According to Hyde (2010) tax evasion cost the UK treasury over £15 billion annually. This is approximately 3% of the total tax liabilities that individuals and organisations are meant to pay to the Her Majesty Revenue and Customs (HMRC). While an estimate of £25 billion is lost through tax avoidance annually (Murphy, nd). These are huge sums of money that could go a long way to help the government reduce the national deficit or could have been used for national development projects but have eluded the government. This report seeks to compare and contrast tax avoidance and evasion. Secondly, critically evaluate the effectiveness of HMRC’s approach to the “tax avoidance industry” in recent times.
Comparison between tax evasion and avoidance
Both tax evasion and avoidance are ways and means that people and organisations use to deny the treasury of the required revenue that they ought to have collected. While in broad terms both activities are wrong and morally questionable, it can be argued that one is legal and the other is a criminal act. The following are the comparison between tax avoidance and evasion.
Evasion is the illegal manipulation of business affairs to escape taxation. This is a criminal act that when caught will lead to prosecution. An example could be the directors of family-owned business not declaring cash sales. Another example might be the payment of a low salary (below the threshold of income tax) to a family member not working in the company, thus reducing profits in an attempt to reduce corporation tax (Elliot & Elliot, 2011). In contrast, tax avoidance is sometimes seen as legal especially if the mode of practice used is define by law such as giving gift to your children in such a way to avoid paying an inheritance tax. It can be seen as artificial ways of manipulation one’s affairs, within the law, so as to reduce liability, it is legal and it can be argued that it is not immoral. (Elliott & Elliott, 2011) Some of the means by which individuals avoid tax payments are; a. Shifting income from a person with higher rate tax payer to a basic rate tax payer b.
Moving transactions out of the UK to tax heavens such as Switzerland. c. changing the nature of transactions, in particular so that income tax is subject to Capital Gains Tax rather than income tax d. Tax abusing the law on limited companies (Murphy nd p3). Even though tax avoidance is legal, the HMRC have statutory powers under the tax law (“anti-avoidance”) provisions to stop organisations from designing tax avoidance schemes which may be seen as a gross exploitation of loopholes in the tax system. Example of this scenario is when HMRC asked Barclays bank to pay £500 million of tax avoidance recently and also stopped them from designing and using two schemes that were intended to avoid substantial amounts of tax (BBC, 2012)
Both means of avoiding the required tax payment is immoral. Even though tax avoidance can be seen to be legal it is still immoral. This is because, it is seen as a clever means of dodging one’s civic responsibilities. Murphy (nd) argues that only the few rich people and companies in society, who can afford the services of expensive accountants and legal advisers, are involved in tax avoidance schemes. This sounds unfair as it prevents the chancellor from creating a fairer tax system that will help the majority of the population (lower and middle class). HMRC Approach to the “tax avoidance industry”
The following are some of the strategies that HMRC is using to combat the tax avoidance industry Making tax law robust against avoidance
This is one of the governments excuse for scrapping the 50% (50p) income tax for people earning income of £150,000 per annum to 45% by next year. This is because it is estimated that there is a drop in tax collection of £20 billion as the total declared taxable income of those earning more than £150,000 a year slumped from £116 billion in 2009-10, to £87 billion in 2010-11 (Pollock, 2012). Engaging with customers about approach to avoidance
According to the BBC (2012), under the banking code on taxation, the banks that signed have commitment themselves not to engage in tax avoidance scheme, therefore, anyone such as a bank, accountant, lawyer or tax adviser, who devises a seemingly legal tax avoidance plan, is obliged to tell the tax authorities about it within a few days of using it or marketing it to clients. This is a good way by which the HMRC is working hand-in-hand with their customers to prevent avoidance. This system will only work if the customers are willing to disclose the loophole to HMRC.
The HMRC looses an estimated sum of £40 billion annually through tax evasion and avoidance. Tax evasion is a criminal act which perpetrators can face prosecution for it, while tax avoidance can be seen as using the loopholes in the tax law to avoid paying the right amount of tax required. HMRC are using the following strategies to tackling the problem of tax avoidance; making tax law robust against avoidance and engaging with customers on to seal any loophole in the tax avoidance industry.
* Part B:Inheritance tax
* 1 Introduction
Inheritance tax (IHT) can be defined as the tax that is paid on ones estate after death on condition that his/her estate is valued in excess of £325,000. IHT is chargeable to an individual who is domiciled in the UK. It is chargeable in relation to all his/her property situated throughout the world. An individual who is not domiciled in the UK is liable to IHT only in relation to property situated in the UK. (Melville A, 2012).
Arguably there are implicit sentiments of unfairness with the payment of this tax. This can be based on the argument that the deceased has already paid tax on the income that he used to acquire the estate, hence charging tax on the estate again can be construed as ‘double taxing’. To this end, many commentators believe that inheritance tax can be avoided altogether through careful planning.
This report discusses the planning measures that a tax payer can take to avoid or mitigate IHT liabilities and evaluate the likely success of such strategies. The report will also outline any effect that this planning measure will have on the taxpayer’s liability under any other tax. * 2Tax planning measures that mitigate IHT liabilities
There are different ways by which payment of IHT can be either mitigated or avoided entirely through planning. Some of these measures are as follows; *
This involves reducing the value of the asset through immediate lifetime gifts to family members, charities, political parties, state institutions such as the national museum among others. According to Mckie and Mckie (2010), the following are some of the means by which the value of the asset can be reduced. a. Spouse – Assets can be transferred to spouse whether during lifetime or on death. There is no cap on how much can be transferred to partners living in the UK. However, there is a cap of £55,000 for partners that are not domicile in UK.
b. Annual exemption on gifts- One can give gifts up to £3,000 in any tax year. Any unused allowance from the immediate previous year can be carried forward. Small gifts up to £250 per person in each tax year. c. A marriage gift to the value of £5000 from each parent of a couple getting married is exempted from IHT. This is extended to grand children who are getting married but to the value of £2,500. Anyone else can give £1,000. *
2.2Potentially exempt transfers (PETs):
These are gifts that do not immediately come under the tax-free gifts but could become tax free in future. An asset transferred to either family member or organisation under PET is only exempted if the donor lives for seven years after making the donation. However, if the donor passes way within seven years, the asset becomes a chargeable transfer and the person who received the PET will be asked to pay 40% IHT on it. The amount of tax is calculated using taper relief according to citywire [online]. This means that the older the gift, the larger the reduction in tax. * 2.3Alternative Investment Market (AIM) shares
These are investments that can be made throughout one’s lifetime that will be exempted from IHT when the investor dies. Some of the companies whose shares fall under the AIM, which qualify for an IHT exemption are available at the junior wing of the London Stock Exchange. The investor holds the unquoted shares minimum of two years, they will be considered as business property and will be eligible for business property relief at 100%. This means that they fall outside of the investor’s estate portfolio for IHT purposes.