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Tax avoidance is not the same as tax planning, says HMRC in ‘issue briefing’

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The vast majority of UK taxpayers do not avoid or evade tax, and avoidance accounts for about 1% of tax due, according to a new HMRC ‘issue briefing’ on tackling tax avoidance.

The department said the best way to tackle tax avoidance was 'to prevent it arising in the first place, by designing tax law effectively, underpinned by clearly-stated policy objectives’.

HMRC estimates the UK’s ‘tax gap’ at £35bn a year, including avoidance of £5bn. ‘While that may be too high – being as it is more than zero – evidence suggests it’s probably one of the lowest in the world,’ Exchequer Secretary David Gauke said in a recent speech at Policy Exchange. ‘That’s because, contrary to some claims, the vast majority of UK taxpayers do not aggressively avoid tax,’ he added.

HMRC’s issue briefing, published this week on the department’s Briefings page, defines tax avoidance as ‘bending the rules of the tax system to gain a tax advantage that parliament never intended’.

‘It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law,’ it said.

‘Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended.’

HMRC outlined its anti-avoidance strategy, which ‘protects or recovers billions in tax that would otherwise be lost’.

‘For instance, in July 2011 the National Audit Office reported that enquiries involving large businesses, which were managed through our High Risk Corporates Programme, had saved more than £9bn in revenue to March 2011 and had “contributed to reduced avoidance activity by major companies”. Since 2010, HMRC has contested around 30 direct tax avoidance cases in the courts and has so far successfully protected about £4bn in tax. During the same period, wins in 15 major indirect tax avoidance cases have protected an additional £750m.’

A ‘small proportion’ of taxpayers actively sought opportunities to avoid paying tax. Those most likely to engage in avoidance were large businesses and wealthy individuals, HMRC said.

The Daily Telegraph quoted Mike Warburton, Director at Grant Thornton, as saying that while it was understandable that HMRC was taking rigorous steps to tackle avoidance the problem was ‘trying to define it’. Tax legislation had evolved over time into ‘a complex web of measures which may no longer reflect current intentions’.

But Peter Hargreaves, co-founder of the financial services business Hargreaves Lansdown, was reported yesterday as claiming that his company was ‘one of only two FTSE 100 companies which do not use offshore or other tax avoidance arrangements’. Hargreaves was talking to the London Evening Standard.

Taxand, a global organisation of tax advisers to multinational businesses, noted earlier this week that multinational companies in Europe were ‘increasingly concerned’ that their company’s reputation could be affected by ‘exposure to the public of corporate tax planning activity’.

Frédéric Donnedieu de Vabres, Chairman of Taxand, said there had been ‘many examples in Europe of corporates being named and shamed for their planning approaches’.

He added: ‘There remains a significant amount of confusion around tax planning; the public and media don’t always view legitimate tax structures that way. The importance of demonstrating substance has risen to the fore and companies must also be aware of retrospective legislation. Companies need to be seen as good corporate citizens, or potentially face reputational damage.’

The TUC launched a ‘spoof celebrity-gossip style magazine’ this week in order to ‘embarrass the government into acting against the celebrity tax dodgers who are only paying a fraction of the tax they should be’.

Kerching! was written by Richard Murphy, the anti-avoidance campaigner and director of Tax Research UK. The guide lists ‘the ten most popular ways which celebrities and corporations regularly employ to get around tax rules, including the use of offshore trusts, an over-enthusiastic use of Gift Aid and an extensive use of tax havens like the Bahamas, Mauritius and Panama’.

The TUC called for a general anti-avoidance principle, a halt to job cuts at HMRC and the abolition of the remittance basis for non-domiciled taxpayers.

The TUC appeared to be ‘somewhat behind the times’, said Miles Dean, founder of Milestone International Tax Partners: ‘Why don’t they look beyond the UK and see what other countries are doing? Look at Spain, the Netherlands, Switzerland, US, Canada – they all give tax breaks to wealthy foreigners to welcome them to their shores.’

An HMRC consultation on a general anti-abuse rule, designed to tackle aggressive tax avoidance schemes, will close next week.