Tax Avoidance – Shades of Grey

Amidst the current furore over tax avoidance by both corporate giants and wealthy individuals, little has been said about the actual nature of tax avoidance. The difference between avoidance and evasion was well understood once. Avoidance was legal, evasion was illegal, and that was about all there was to it. As former Chancellor Denis Healey once put it, the difference between avoidance and evasion was the thickness of a prison wall.

Now, according to some politicians, we have good tax avoidance (e.g. pensions and ISAs) and unacceptable tax avoidance such as the aggressive and highly artificial schemes that some well known celebrities have been involved with, which may not even turn out be legal in some cases.

However, in between these 2 extremes lies a whole range of avoidance mechanisms, ranging from sensible tax planning that anyone can do to certain practices that are frowned on by the authorities but grudgingly accepted as part of the tax landscape.

The trouble is that by branding tax avoidance as “morally repugnant” but being less than forthcoming about what exactly they are referring to, politicians and the media have tarred all tax planning with the same brush. It is hard to know these days what (in their eyes) is morally acceptable and what isn’t.

Sensible tax planning would include things like using up your annual allowances for inheritance tax and capital gains tax. For example, why sell all your shares at the same time when by waiting a few weeks you could save yourself a big tax bill?

Most reputable tax planning is, like this, based around the optimal timing of transactions and using up all your allowances.

Next step up the ladder would be things like putting investments in your wife’s name to save higher rate tax, or nominating a second home as your principal private residence.

These are not unintended loopholes exploited by the unscrupulous but hard and fast rules laid down by Parliament for that very purpose. There is nothing dodgy about them.

Then you get to things like paying your wife perhaps a tad more than anyone else would and claiming it against tax, or by gifting her shares and splitting the dividends. The last Labour Government was annoyed enough by that one to propose new legislation on family businesses, but it proved unworkable and had to be dropped.

The point is, you cannot think of tax avoidance as a single nefarious activity. True, you have the disreputable schemes which deserve to be stamped out, but there are a huge number of other tax planning techniques that are open to everyone and, for the most part, are generally accepted to some degree or other.

In short, tax avoidance is not black and white – it comes in many shades of grey.

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