Tax Avoidance Essay

4175 words - 17 pages

IoD Big Picture

Summer 2013

Tax avoidance: remedies and collateral damage

• The term ‘tax avoidance’ needs to be carefully defined and is not the same as ‘tax abuse’ or ‘tax evasion’. This article considers where avoidance becomes abuse and, in particular, the advantages and disadvantages of some measures to control it.

Tax avoidance: remedies and collateral damage
Richard Baron, former Head of Taxation at the IoD, and Stephen Herring, his successor, consider the proper use of the term ‘tax avoidance’, where avoidance becomes abuse, and the pros and cons of some measures to control it.

The basics of UK tax law are simple, but difficulties arise from complex ...view middle of the document...

This is a more authentic use of the term ‘tax avoidance’. We discussed “Taxing multinationals – the balancing act” in the previous issue of Big Picture. Here, we shall consider this proper use of the term ‘tax avoidance’ and where avoidance becomes abuse, and, in particular, the merits and disadvantages of some measures to control it.


With governments continually thwarted in their attempts to close loopholes, the current focus is on two measures: the compulsory disclosure of tax avoidance schemes (DOTAS); and a new general anti-abuse rule (GARR) to combat highly contrived tax avoidance schemes.

Both of these weapons should prove effective, but they must be properly targeted on tax abuse and aggressive tax avoidance, and must not adversely affect reasonable and necessary tax planning.

The basics of UK tax law are simple. Income, gains, sales, inheritances, and transactions in land are put into various categories: taxable, exempt, arising in the UK, arising abroad, and so on. The relevant amounts are computed according to the specific rules for each tax as enacted by Parliament. In addition, there are different categories of taxpayer:

IoD Big Picture
“It is complexity and the need for specific rules which have often opened a door to aggressive tax avoidance and tax abuse.”

Summer 2013

individuals, trusts and companies, any of which may be resident in, or resident outside, the UK. Then there are the tax rates. Once we know all of the relevant classifications for a given transaction and the parties to it, it ought to be straightforward to work out the amounts of tax due. Difficulties for the taxpayer arise from two sources.

The definitions of some of the categories are excessively elaborate. In VAT, it is perfectly normal to have lists of items that are subject to special rates, exceptions to the listed items, and exceptions to 1 the exceptions. In corporation tax, the straightforward notion of a loan, interest on which is deductible for the payer and taxable on the recipient, is replaced by the concept of a loan relationship, and 2 the relevant legislation takes up over 100 pages.
Extensive records must be kept, and detailed reports must be made to HM Revenue & Customs (HMRC), in order to demonstrate that the right amounts of tax are being paid.

Even when taxpayers make correct and timely reports, difficulties may arise for HMRC, because a sequence of transactions may be necessarily elaborate. It may involve several entities, which belong in different categories, for example UK-resident and non-resident, or companies and trusts. Then the technically correct treatment at each stage may lead to a bizarre overall result, such as income being matched against losses which have not yet crystallised or even not being taxed at all. It is this complexity and the need for specific rules which have often opened a door to aggressive tax avoidance and tax abuse. Each party complies strictly with...

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