Tax avoidance and tax evasion are not the same thing. Yet they are often conflated in the media and in the court of public opinion. In this article I consider the differences and similarities, and conclude that they do need to be kept separate. But an informed discussion about the line between acceptable planning and unacceptable avoidance is also needed.
Are tax avoidance and tax evasions completely different phenomena with different solutions?
As a lawyer and a tax adviser I have always taken it as axiomatic that tax avoidance and tax evasion are different things. However if you listen to the media, read papers produced by various NGOs, or even look at some of the pronouncements coming out from supranational bodies such as the EU Commission, the two concepts are often merged together. In this blog I would therefore like to explore in more detail to what extent there really is a difference between the two.
A clear legal difference?
The starting point could be the legal difference. Evasion is a criminal offence, it involves deliberately breaking the law and requires some kind of concealment. By contrast avoidance is not illegal. It is true that avoidance may not be effective in that it may be blocked by anti-avoidance rules or found not to work by a court; but it is not a criminal offence to have undertaken it. Not being effective, and being illegal are two different things.
There is in fact a wider dispute about what avoidance actually means. Some argue it is a misnomer. Either a structure designed to reduce a tax charge works - in which case it is said no tax is due and so it cannot have been avoided; or the scheme does not work - in which case the tax is due and will be paid and so has not been avoided. There are also debates about whether or not there is a difference between tax planning, tax mitigation, avoidance and “aggressive” avoidance. I will come back to that, but for the purposes of this blog I am using avoidance in the way that it is often used in everyday speech - i.e. getting round, or attempting to get round, the rules in a way that is legal. According to this definition a scheme may fail if tested in court or it may be found to be effective. But in either case the result which the taxpayer argues for is not the one which - broadly speaking - you could say was intended according to the law.
So the legal definition is one way of distinguishing between the two. This will have certain consequences. Evasion carries criminal sanctions whereas avoidance carries, at most, interest costs and civil penalties if it fails. However, is the legal definition sufficient for considering evasion and avoidance completely different phenomena?
Is there an ethical or moral equivalence?
Another way of looking at the issue could be through an ethical or moral lens. It could be argued there is a clear difference as one involves breaking the law and the other doesn’t. Furthermore, evasion, which involves dishonesty, is much more likely to be involved with other criminal activity. However, if one focuses on the financial effects of evasion and avoidance the results may be similar: in both cases the government does not receive tax monies it was expecting. It could be argued that in the case of evasion the government was entitled to the tax whereas in cases of avoidance it will either receive the tax due - if the avoidance fails - or it was never entitled to it - if the avoidance succeeds. Such an argument though puts more weight on the freedom of the taxpayer to reduce the cost of tax in any way that is lawful than on the legitimate expectation of government and society to receive the payment. It could also be argued that avoidance - particularly when it is clearly exploiting a loophole - shows disregard for, and undermines, the rule of law.
Are there different drivers or attitudes in play?
Is there something different in the underlying attitude which drives evasion and avoidance? Again it could be argued that evasion involves deliberately breaking the law whereas a taxpayer can enter into an avoidance transaction while fully respecting the law. Is the difference therefore one of being law-abiding or not? However the line between these two is the one between adhering only to the letter of the law and respecting the purpose or intention of the law (however you define that). Does that line become too thin at times?
Some might argue that the attitude which underlies both is that tax is just a cost to be managed. Although it might be more correct to say treating tax as purely a cost is what drives avoidance whereas the attitude which drives evasion is that the rules do not apply to a particular taxpayer and so the cost is not an issue.
Do they require different counter-measurers?
The measures which need to be taken to stop avoidance and evasion are related but not identical. Avoidance can be addressed through voluntary reporting including the filing of tax returns, mandatory disclosure regimes and, for companies, country by country reporting. Public disclosures will also help in informing the debate and putting pressure on companies not to engage in activity which they would not want set out on the front page of the papers. Such voluntary or public reporting is less effective when it comes to evasion: criminals are unlikely to comply. To address evasion different measures such as mandatory disclosure by third parties - e.g. financial institutions or company service providers - and exchange of information between tax authorities is more appropriate. Nevertheless there is one area where the public debate could be very similar. Undoubtedly media exposure and the general public mood has made it less acceptable for individuals and companies to enter into tax avoidance schemes. This public debate this will probably not affect “real” criminals and those determined to hide large amounts of wealth from the taxman. But a significant amount of tax is evaded through the “cash in hand” economy. A change of public opinion could therefore lead to a significant reduction in evasion in this area. To this extent, the public mood or perception issue is relevant in both areas.
A practical approach – how best to reach agreed solutions
In conclusion I think it is not as simple as saying that evasion is illegal and avoidance is not. It has to be admitted that this there are commonalities between the two, at least at the margins. If we want to raise tax fairly and ensure public trust in the system, we need to address both.
Nevertheless I still think there is a practical reason for maintaining a clear distinction between the two. Evasion is always deliberate and criminal and we can all agree that it should be stopped. Avoidance can be harder to define. Most people would agree that the mantra “it’s legal so I can do it” is not acceptable in today’s environment but equally taking advantage of government approved schemes is. There will be a grey area in the middle where some believe actions are acceptable tax planning while others define the same thing as avoidance. Rather than creating unnecessary confusion which can taint the whole debate, in my view, we should keep evasion and avoidance separate. On the one hand we can then focus on what tools and processes are required to stop evasion. This will be largely a technical debate about what works and what doesn’t but hopefully there should be unanimous agreement about the intended results. On the other hand, there can be a wider debate, where there will be disagreement, about the boundary between acceptable planning and unacceptable avoidance. It is here that a responsible tax approach is particularly important in setting a framework and changing behaviours. When there is transparency and clarity about the criteria used to judge tax planning, it is easier to understand why certain actions are taken and to explore what is and what is not acceptable.
by Chris Morgan
Chris became Head of Tax Policy for KPMG UK in 2011. In this role he was a regular commentator in the press, as well as on radio and TV, led discussions on various representations with HMRC/HMT. In 2014 Chris spearheaded KPMG UK’s Responsible Tax for the Common Good initiative. In September 2016 Chris took on the role of Head of...