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Where is the line between Tax Evasion and Tax Avoidance?

If you watch the news or read the papers you will see stories about celebraties and sports stars using fancy tax schemes to avoid or delay payments of tax. To the average man or woman in the street this seems morally wrong, especially with the country being in such dire economic turmoil, and everyone should be seen to be paying their share. This is interesting, and takes me back to my days as an economics student studying the principals of a fair taxation system.

The politicians have sensed the mood of the people and need to be seen to addressing it.

What is tax evasion, and how does it differ from tax avoidance?

Tax avoidance is a perfectly legal utilization of the tax law to your own advantage, which reduces or delays the amount of tax that is due to be paid. It is not to be confused with Tax Evasion which is the use of illegal means to not pay tax. Most people will do tax avoidance to some degree, perhaps investing in an ISA, but not to the degree that some footballers or comedians have taken it to.

Tax code in the UK is complex and getting more so. The popular reference for Tax Advisers , Accountants and Lawyers is the Tolley’s tax handbooks which have now over 11,000 pages. So it is perhaps no surprise that one advisers interpretation may be different from another.

The lines between tax avoidance and tax evasion can often be blurry, and can often be something that is available (due to costs) to the privileged and wealthy in society which can cause moral outrage to the majority of the population.

Tax evasion should not be confused with avoiding tax by doing things such as investing in a pension or an ISA, running your affairs through a company and receiving dividends, which are all legitimate tax planning measures.

The debate between tax evasion and tax avoidance will be interesting, with many schemes such as the K2 scheme being seen as a tax avoidance scheme, which is perfectly legal but seen as morally wrong by some.

Also when the politicians start making statements such as tax evasion and tax avoidance being morally repugnant, its going to get exciting. Maybe people who live in glass houses shouldn’t throw stones, I am sure a story or two will emerge.

Any debate around tax evasion and aggressive avoidance, to have any credibility should include how the establishment use the secretive world of trusts to protect their wealth.