* Part A: Tax Avoidance and evasion
According to Hyde (2010) tax evasion cost the UK treasury over £15 billion annually. This is approximately 3% of the total tax liabilities that individuals and organisations are meant to pay to the Her Majesty Revenue and Customs (HMRC). While an estimate of £25 billion is lost through tax avoidance annually (Murphy, nd). These are huge sums of money that could go a long way to help the government reduce the national deficit or could have been used for national development projects but have eluded the government. This report seeks to compare and contrast tax avoidance and evasion. Secondly, critically evaluate the effectiveness of HMRC’s approach to the “tax avoidance industry” in recent times. Comparison between tax evasion and avoidance
Both tax evasion and avoidance are ways and means that people and organisations use to deny the treasury of the required revenue that they ought to have collected. While in broad terms both activities are wrong and morally questionable, it can be argued that one is legal and the other is a criminal act. The following are the comparison between tax avoidance and evasion. Legality
Evasion is the illegal manipulation of business affairs to escape taxation. This is a criminal act that when caught will lead to prosecution. An example could be the directors of family-owned business not declaring cash sales. Another example might be the payment of a low salary (below the threshold of income tax) to a family member not working in the company, thus reducing profits in an attempt to reduce corporation tax (Elliot & Elliot, 2011). In contrast, tax avoidance is sometimes seen as legal especially if the mode of practice used is define by law such as giving gift to your children in such a way to avoid paying an inheritance tax. It can be seen as artificial ways of manipulation one’s affairs, within the law, so as to reduce liability, it is legal and it can be argued that it is not immoral. (Elliott & Elliott, 2011) Some of the means by which individuals avoid tax payments are; a. Shifting income from a person with higher rate tax payer to a basic rate tax payer b. Moving transactions out of the UK to tax heavens such as Switzerland. c. changing the nature of transactions, in particular so that income tax is subject to Capital Gains Tax rather than income tax d. Tax abusing the law on limited companies (Murphy nd p3). Even though tax avoidance is legal, the HMRC have statutory powers under the tax law ("anti-avoidance") provisions to stop organisations from designing tax avoidance schemes which may be seen as a gross exploitation of loopholes in the tax system. Example of this scenario is when HMRC asked Barclays bank to pay £500 million of tax avoidance recently and also stopped them from designing and using two schemes that were intended to avoid substantial amounts of tax (BBC, 2012)
Both means of avoiding the required tax payment is immoral. Even though tax avoidance can be seen to be legal it is still immoral. This is because, it is seen as a clever means of dodging one’s civic responsibilities. Murphy (nd) argues that only the few rich people and companies in society, who can afford the services of expensive accountants and legal advisers, are involved in tax avoidance schemes. This sounds unfair as it prevents the chancellor from creating a fairer tax system that will help the majority of the population (lower and middle class). HMRC Approach to the “tax avoidance industry”
The following are some of the strategies that HMRC is using to combat the tax avoidance industry Making tax law robust against avoidance
This is one of the governments excuse for scrapping the 50% (50p) income tax for people earning income of £150,000 per annum to 45% by next year. This is because it is estimated that there is a drop in tax collection of £20 billion as the total declared taxable income of those earning...
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