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Is Tax Evasion Rife in the Profession?

10th May 2013
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The latest announcement that vast numbers of the very rich are apparently evading vast amounts of tax should come as a wake-up call to us all.

There has been a great deal of debate in recent months, not least in this column, about HMRC's failure to collect as much tax as it should. Whether the tax gap is £35 billion or over £100 billion it can be seen to represent a terrible failure by those in authority.

For the most part, the contention has been that taxpayers have no obligation to pay more tax than is demanded by law. In principle, how can anyone disagree with that?

The issue that has really been at stake is how the law should be interpreted and whether taxpayers should take a moral stance and pay more tax than they believe they are actually obliged to under the terms of our incredibly complex tax legislation.

This has led to a whole new vocabulary in which tax avoidance has to be distinguished from abusive tax avoidance, aggressive tax avoidance and the one taboo about which almost everyone agrees, tax evasion.

Suddenly, assuming that an announcement highly publicised by the BBC this morning (10 May) is correct, there has been not so much a sea shift as a tidal wave.

It is hard to know what is more shocking. First, there is the revelation that, following a joint investigation by Panorama, the Guardian and The International Consortium Investigative Journalists, "A joint investigation by the UK, the US and Australia to identify those using offshore tax havens to hide wealth has uncovered more than 100 people".

It has often been suggested that rich people are greedy. In this case, it appears that 100 of the richest people in the UK (or possibly America and Australia too) have deliberately chosen to evade (note that verb) enough tax to solve all of the NHS's problems overnight.

To compound this criminality, the report goes on to allege that this may have been achieved with the assistance of more than 200 individual UK accountants, lawyers and professional advisers making use of the secrecy that has been offered by various tax havens around the world.

When one sees revelations by The Times suggesting that the odd professional adviser has turned out to be a crook, it is hard to be surprised. Every profession, even the most honourable, will attract its occasional rogue.

However, now perhaps we can all forget about the moralising and suggestions to the House of Commons Public Accounts Committee that various activities that they tend to frown upon are perfectly legal and permissible, even if the public and the newspapers find them abhorrent.

If there really have been 200 people practising our profession or something very close to it while promoting criminal activity, that is a severe embarrassment from which it may take us all years to recover.

It seems safe to assume that the average reader of this column or AccountingWEB more widely is decent, legal, honest and truthful both in advising clients and in carrying out their normal daily activities.

Perhaps your columnist is missing the point and he is in a minority of one, surrounded by practising accountants, lawyers and other tax advisers all of whom lie and cheat in order to save their clients’ money.

Personally, I doubt it. However, if that really is the case then, since I enjoy sleeping at night, retirement and a full-time career as a theatre critic could beckon in the very near future.

Also keep an eye on the column written five days after this.

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Replies (9)

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By ShirleyM
10th May 2013 10:23

Selfish, greedy people

As you say, there will always be people who are happy to help themselves, with no thoughts of the consequences to others.

I do think that accountants/tax advisers/bankers, or whoever is assisting in evasion (or even aggressive & artificial avoidance), have not been taken to task for their part in the evasion.

Where an accountant has been part of a fraud, maybe they have been punished, but not where they have been paid for 'services and advice' provided. They have been allowed to keep the massive fees gained from assisting others to evade tax. Therefore, no deterrent! You get to keep the fees either way, and it's hard cheese for the taxpayer (and the country) that loses out from their selfish & greedy actions.

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By John McGovern
10th May 2013 10:49

Evasion or avoidance

This seems to come back to the old chestnut of the different between illegal evasion and legal avoidance. No one would suggest that evasion is acceptable, however it has always been the case that a taxpayer can structure his business in such a way as to legally avoid paying taxes.

The key word is “legal”.  What we now seem to have is a government that is blurring the black & white distinction between legal and illegal by introducing the concept of “moral” into the argument.

My own view is that this is wrong as everyone’s morals are different.  It could be argued that “morally” a client should pay more tax because the country needs the income, but, “morally” it could equally be argued that the client should pay no tax because “morally” he does not agree with his money paying for tanks and bullets or whatever.

Surely the answer is for legislators to redraft the law so that it properly defines what can and cannot be done and closes the loopholes.  

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By ShirleyM
10th May 2013 11:09

@John McGovern

The difficulty lies in identifying 'legal' avoidance. Many of the aggressive and artificial schemes are promoted as 'legal' and approved by a prominent QC, but have later been proven to be illegal (ie. evasion rather than avoidance).

Maybe the USA has it right, and we have it wrong, in that tax avoidance schemes have to be approved as 'legal' schemes, before being promoted.

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Replying to Paul Scholes:
David Winch
By David Winch
10th May 2013 11:44

The old chestnut

ShirleyM wrote:

Many of the aggressive and artificial schemes are promoted as 'legal' and approved by a prominent QC, but have later been proven to be illegal (ie. evasion rather than avoidance).

