Tax avoidance – Is it legal?

The former Chancellor of the Exchequer, Denis Healey explained the difference between tax avoidance and tax evasion in this way:-“The difference between tax avoidance and tax evasion is the thickness of a prison wall.’ Tax avoidance is legal.

Tax avoidance is finding ways to ensure that you pay less tax than you would normally be expected to do on earnings, profits or gains, legally. For example, if you have some savings and don’t want to pay tax on the interest from them, you could open an Individual Savings Account or buy National Savings bonds or make deposits into National Savings accounts. If you do this, you don’t pay tax on the interest which accrues. This is a perfectly legally acceptable way of not paying tax.

Someone who pays the right amount of tax on money declared is ‘tax compliant’ i.e., that person is paying the amount the law requires. However, he/she is not paying tax on all the money he/she has earned or gained that year. A person who refuses to pay a percentage of tax because of objections on moral grounds of a government’s policies (for example the amount of the defence budget) is known as a “tax protester”. This is not classed as tax evasion or avoidance, but is in a separate class.

Tax havens are still operating, and those who make use of them are classed as tax avoiders. Millions of pounds are lost by Her Majesty’s Revenue and Customs service because of these tax havens for the wealthy every year. However the UK government has been reluctant to legislate against these over the years. Such havens are the Channel Islands, some of the Caribbean islands and Switzerland. There are also off-shore companies set up by the very wealthy, so that they do not pay tax in Britain, which is higher than taxes in some other countries. In the past there have been ‘tax exiles’ wealthy Britons who have chosen to live in countries outside the UK so that they were not liable to pay high British taxes. When this kind of money leaves the country, economic damage ensues, and so the government tries to make tax laws easier to attract those tax exiles back to Britain as would any government.

Of course a lot of planning goes into setting up an off-shore company, and not everyone can do this, but if you consider the case of the entrepreneur Richard Branson, whose money is tied up in his companies, he could retire, liquidate his assets and pay virtually no taxes if he were to move abroad. Of course he may not do this and might willingly pay UK taxes, as the laws might have changed by the time he retires.

Independent financial advisers can help you avoid paying taxes, as this is not deemed suspicious. If you earn a lot of money, you may object to paying high taxes. However, those with a social conscience will realise that by avoiding paying taxes they are depriving others of services such as the National Health Service, the police force, etc.