While tax evasion has long been regarded as wrong, of much greater concern to the majority of wealthy taxpayers is the change in rhetoric against people who are not breaking the law
‘Tax evasion is not a victimless crime’ said Keir Starmer, the UK’s Director of Public Prosecutions in a recent high profile speech.
‘We’re closing in on undeclared income’ scream the HMRC adverts taken out on billboards and bus stops, accompanied by a piercing set of eyes which stare out at the observer.
Those words are being backed up by actions. The UK’s Chancellor of the Exchequer, George Osborne, has recently provided HMRC with large increases in their enforcement budget, resulting in many more tax inspectors and a better infrastructure. Those who have wrongfully evaded tax are more likely than ever to be punished.
While tax evasion has long been regarded as wrong, of much greater concern to the majority of wealthy taxpayers is the change in rhetoric against people who are not breaking the law.
The Chancellor recently said: ‘It is unacceptable for a minority to avoid paying their fair share, sometimes by breaking the law. The action we are announcing today will help HMRC close in on those who seek to avoid or evade tax.’
So what is really happening?
Evasion and avoidance
Traditionally, individuals looking to arrange their affairs have known about two distinct ways of reducing the amount they pay in tax. The first is tax evasion, broadly, the intentional non-payment of taxes through techniques such as hiding assets, declaring incorrect information, or paying for items in cash to ensure that they remain under the radar. Tax evasion is both recognised and accepted as legally and morally wrong.
The second is through tax avoidance, broadly, structuring one’s affairs to take advantage of exemptions, efficiencies, or sometimes ‘loopholes’ in the tax laws of a jurisdiction.
In the past, there was a clear and well-understood distinction; tax evasion was illegal, tax avoidance was not. Tax avoidance was sometimes benign; other times it might push the boundaries and come with a risk of failure. But one thing was clear: tax evasion and tax avoidance were completely different things. What has changed?
It now appears that the traditionally understood distinction between tax evasion and tax avoidance is a thing of the past. In his recent Autumn Statement, the Chancellor spoke not of tax evaders, but of ‘tax dodgers’. This phrase seems to include both those who take part in evasion and ‘aggressive’ avoidance.
So how should wealthy individuals now legitimately behave?
It now seems that individuals will now be faced with three, not two, distinct categories and outcomes.
Tax evasion remains illegal and increased spending on enforcement at HMRC means tax evaders will be more heavily targeted. Consequently, Individuals with funds tainted by historic tax evasion should seek advice on ‘cleaning up’ those funds, perhaps through the potentially attractive ‘amnesty’ options of the Liechtenstein Disclosure Facility and the UK-Swiss Agreement.
Tax avoidance is now effectively split into two categories:
(a)Aggressive tax avoidance.
This will be targeted far more vigorously. As well as having greater numbers, HMRC’s enforcement team will also have a significant new weapon in their arsenal: the General Anti-Abuse Rule (GAAR). The GAAR, which will come into effect later this year, may give HMRC a way of successfully overturning ‘schemes’, even where technical legal arguments support them.
(b)The second category of tax avoidance can perhaps be referred to as ‘tax planning’. This is entirely legitimate and it will remain so.
Examples may include:
(i)Planning your affairs to take advantage of reliefs made available by legislation for a specific purpose, such as the enterprise investment scheme, or charitable giving
(ii)When faced with a number of options for structuring a commercial transaction or decision, choosing the one which results in a lower burden of tax
(iii)Considering future tax implications in the design of estate planning structures, or structures for bringing in clean capital to UK.
Wealthy individuals with UK connections should review their affairs, but need not panic. Tax planning remains legitimate, so long as individuals understand where the new boundaries lie. The next few months may even provide an opportunity as clients can rearrange their affairs pre-implementation of GAAR and (if necessary) clean up previous indiscretions and/or oversights.
As ever, individuals that obtain proper advice will be best placed to cope with the new regime.
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Glen Atchison is the head of the private client practice at law firm Harbottle & Lewis. Chris Moorcroft is an associate at the firm.