You may think I am splitting hairs, but if a tax 'avoidance' scheme is approved by a prominent QC but later proves to be ineffective (resulting in no legitimate tax saving) then it does not follow that there has been tax evasion.  What there has been is an ultimately unsuccessful attempt at tax avoidance.

In order for there to be tax evasion there has to be dishonesty - that means someone doing something which they realise ordinary and decent people would regard as dishonest.

If a taxpayer follows advice from his accountant with legal advice in support he is not being dishonest - even if the scheme ultimately comes to grief.

David

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Replying to Paul Scholes:
By slipknot08
16th May 2013 09:06

NOT illegal

ShirleyM wrote:

The difficulty lies in identifying 'legal' avoidance. Many of the aggressive and artificial schemes are promoted as 'legal' and approved by a prominent QC, but have later been proven to be illegal (ie. evasion rather than avoidance).

Maybe the USA has it right, and we have it wrong, in that tax avoidance schemes have to be approved as 'legal' schemes, before being promoted.

 

Utter nonsense. What the majority of the cases have found is that, of two possible interpretations of the legislation, HMRC's is correct. It is NOT found to be illegal, nor (in the vast majority of cases) is it found to be evasion - the interpretation of the legislation is found to be wrong, and the (higher) court then states the position, which is then regarded as always having been the case. This happens to HMRC in cases just as much as it happens to taxpayers and their advisers.

Taking a different (but supportable, and often based on the opinions of a number of professionals, including Counsel) view of the law is NOT illegal - even HMRC's manuals make clear, when discussing whether penalties would be appropriate in a case that "taking reasonable care" includes "taking a reasonably arguable view of situations that is subsequently not upheld".

This is different to outright evasion, which everyone agrees IS illegal, and I think it is uncontested that anyone indulging in or promoting evasion should be pursued with the full force of the law.

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By ShirleyM
10th May 2013 11:53

Thanks, David

I guess that is why it is worth the risk, as there is no 'crime', and nobody is punished, not even the promoters of the failed scheme as they get to keep their booty. Therefore, absolutely no deterrent at all and very little risk.

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Steven Bone
By Steven Bone
17th May 2013 12:45

Definition of legality

It's an interesting debate about avoidance being 'legal'.  This came up on 31st January when the Big 4 tax bosses were grilled by the Public Accounts Committee. It seems to depend upon what definition of 'legal' (or lawful) you are using.

Tax avoidance is not criminal conduct (unlike evasion, such as fraud), even if the planning proves to be unsuccessful.  In that sense it is 'legal'. 

However, if a QC approved avoidance scheme proves to be ineffective (that is, as David Winch puts it above - the interpretation of the legislation is found to be wrong, and the higher court then states the true position) then although there is no suggestion that the planning is criminal (therefore, it is 'legal'), it was nevertheless contrary to the law (therefore, is not 'legal' in a tax/ civil law sense).

As the PAC transcript puts it:

Richard Bacon MP to Deloitte's Bill Dodwell (Q69) "... at the point at which you lose in the courts, the courts have found that what you were doing was unlawful. Yes or no?".  Mr Dodwell replied "Yes". 

Mr Bacon continued (Q 71) "If you tried to do it again, it would be struck down by the courts again. You cannot do it, and you advise your clients that they cannot do it because it is unlawful, don’t you?".  Mr Dodwell replied "Sure. Of course."

Mr Bacon concluded "So it is unlawful" ... 

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Replying to zoemarciniak:
By slipknot08
17th May 2013 13:06

definition of legality

Thanks for that Steven - it just reinforces that the PAC are being wilfully ignorant on this point, in order to make good soundbites.

I just wish they would have a real - informed - debate, which then might result in better legislation in future. No chance of that though -  they'd have to let go of their preconceptions and actually listen to their witnesses... and one day pigs will have flight clearance at Heathrow...

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David Winch
By David Winch
17th May 2013 15:43

Unlawful v criminal

There are things which are unlawful but not criminal.  The criminal law is only a part of the law.

An example may help.  Suppose John Client has a 'one man company', John Client Ltd.  He declares and pays a dividend but there are clearly insufficient distributable profits to cover the dividend.

What he has done is unlawful - he has contravened the Companies Act 2006 provisions relating to dividends, see s830.  In consequence the persons receiving the unlawful dividends may be obliged to pay them back, see s847. 

But (unless it is part of some dishonest wheeze to defraud creditors or evade taxes) what he has done is not criminal.  There is no suggestion in s847 that this could lead to a criminal prosecution, fine or imprisonment.

The example from the PAC hearing also covers something which is unlawful but not criminal (unless, etc as before).

So there are (1) things that are legal - which are neither unlawful nor criminal, (2) things that are unlawful - which category covers things which are not legal but may or may not be criminal, and (3) things which are criminal.

David

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