also be more precise about their intentions. With important changes already made to the tax system in recent years and still bedding in, the best thing for all concerned is stability.

James Hender is head of private wealth at Saffery Champness