So has tax avoidance become illegal now?

ONE OF the first lessons I learned about tax was that evasion was illegal but avoidance was legal. This mantra held true for many years — but apparently no longer, given recent headlines such as: “Celebrity caught up in taxavoidance scandal”.

When did tax avoidance become scandalous and, if it is, is there any room left for legitimate tax planning?

Over the past 10 years, successive governments have cracked down on tax lost which they consider was rightly due. The “tax gap”, as it is known, is estimated at around £30 billion each year and is made up of many different strands, including tax fraud, cash businesses and illegal smuggling.

HMRC has had a particularly hard time in challenging the strand which includes tax-avoidance activities to ensure those involved have paid the correct amount of tax. In the 1990s and the noughties, there were huge numbers of tax-planning schemes marketed as legitimate ways to save tax.

Companies engaged tax experts, who devised clever ways of legally avoiding tax bills. These were commonly sold to high-net-worth individuals as a tool to reduce tax bills. The customers were correctly advised by their accountants or financial advisers that everyone has a right to arrange their affairs in the most tax-efficient way and therefore these schemes could be entered into without a conscience.

However, as years moved on, the numbers of these schemes grew exponentially and, with a new culture of paying tax within the “spirit” as well as the letter of the law, HMRC became increasingly irritated by tax-avoidance activities, which it started challenging through the courts. At first it argued that the schemes failed on legal grounds or that they had not been implemented correctly.

More recently, HMRC has needed new ammunition, as scheme operators became wiser. It therefore introduced the GAAR, the General Anti-Avoidance Rule, which legislated that, in certain cases, even if the scheme is technically within the law and all steps have been carried out correctly, tax will still be due, so everyone pays their “fair share” of tax. These measures, together with other legislative changes, have vastly reduced the number of tax schemes on the market and, of the cases that HMRC has brought to court, many have been judged against the taxpayer.

Tax-avoidance schemes are not the same as arranging one’s affairs in a tax-efficient way but we would now do

The new culture is to pay tax in the spirit of the law’

better to call that tax mitigation, rather than tax avoidance.

In HMRC’s view, if there is a legitimate tax saving and an individual makes use of the saving in the way it was intended, then that is tax mitigation. However, if you enter into a convoluted arrangement which might be technically within the law but does not reflect a real situation, then that is illegal tax avoidance.

For example, paying money into a pension when you are younger is a positive and legal tax-saving idea to plan for retirement. The consequences of putting money into a pension are, for example, that you cannot access it until pensionable age and you are restricted as to what the pension scheme can do with the funds in the meantime.

If someone therefore offers you the opportunity to invest in a pension scheme where you have full control over your money with instant access, then that is not how the tax relief was meant to work and that is now illegal tax avoidance, even if they have found a way that does not technically fall foul of the pension legislation.

I feel sorry for many of those who are caught up in the headlines. Many will have thought they were investing their funds in straightforward tax-planning ideas; most will have believed the investments were totally legal.

In reality, it is the passage of time and culture which has turned planning that was once legal into something now considered scandalous.

It is surely time to stop hounding people who went into investments that they thought were innocent taxmitigation strategies.

HMRC operates a rule of law and if people have fallen foul of those laws, even innocently, then there will be consequences. Mere speculation of a person’s tax liability without the full facts is nothing more than conjecture, which causes serious reputational damage, even if no wrong has taken place and no tax is due.