The lines are becoming increasingly blurred between tax avoidance and evasion, which may well lead to penalties for perfectly legal activities.
While a clampdown on tax avoidance might sound appealing, as with any set of policies, the pendulum can swing too far and impact essential tax reliefs that safeguard individuals and business owners.
Labour has already promised a review of business tax reliefs, but it is important the party does not get carried away and revoke policies that reward the financial risks taken by individuals to encourage entrepreneurship and ensure businesses are able to continue for future generations.
The current thinking is there are arguably three categories a taxpayer can fall into: compliance, avoidance or evasion. Compliance is paying tax, with HM Revenue & Customs agreeing with each declaration, while evasion is the deliberate non-payment or fraudulent underpayment of tax — both of which are very clear definitions.
The law tells us what is right
Tax “avoidance” is entirely legal but discouraged, and is largely defined by a sense of “what is right”, but who is to say what is right?
The answer must be that the law tells us what is right. The concept of tax avoidance arises when either it is condemned in the court of public opinion or if the country’s leadership deem it to be unacceptable in some way.
Let us take pensions as an example. The vast majority of people would not choose to tie up their money until at least their mid-fifties if it was not for the income tax refund received when they make a contribution, and the fact that the contents of pensions are not subject to income tax, capital gains tax or inheritance tax.
Technically, therefore, those that make pension contributions are deliberately avoiding tax and are engaged in “tax avoidance”. Regardless, pensions are viewed as a smart financial decision and have been actively encouraged by the government for many years. Cynics would argue this is because it is beneficial for them, as it means when people meet retirement age, they are less likely to need state assistance.
So, at what point does the usage of a perfectly legitimate tax relief morph into something that the government suddenly declares as “unacceptable tax avoidance”? It seems the main influencing factors are public backlash, or the personal preference of those in power, thereby allowing subjectivity to cloud the law.
Undoubtedly, the tax system has been broken for a long time, with problems that pre-date the newly elected Labour government. However, the current concern is that the “tax avoidance” rhetoric has been taken too far, and the planned changes to tackle it are ill-thought out, which could have serious unintended consequences.
Speculation is rife about certain IHT reliefs being reformed or even scrapped. While some ask why business owners are entitled to pass on their business wealth potentially without paying any IHT while others suffer IHT at 40 per cent, there are extremely good economic reasons for this relief. It allows businesses to continue without the risk of having to liquidate, to fund an IHT liability for one thing.
