Posted by James Pearson on 22 Nov 2012

Tax avoidance is making headlines at the moment, be it celebrity involvement in off the shelf structures or multinational corporations paying surprisingly low amounts of corporation tax in the UK. This is a hugely emotive issue but it is also a highly technical one that is not always fairly or correctly reported.

In recent years there has been a blurring of an important distinction between tax avoidance and tax evasion. Tax evasion is illegal or at least aggressive attempts to reduce exposure to tax through deception and fraud or convoluted and artificial structures that work against the intent of the tax law. Tax avoidance is arranging your affairs, within the bounds of the law, to minimise your exposure to tax. It has always been an important principle that while you are obliged to pay the tax you legally owe, you are not required to pay more than you need to.

The taxation system is more than simply a revenue gathering tool. If that’s all that it was a simple flat rate of tax could be applied across the board. A huge part of the tax system is as a social and economic tool to encourage some behaviour (for example tax reliefs associated with research and development, or investment in small business) and to discourage other behaviour (one only needs to think of the almost annual increase in duty on alcohol and tobacco).  When you throw in the incentives and international agreements that are required to encourage multinational companies to work in the UK you have a very complicated system with a vast number of reliefs and concessions. Making use of those reliefs and concessions is tax avoidance, not evasion.

As well as oversimplifying a hugely complicated situation, current reporting shows a worrying ignorance of the basic principles of the tax system. Companies are subject to corporation tax on their profits, not their turnover. Turnover is the money that a company receives; profits are the amounts that the company has left after spending all the money needed to generate that profit (or indeed loss). A number of articles have compared tax paid with turnover to produce an alarmingly low rate of tax, but this is an unfair distortion. No company has its corporation tax determined by its turnover.

Tax evasion is a serious problem and all steps must be taken to stamp it out, but tax avoidance is a key part of the system, making use of the reliefs and allowances that are put in place by domestic law and international agreements. HM Revenue & Customs (HMRC) will shortly introduce an anti-abuse rule which is heavily based around a subjective test of whether actions are “reasonable” and it is a worrying sign that at the moment ill-informed political and media pressure is driving the Government’s agenda.

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