Planning on avoiding tax?
Can I get in to trouble for planning to avoid tax?
The taxman is trying to demonise ordinary people who play within the rules to limit the amount of tax they have to pay by claiming all tax avoidance is criminal and immoral.
This is not the truth – avoiding tax is sensible, legal and legitimate and this article explains why.
First, let’s look at what tax planning means:
- ordering your financial affairs
- to save tax
- in advance of
- any tax bill arising
‘ordering financial affairs’ is complying with tax rules that are the most advantageous to your financial circumstances
‘to save tax’ is using the most advantageous rules to save the tax you pay
‘in advance’ means tax planning can never be retrospective. Once the transaction has taken place that gives rise to tax, then the tax status of that transaction cannot be changed regardless of how much tax may be due or whether action could have been taken to reduce that tax prior to the transaction taking place
‘any tax bill arising’ is the tax due under the rules in force when a transaction takes place
A taxpayer has the right to pay the least amount of tax possible as long as the law is not broken. The right is set out in a number of court cases.
Tax law is laid down by statute, for example in Acts of Parliament. Judges sitting in court interpret statute. These interpretations are called case law. Case law has the effect of changing the theory to suit practice and carries a similar force of law to statute.
The Ramsay Principle
The Ramsay Principle derives from the tax court case W T Ramsay Ltd v Inland Revenue Commissioners ( STC 174). This was reinterpreted by a series of later cases, notable the Inland Revenue Commissioners v Burmah Oil ( STC 30).
The principle states that where tax is due and a transaction or series of transactions are undertaken that have been decided in advance that have no commercial purpose other than avoiding the tax due, then the transactions should be ignored and the tax due should be paid.
The principle is applied to tax avoidance schemes and effectively puts the taxpayer back in the position heshe was in before the scheme was implemented. This is why tax avoidance schemes do not work and generally only benefit the provider of the scheme, who profits from charging a fee.
Other important case law
In Ayrshire Pullman Motor Services & Ritchie v Inland Revenue Commissioners ((1929) 14 TC 754), Lord Clyde remarked: “"No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue".
In Inland Revenue Commissioners v Duke of Westminster ( 19 TC 490), Lord Tomlin said: "Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be."
Tax evasion is a crime and occurs when a taxpayer deliberately sets out to falsify the information in a tax return to reduce the amount of tax due. Evasion generally involves lies and fraud.
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