Tax Evasion and Tax Avoidance

1
Tax Evasion and Tax Avoidance
Lec11 C33TC3

• Tax Evasion
• Illegal eg withhold information note the Black
  economy
• Tax-payer compliance improved by Deduction at
  source Auditing and revenue enquiries Duty to
  notify chargeability Powers of
  assessment Powers re taxpayers papers Warrant
  to enter premises and remove documents

2
Tax Evasion and Tax Avoidance

• Tax Avoidance
• Arranging affairs to minimise tax legal and
  encouraged Artificial schemes

3
Tax Avoidance

• Tax avoidance and the law
• 1 Case law
• 2 Legislation

4
Tax Avoidance

• 1 Case law
• IRC v Duke of Westminster 1936 19 TC
  490 Servants paid by deed of covenant in place
  of wages
• Held legal documents could not be overturned
  merely because the motive was to save tax
• Every man is entitled to order his affairs so
  that the tax attaching under the Act is less than
  it otherwise would be.
• Importance of the letter of the law not the
  substance
• Tax avoiders charter

5
Tax Avoidance

• WT Ramsay Ltd v IRC 1981 STC 174
• Tax avoidance scheme
• Series of transactions that left the taxpayer in
  the same position at the end as at the beginning
  (circular transactions)
• In course of transactions a CGT loss (allowable)
  and a CGT gain (not chargeable) had arise. Idea
  to use the CGT loss against other gains.
• Held Pre-ordained events so court could look at
  cycle of transactions as a whole. This resulted
  in no gain, no loss. So CGT loss not available.
• H of L said not overturning Duke of W. but
  limiting it.

6
Tax Avoidance

• Tax avoidance split
• Legitimate tax planning mitigation of tax
• Not allowed Artificial tax avoidance schemes

7
Tax Avoidance

• Furniss v Dawson 1984 STC 153
• Ramsay principle extended to a non circular
  transaction
• Sale of shares with artificial step to avoid tax
• Held extra step ignored and gain taxed

8
Tax Avoidance

• Restrictions to Ramsay principle
• Craven v White 1988 STC 476
• Similar to F v D sale of shares through IOM
  company But sale to third party not planned in
  advance
• Not pre-ordained at time of share exchange

9
Tax Avoidance

• For Furniss v Dawson to apply 1 Series of
  transactions must be pre-ordained 2 Transaction
  must have no other purpose than tax
  mitigation 3 Intermediate transactions not
  contemplated as having independent life 4
  Pre-ordained events must in fact take place
• Lord Oliver

10
Tax Avoidance

• Restrictions to Ramsay principle cont
• Piggot v Staines Investments 1995 STC 1418
• Note Rex v Charlton Others 1996 STC
  1418 Bungled tax avoidance scheme regarded as
  evasion and prosecuted as a crime

11
Tax Avoidance

• Further development of Ramsay principle
• IRC v McGuckian 1997 STC 908
• Lords Steyn and Cooke indicated that Ramsay
  principle is not just to determine what a real
  transaction is but to interpret the purpose of
  the statute

12
Tax Avoidance

• 2 Legislation
• Anti avoidance legislation significant feature of
  UK tax code
• Works in different ways
• 1 Deny a relief which might be used to manipulate
  a situationExampleSchedule B/Schedule D
  forestry regimeCost of planting new forest
  offset against Sch D income to encourage growth
  of timber in UKUnforeseen effects and perceived
  as a means of avoiding tax by the wealthy

13
Tax Avoidance

• 1 Deny a relief which might be used to manipulate
  a situation (cont)Solution Not to adjust
  relief to prevent (eg) a coniferous
  monocultureBut to abolish the tax regime to
  close a tax loophole exploited by the wealthy

14
Tax Avoidance

• 2 Introduce a special tax regime for the type of
  transaction and taxpayer concernedExampleS.42
  CAA 1994 a) Special 10 capital allowance
  rate b) denial of relief altogetherTo prevent
  advantage being taken of generous UK allowances
  for non UK leasing equipment

15
Tax Avoidance

• 3 Inland Revenue power to challenge transactions
  where they feel there is a tax avoidance motive
  presentExampleS 775 ICTA 1988 Where
  individuals earning capacity is exploited in
  return for a capital sum..Pop star sells
  services to company for fixed (relatively low)
  salary and shares. Shares (capital) sold for
  large amount Under S 775 capital sum treated as
  income

16
Tax Avoidance

• 4 General Anti-avoidance Rule (GAAR) Favoured by
  Labour government 1997 Institute Fiscal Studies
  Report 1997 IR reported Confine to corporate
  affairs Law Review Committee opposed
  GAAR Burden of proof would fall on
  taxpayer Clearance procedures of IR
  inadequate 1999 Budget GAAR not to be
  introduced for time being 2004 Budget Schemes
  and arrangements to be submitted
  for prior approval

17
Tax Evasion and Tax Avoidance

• Bibliography Nightingale chapter 6
• Taxation Policy and Practice Lymer and Oats
  2006-07 Chapter 1 pp 31-34 and Chapter 11
• Tolleys Tax cases